By Dr Sanjay Murari Chaturvedi
Real Estate is dangerously heading towards dead end by 2050. The sunk cost in the real estate and further investments in saturated markets giving us indications that we are heading towards point of no returns. Looking at world real estate markets, China crisis, Souths Korea crisis, Dubai in early 2010 and so on. When market has abandon stock and no takers, market stands on maturity level where there is no growth. The Theorem of Scarcity doesn’t work on artificial data of scarcity or notions where everyone is seller.
The Stage is set:
Today, corporate financier look at Real Estate as lucrative investment destination with returns on investment is as high as 25-35% YoY plus a rock solid security for its mortgage business, whether it is debt market or equity market. Assets Reconstruction companies galore. Every corporate, housing finance company / institute and Non Banking Financial Entities have entered the business of Assets Reconstruction. What does it means? It means that ARCs are in business of buying Mortgaged backed securities which are from bad loans over the years real estate financiers are funding. ARCs are nothing but margin hunters.
What is the Fate:
The fate of ARCs that almost 90% of their auction of properties are failing for want of poor methodology of valuation by the initial financiers because of carried away approach towards the slogging real estate markets. There are no takers of the stocks of ARCs and Stressed Assets divisions of banks as almost every public auction is failing for first three attempts. Resulting into private treaties and selling the portfolios at a loss of profit or in other words lesser margins. Sometimes hand in glove with the officials of ARCs and investors. The rate of absorption in all segments are slower than the production. Huge inventory lying and flats/ offices are vacant. May be, it is a cycle where the inventories piling up and demand is limited, but fact remains that in the long run, the cost of fund to hold back such huge inventory to a particular level will ask its price.
Builders are replaced by Funds:
Practically no builder is debt free. Either taking equity partner or costly debt, there is no other fund source for real estate development as days are gone where the projects were self funded and people stand in que to book there flats/ offices / shops. As financier fear that builder may take cash in tractions over the table and will conceal the real sell price, they keep their own check and balances and keep the selling price higher than market price so that builder do not have any margin to take cash from his customers. In the return, builders have become mere contractors in the hands of fund people.
Rental fluctuation:
With lots of economic regressions and adjustments for equilibrium, the employment generation and micro market shift its focus from season to season and demography to demography. This resulted in uncertainty in rental markets. It was observed that because of the redevelopment process, tenants get 18 months rents in advance and hence rental are affordable at all levels as people don’t want to leave the vicinity for reasons like schooling of children, office, shops, etc. It is short term. Mentally of Indian people is that they don’t want to stay on rent forever. Hence they keep on looking for permanent accommodation. Because of this, rental market is short term. Real Estate investor to yield rental income have to depend on the demand for rental accommodation which may end sooner or later as the pace at which India is accommodating its population, “Housing For All” soon will be achieved if not later by 2035. Rental yield in business premises also have limited scope as because of advance communication system, decentralization of commercial activities have emerged as rising trend in urban agglomerations.
The Cycle:
Real Estate business has a certain cycle for its business process which purely depend on its absorption. Every decade has ups and downs because of government policies, financial and capital market rise and fall, FDI, Hedging habits and new arenas for investments. Securitizations of real estate will take its time as it usually not exchange traded products and fractional ownership still to see a day light under the shadows of acceptance of the investors. A certain cycle / path is discovered by western countries and developed economy where the real estate have saturated to a point of no return.
Conclusion:
Real Estate is a sunk cost. This has been fundamental phenomena world over. By 2050, those who fund loan against real estate/ property will realise that it is no more a scare commodity. Supply is abandon and user have great options. When a mature real estate market tilt itself to buyer’s market forever, year 2050 is no far where the real estate market will achieve to loose grounds and reach point of no return.
