Mails have been pouring in, asking for our stand on real estate, particularly in view of Om’s analysis. I will take this chance to elucidate on what we believe.
We think India is a poor country and contrary to what many people believe, it is slated to be so for the next few investible periods. Necessities are going to come at a premium and luxuries shall be available at a discount. We shall continue to see queues for subsidized LPG Cylnders, and home delivery of tickets for watching a blockbuster in a multiplex (so bad, they cannot bring the multiplex to our doorstep).
Indian Societal Structure
“A country of 1.2billion people must have a substantial number of customers for whatever you can throw at them at whatever price”
Let us take a different approach – a bottoms-up income based approach to judge the market size of customers for residential real estate at prices touching Rs 50,000 a square yard for freehold, and Rs 4,000 a sq ft for leasehold.
A few MNC’s, investment banks, and management consulting firms pay handsome salaries to premier college graduates. If we analyze the college enrollment data of last three decades, we can expect about 200,000 employees, who get salaries exceeding Rs 30lacs per annum.
An enquiry with Income Tax office confirms this facet. Even if you adjust for fringe benefits and exemptions, it shall not be disputable to say that “less than 200,000 employees earn more than Rs 5m annually.”
Who else are rich in India – businessmen of course? The number of companies earning more than 10cr annually can be pegged at 50,000 (estimates based on RoC filings). Taking two promoting families a company on an average, we can safely say that 100,000 businessmen match or exceed the income levels we discussed previously.
The last part of the riddle is the politicians – 800 MPs, and 5,000 MLAs. Assuming each MP has 10 cronies and every MLA has 5 cronies (cronies can include bureaucrats) and no one overlaps with the classes already discussed above (a liberal assumption if you ask us), we are talking about 33,000 ultra-rich politically inclineds (PIs, including politicians and their cronies). Now for every MP seat, there are two other strong candidates, who are financially and croni-cally as capable as the winner, ditto for MLAs. So, we have 66,000 other ultra-rich PIs, putting the total at 100,000 for PIs.
We are still left with the performing class (actors, singers, cricketers), who can be numbered on fingertips. Assuming 100 different classes of performers, and 100 performers per class, we still get only about 10,000 performers.
Adding all the four classes, we have a figure of 410,000 who are economically capable of guzzling real estate at the above discussed prices. Is there enough real estate to satiate the demand of these 4.1lac richests. There seems to be almost as much in Gurgaon itself – leave alone other regions. Based on a sample size of 100 in this class, we concluded that about 30% i.e. 123,000 are themselves active directly in real estate through self/proxies. Indians always find resources for the talk of the times due to their entrepreneurial gene (more on this later).
The Growth Myth
India is a large economy (size almost $4 trillion if you take into account black money) growing at 8%. But the incremental income is failing to materialize for a majority. 95% major new companies and IPOs have been offshoots of the existing promoter family network. In politics, entry is difficult without having an in and so is survival. That leaves the service class as the only place, where you can carve out a way up (in economic terms, high mobility). The salaries in the lower and higher echelons have been more or less stable, just about meeting inflation, leaving only a few even in this category to benefit from the growth. No wonder, India is seeing the highest growth in the number of billionaires. Yes, India is growing, but so is inequality (as measured by Gini’s coefficient). In this sense, India seems to be taking direction of Thailand: growing inequality, rampant corruption, high growth and high inflation.
Who else is in India?
There are 180lac government/public sector employees in India, of whom about 5% i.e. 9lacs are Group A /B officers. 84lacs are employed by the private organized sector. Then there are small-time shop-owners businessmen to the tune of 100lacs. A Group A government/public sector officer earns Rs 50,000 per month during the mid stages of his life. He can afford to buy a home for Rs 30lacs without any other support. Well paid private sector employees (mostly in metros) can afford to buy a home for Rs 50lacs. The purchasing power of shop-owners and their kin fall in that range as well. Sadly, prices in metros as well as non-metros are completely misaligned to the reality of purchasing power.
Historically, a high number of purchases have been fueled by home equity – in short, the exorbitant price that the seller gets for his owned real estate enables him to buy something else at an equally exorbitant price. That has set loose a dangerous trend, which when reversing, will have a cascading impact across the segments.
The Supply Side
Not so long ago, investors were jumping up and up over Unitech. 10,000 acres of real estate must be worth at least a Rs 10,000cr and a credible company like Unitech should be able to realize sales of up to Rs 100,000cr from this land, if not more. But the reality has dawned. The real estate companies, all over India, put together, are developing 30,000 acres of land in the next two years. Assuming an average size of 2,000 sq ft for a home, the figure leads to a supply side estimate of 1.15m homes. India has 70m urban households, of which just about 14m are in a position of even contemplating a house buy. The ratio of tenants to house-owners in India is a measly 2%. So, we are left with an end user demand for just 23,000 homes, that too, at much lower price estimates than are prevalent. How long can a majority of supply be sustained by investor demand in the wake of falling prices in real terms (a key thing, as companies never emphasize the inflation aspect)?
How about a bit of rhetoric?
Indians are highly entrepreneurial; unlike the Americans or Europeans (my statement may call for censure from the face-book smitten populace). But I am not talking about pieces of art created by idle minds. I am talking about carving out a way to survive within highly limited means.
A company will learn more from a product launch here in a month than they will in a year in US. People define their own use of a product; a washing machine is used for making Lassi, a shampoo for seamless washing of buffaloes. In USA, the customers are too brainwashed by continued exposure to scientific marketing and systematic neuro-programming to develop even simple alternative uses which seem almost akin to common sense.
Where else can you see development of a submersible pump for air coolers for $3 or jugaad at its best “a convertible sports jeep” for $3,000, that looks much like the resource guzzling hummer at its worst. Sample this – a million students graduate every year, hardly 10% gets placed in the organized sector (Americans and Europeans will laugh at this statistic, even in today’s recessionary times), yet year-after-year 80% of the unemployed graduates find an honorable way to survive. Surely this cannot be by accident.
PIEG (Poor India with Entrepreneurial Gene) Hypothesis: The entrepreneurial gene in a widely poor populace provides an important insight into crowd behavior in India. Many investors made crores during the last two decades in Real Estate that explains fascination with real estate during last few years, those smitten by it were rich and poor alike – rich due to its tax-efficient nature, poor due to the riches it offered. But Indians are quick learners. The last few years in Real Estate have been fairly static, with minimal returns. With good infrastructure and substantial competition, enough supply shall be online to ensure negative real returns on real estate in the decade ahead. It will perhaps take an ordinary Indian a couple of years to figure things out, but figure he will out, before the mayhem. The exit may happen in stages, but the phenomenal returns on a preferred asset park of yore are gone forever.
When that happens, there will not be any left to splurge on buying homes at $100,000+ price points. Those who can are already neck deep in the home market. Those who cannot, will rather find ways to survive, then waste their limited means on a sumptuous living experience. If there is a market, it is likely to be for $15,000-$30,000 homes in Tier-II cities, and for $40,000-$80,000 price points in Tier-I cities, nothing beyond that.
There will still be opportunities due to standardization in cost of real estate; prices can rise in places which were hitherto left untouched – like Bihar and MP. Yet, I scarcely see an organized player extracting any benefit out of it.
With that, I sum up our fear of Real Estate fascination.
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