A report by Manish Bhandari of Vallum Capital says that the endgame of speculation in Indian real estate has begun. Bhandari says that a multitude of factors are converging after a decade, setting the stage for a deep correction in real estate. The story in India has all the ingredients of a making of a bubble a la Mississippi Scheme, the South Sea Bubble or the Tulip Mania.
Real estate prices in India are among the highest when compared on a per capita basis. Rent yield in India, which can be used to compare returns within real estate across countries as well as to compare across asset class, is one of the lowest in the world. Indian real estate earns a rent yield of only 2.7 per cent compared to 4.7 per cent in the US and 4.5 per cent in Japan.
Within emerging markets, Indonesia has a yield of 9.3 per cent while Philippines real estate investment earn a rent yield of 8.6 per cent. The only other country which has a 2.7 per cent yield is China which is already facing a bank-fuelled bubble like scenario in its real estate sector, which its government is desperately trying to control.
RBI is sucking out liquidity like a sponge and the sector that will be the worst affected is real estate. Bhandari says that the fall in property prices is likely to start from the deleveraging cycle by Indian banking sector which is running a multi-decade investment to deposit ratio of 108 per cent. Balance sheets are expected to be deleveraged over the next three-four years. The previous deleveraging cycle in 1997-2003 saw real estate prices correct by 50 per cent in Mumbai Metro Region.
Adding to the liquidity crisis is the likely exit of private equity (PE) players from the market. Average life of private equity in real estate is seven-eight years. Year 2013 marks the beginning of private equity returning back to shores. Manish says that PE players entered India at an exchange rate of 45; they will now be exiting at around 70 levels a loss of nearly 50 per cent in currency conversion itself. The exit of PE funds will create a distress sale situation in the real estate market, shortly leading to depressing price situation for the next 18 months.
Bhandari feels that unless the government deflates the housing bubble in an orderly manner, the collapse by market mechanism will surprise generations on how a nation on its way to prosperity by speculating on a piece of land eventually lost a fortune.