Who is profiting from realty?
For a decade Indian real estate has boomed as a high profit business for builders, land-owners, land bankers/hoarders, real estate companies, foreign investors, property agents, speculative retail buyers, NRIs and numerous supporting businesses in the informal sector. This has led to a new breed of real estate millionaires and tycoons who profited largely from the property boom with very little capital in a short span of time taking away 100s if not 1000s of crores in profits.
What happens on the ground?
Property story in India is similar to its onion story. In the case of onions, the farmer gets a fixed price for his produce of Rs.8/Kg (includes Rs.3.6/Kg profit), which the middlemen and traders hoard, inflate and sell @Rs.70 to the average consumer in the vegetable market. Similarly, the original land owners (mostly agriculturalists) sell their land for a pittance to land bankers, who hoard and sell them to developers at anywhere between 10-60x depending on the time of their sale. The developers in turn inflate the price and sell it to retail buyers, who buys it @ a net rate that is expensive by say 60x-100x the price at which the original land owner sold it.
Care for a sample?
Any sample taken from the suburbs of Indian cities would present you with the relevant picture - A suburban plot in Chennai sold at Rs.30 psf in 2003 is being sold at Rs.1875 psf in 2013 (63x) and an apartment at the same place is being sold at Rs.3200 psf by a developer in 2013 (106x the 2003 price). Discounting the cost of construction & approvals may bring down the profit ratio to 60x. Again there could be wide variations to this ratio, but every city has its own bubble episode.
Net-net, middlemen that were placed between the buy @Rs.30 & sell @Rs.3200 have had a tremendous multiplier effect on their wealth in a decade (160% p.a CAGR). Not to forget the speculative retail investors who engage in pre-launch buys and again re-sell those to end retail buyers for another 15-30% gain in the final leg of this bubble saga.
Ever heard of "Buy LOW, sell HIGH"?
Property has become such a compelling asset all over the world to the extent that even sovereign wealth funds and large fund houses hold up to 60% of their portfolio in properties. So, why would the retail investor not be a part of the game? He is in too, but with a key difference - the end buyer makes a genuine buy of a property in which he plans to live and leave as inheritance to his kids, whereas the institutional investor is only interested in speculative quick profits. Much akin to equity markets, institutional investors (domestic & foreign) enter the market low, inflate, sell high & leave with huge profits. And once they leave, the bubble bursts, making the end buyer indebted for life with a high liability. So, the next time when you think of buying a property, remember this:
"Price is what you pay; Value is what you get;" - Warren Buffet
Economics basics tells us that there is a cycle of peak & trough in every asset class. So, did it ever occur to you why property prices are going in only one direction so far? Next article examines what lies beneath the property boom in India..
What happens on the ground?
Property story in India is similar to its onion story. In the case of onions, the farmer gets a fixed price for his produce of Rs.8/Kg (includes Rs.3.6/Kg profit), which the middlemen and traders hoard, inflate and sell @Rs.70 to the average consumer in the vegetable market. Similarly, the original land owners (mostly agriculturalists) sell their land for a pittance to land bankers, who hoard and sell them to developers at anywhere between 10-60x depending on the time of their sale. The developers in turn inflate the price and sell it to retail buyers, who buys it @ a net rate that is expensive by say 60x-100x the price at which the original land owner sold it.
Care for a sample?
Any sample taken from the suburbs of Indian cities would present you with the relevant picture - A suburban plot in Chennai sold at Rs.30 psf in 2003 is being sold at Rs.1875 psf in 2013 (63x) and an apartment at the same place is being sold at Rs.3200 psf by a developer in 2013 (106x the 2003 price). Discounting the cost of construction & approvals may bring down the profit ratio to 60x. Again there could be wide variations to this ratio, but every city has its own bubble episode.
Net-net, middlemen that were placed between the buy @Rs.30 & sell @Rs.3200 have had a tremendous multiplier effect on their wealth in a decade (160% p.a CAGR). Not to forget the speculative retail investors who engage in pre-launch buys and again re-sell those to end retail buyers for another 15-30% gain in the final leg of this bubble saga.
Ever heard of "Buy LOW, sell HIGH"?
Property has become such a compelling asset all over the world to the extent that even sovereign wealth funds and large fund houses hold up to 60% of their portfolio in properties. So, why would the retail investor not be a part of the game? He is in too, but with a key difference - the end buyer makes a genuine buy of a property in which he plans to live and leave as inheritance to his kids, whereas the institutional investor is only interested in speculative quick profits. Much akin to equity markets, institutional investors (domestic & foreign) enter the market low, inflate, sell high & leave with huge profits. And once they leave, the bubble bursts, making the end buyer indebted for life with a high liability. So, the next time when you think of buying a property, remember this:
"Price is what you pay; Value is what you get;" - Warren Buffet
Economics basics tells us that there is a cycle of peak & trough in every asset class. So, did it ever occur to you why property prices are going in only one direction so far? Next article examines what lies beneath the property boom in India..
Comments
Post a Comment