Real Estate & India’s Savings..!
by Mr. Ritesh Jain,
Tata Asset Management Co. Ltd.
Earlier, having
a home was a dream that took years to fulfil & needed a lifetime’s savings
& loans from relatives and friends.
Things have
changed a lot with the advent of housing loans. But not only are people buying
houses sooner in their lives, housing loans are also fuelling the appetite for
hoarding real estate.
Live to an asset
class
The concept of
real estate has transformed from just being a place to live to an asset class
of choice. The average Indian’s love for real estate is well known, and why
not?
In some pockets,
real estate & land have delivered above average returns relative to most
asset classes.
However, due to
lack of regulatory control, the sector has also become a favourite investment
avenue for many with undisclosed income sources.
Along with gold,
the real estate sector has played an ancillary role as a vault of illicit
wealth in the country.
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| Mr. Ritesh Jain Tata Asset Management Limited |
But, the
emerging trend speaks a different story- real estate may be losing its
attractiveness and giving way to financial assets.
This change in
trend is being driven primarily by:
• Positive real
interest rates after a long period of financial repression
• The central
government coming down heavily on black money. The latest in this is the
proposed Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, also
known as the black money Act, which recommends classifying offence as
non-compoundable, and up to 10 (TEN) years imprisonment, thereby placing
ownership of foreign illicit assets at par with criminal offence
• Elevated
ownership of properties in the past few years.
Transition from
physical to financial assets The historical distribution of household savings
between physical & financial assets has been more or / less equal.
However, 2008
onwards, households increasingly allocated a higher portion of their savings to
physical assets (real estate & gold) resulting in financial savings
shrinking to half of physical savings.
Investments in
financial assets..
The future may
be different. With inflation under control & real interest rates being
positive, the returns from real estate sector are now showing signs of fatigue,
which could push investors out of the sector and in to financial assets.
Positive real
rates are important to incentivize investments in financial assets, but this
alone cannot channel incremental household savings into financial assets; it is
the thriving black money fuelled real estate market which needs to be curbed.
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| From Live Mint |
The strict
stance of the new government has the potential to disrupt a well-oiled black
money ecosystem and curb such transactions in real estate. It will also trigger
movement of household savings into financial assets, thereby making cheaper
capital available to the private sector, apart from lower tax burden and
lowering inflation.
Measures and
products such as Jan Dhan Yojana, direct transfer of benefits, strict rules on
black money and others may lead to:
• Reduced
leakage from government expenditures
• Reduced use of
cash in deals and transactions
• Tracking of
funds movement by routing transactions through the banking system
• Rules and
regulations to deal with violations
Is there a
genuine demand for real estate?
India is in a
strange position:
It has more
houses than households. According to Census 2011 data, while the number of
urban households has gone up from 187 million in 2001 to 247 million in 2011
(an increase of 60 million), the number of houses has gone up more—from 250
million to 331 million (a difference of 81 million).
This means there
are 21 million more houses than households. Clearly, a large portion of the
incremental investments in real estate was made by investors rather than by
households to actually live in these houses.
Mr. Arun Kumar,
professor at the Jawaharlal Nehru University, and an expert on India’s black
economy, estimates more than half of the economy to be illicit, split equally
between consumption & savings, and a large portion of this savings invested
in real estate and gold. The simple explanation for this is that many
apartments will be bought and resold, and the cycle will repeat itself, but
nobody ever needs to live there. And in this way, they become a parking lot for
illicit money.
The pinch of
slowing demand for real estate is already being felt by developers who are
turning to discounts and even freebies to attract buyers. With fewer buyers,
developers are faced with inventory pile up. Apartment inventory in National
Capital Region (NCR), Mumbai and Bengaluru has been building up to reach the
highest levels, according to data by Liases Foras, a Mumbai-based real estate
rating and research firm.
In Mumbai alone,
the estimated unsold inventory could take 5 years to clear at the current rate
of sales, and with the projects in pipeline, this number could reach closer to
a decade to clear.
The various
steps being taken to curb flow of black money are in the right direction. If
the resolve remains strong, we might be standing at the cusp of an inflection
point where households’ skewed investment portfolio could be incrementally
favoured towards financial assets.
But, how things
progress for the realty sector will have a role to play in this. Realty is in
for a double whammy.
Not only will positive real rates gradually lead to
channelling of incremental household savings to financial assets, clamp down on
unreported income will further reduce the attractiveness of investing in real
estate.
The message is
clear..!
Given the emerging
scenarios, financial assets such as mutual funds, insurance and banking
products are positioned to yield better returns than physical assets like real
estate.
And for those
waiting to fulfil their dream of owning a ghar, the good times may not be too
far away.
About the author
Mr. Ritesh Jain
is chief investment officer at Tata Asset Management Co. Ltd.
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