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Excess supply in Indian Real Estate – Correct way forward

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Tushar Kansal
Tushar Kansalhttp://www.tusharkansal.com
Tushar Kansal has served in senior positions in Corporate Finance at Deloitte Touche Tohmatsu, Brand Capital (ToI), Aircel & was Head (Debt Management) at MTS India where he raised more than USD 2.5 billion complex structured debt from International and Indian Banks. He launched the startup IndusB2C.com in end-2014, prior to which he served as CFO (Chief Financial Officer) of DLI (Distribution Logistics Infrastructure), owned by Guggenheim; a USD 200 billion American Private Equity (PE) Fund. He is a B.Tech (Textiles), MBA (Financial Management) from University of Delhi and Google AdWords/ Analytics Certified. Tushar blogs at tusharkansal.com, tweets @TusharKansal & publishes relevant news on the right-wing Facebook page https://www.facebook.com/induschurning/

Real Estate (RE) is indeed in excessive supply. Reports say 6 years of inventories and so on. History to ponder is whenever Congress is in power, it makes huge money from corruption & puts it in RE. Just check entire history – Congress ensures RE goes up & up when it is in power. Also check – whenever BJP is in power, RE sees only nominal rate hikes.

Who puts this hoard of black money in RE? Corrupt Congressmen/ Businessmen aided by the fact that RE companies themselves have huge stakes of Congress politicians. DLF, Emaar MGF, Indiabulls RE is closely linked to Congress as an example. I am personally witness when Haryana Congress Government decided to create Dwarka Expressway, overnight – applications of RE companies for land in that stretch were cleared by Hooda’s in one go – this is just a small example on how much Congress would have made from that one stretch of 18 km land!

The RE model itself as practiced till now – pre-launch projects without even acquiring land fully – use that money to buy land – invest proceeds in tying up further land – leave the project in a limbo (since Buyer agreements fool proofed Builders against anything & everything) – then allot bulk of flats to group of investors – start hiking rates so investors load off these flats to end Buyers. These crony RE Builders ensured rain of black money coming in RE – On other hand, criminal Congress politicians like Chidambaram arm twisted RBI Governors to lower interest rates so that end Buyer would load up debt & demand comes in (No matter inflation burst through the roof for 10 years making life hell for the common man).

Other way of Congress to ensure steady supply of Black money to RE was by giving huge undue benefits to crony capitalists – Naveen Jindals of the world who got Coal mines for a song for example, or the Quantitative Easing (QE) by Pranab Mukherjee & Chidambaram post 2009 which resulted in 10 lakh crore of loans to select Businessmen – all of whom are now top Loan defaulters of PSU Banks – where did most of that money go? – Siphoned off from companies by these promoters and invested in RE! Naturally, RE rates went through the roof!

When Modi came, he spoke to Raghuram Rajan (R3) about lowering interest rates, R3 said till the time black money routes to RE is not closed, it wont result in any good. So, Modi has now passed the RE Bill and all loopholes (in above para) have been closed.

Prices of RE have crashed – But point to note is that they need to come down more! Why? Just see the Rental yields! Residential rental yields are in range of ~2% p.a while Commercial yields are in range of ~5%. They dont even cover inflation! (Global comparison – Rental yields globally are ~10% but then those are different markets).

Why are prices not coming down more inspite of that fact that demand is not coming in & Builders are taking cash loans from black money markets at 24-40% p.a.!? Two reasons – One, Commercial RE is still strong. There is good demand, India is now top FDI incipient country. Second, there is a nexus of Builders – a Lobby – which invested in land, paid off Congress politicians, local bodies for Licences etc, has already invested pre-launch money in new land and has been sustaining the projects at snails pace by borrowing mind-numbing interest rate black money cash loans – they are ensuring rates dont fall any further.

Just go to Golf Course road @ Gurgaon once – drive on that 20 km stretch – you will see huge high rises – Grand projects on both sides – with one thing in common – 90% are vacant – they are Ghost mini cities – but Builders like DLF have tanked up 20,000 cr loan from Banks and Equity from Stock Exchanges – so it has holding power – Builders of likes of DLF can wait endlessly – their investors keep on offloading flats slowly while prices remain high.

My sense is – now that most speculators have crashed to Earth, holding power of Mid-size Builders has waned – other innovations like Affordable Housing has all been tried – Banks no longer have money to lend, end-Buyer is only buying fully built-up properties and not touching under-construction one’s – Black money in system has drained out – and R3 is ensuring interest rates dont come down artificially (since he is CPI targeted) – we will see more price correction in residential segment eventually and big Foreign Construction firms will cherry pick prime projects and finish construction. Sanity will return with implementation of RE Bill and creation of a RE Regulator. But Commercial RE will remain high because end demand is strong.

Good articles to read on this issue:

http://swarajyamag.com/smart-cities/why-indian-real-estate-will-see-a-crash-or-at-least-a-long-period-of-stagnation
http://swarajyamag.com/business/real-estate-was-a-dud-in-2015-the-business-model-is-on-its-last-legs

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Tushar Kansal
Tushar Kansalhttp://www.tusharkansal.com
Tushar Kansal has served in senior positions in Corporate Finance at Deloitte Touche Tohmatsu, Brand Capital (ToI), Aircel & was Head (Debt Management) at MTS India where he raised more than USD 2.5 billion complex structured debt from International and Indian Banks. He launched the startup IndusB2C.com in end-2014, prior to which he served as CFO (Chief Financial Officer) of DLI (Distribution Logistics Infrastructure), owned by Guggenheim; a USD 200 billion American Private Equity (PE) Fund. He is a B.Tech (Textiles), MBA (Financial Management) from University of Delhi and Google AdWords/ Analytics Certified. Tushar blogs at tusharkansal.com, tweets @TusharKansal & publishes relevant news on the right-wing Facebook page https://www.facebook.com/induschurning/
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