India Knowledge@Wharton: Buying into realty hype?

India Knowledge@Wharton: Buying into realty hype?
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First Published: Mon, Jun 25 2007. 12 15 AM IST
Updated: Mon, Jun 25 2007. 12 15 AM IST
Drive through any of India’s major cities and it will be impossible to go a mile without running into brightly coloured cranes, construction rubble and men in yellow helmets. Commercial high-rises, residential townships, industrial parks and shopping malls are exploding into existence, encouraged by both long-term and speculative investors. Oversized private equity commitments by a growing number of foreign investors and home-grown financial institutions are helping feed the frenzy.
But several astute industry watchers have begun poking holes in that picture. For one, they say many foreign investors have actually brought in only a small portion of their promised investments. According to Aashish Kalra, co-founder and managing director of Trikona Capital, a private equity firm with offices in New York City, London and Mumbai: “Last year, less than $1 billion (about Rs4,100 crore) was actually invested in Indian real estate. That’s less than the value of half a building in Times Square.” Speaking during a conference organized by The Indus Entrepreneurs in New York, Kalra compared that figure to market estimates of $15-20 billion in foreign capital headed for Indian real estate.
Sameer Nayar, managing director and head, real estate finance, Asia Pacific, Credit Suisse, offered a similar assessment. “There is a lot of hype about capital going into Indian real estate ... (but) not a lot of money is actually going in.”
For those who have invested, soaring land prices and price resistance from buyers threaten to narrow margins. Moreover, extracting good returns from these investments calls for significant local market expertise in dealing with regulatory and other obstacles, Nayar said. “You make money because you can deal with the problems, and that’s why your returns could be 50%. If it were an easy market to work in, you would make only 15%.”
Poor health kills small businesses in South Africa
As in most countries, small businesses are everywhere in South Africa —“tuck shops” that sell flour, sugar and other items; seamstresses; auto body shops; brick fabricators; bars and restaurants that seat a handful of people.
While it’s estimated that these businesses account for almost 50% of South Africa’s total employment and 30% of its gross domestic product, the impact of poor health on these enterprises has been largely overlooked by researchers. Measurements of the economic toll of disease tend to focus on the formal economy rather than on the informal sector, with its many owner-worker enterprises and businesses that often have just a few employees.
But a new study by Li-Wei Chao, a research associate at the University of Pennsylvania’s Population Studies Center, Mark V. Pauly, Wharton professor of health care systems, and other scholars is attempting to fill that gap. After conducting health surveys of small business owners in Durban, South Africa, and then tracking the businesses between 2002 and 2004, the researchers found that “poor baseline health and declines in health over time are both significantly associated with subsequent business closure.”
But their research also points to a wider, more insidious effect. “We found that… these (closed) businesses were not replaced by new ones. Hence, these services can be considered ‘lost’ in each community in which the businesses previously existed,” they write. The closing of a corner store, for instance, would not just hurt the owner and his family, but also neighbours who depend on the shop for daily provisions.
The results convey an important message for health care policy makers and providers. “Poor health impacts the economy,” Pauly says. “It seemed clear to us that the demise of many of these small businesses harmed their neighbours as well as the owners themselves.”
Is rainfall insurance a washout for farmers?
In developed nations, farmers use futures contracts, insurance and other financial products to make it through the lean years. One might expect farmers in India to jump at the chance to do the same. But when a company started offering inexpensive rainfall insurance several years ago, fewer than 5% of the eligible farmers bought it.
Defying expectations, the insurance was mostly purchased by farmers who needed it least, while it was rejected by farmers at greatest risk of financial catastrophe if the rains failed.
“Participation rates were lower among the more vulnerable households,” said James Vickery, a research economist at the Federal Reserve Bank of New York, who spoke at a recent Wharton conference on India’s financial system organized by the school’s Financial Institutions Center with the Centre for Analytical Finance at the Indian School of Business in Hyderabad and the Stockholm-based Swedish Institute for Financial Research.
Why did this happen? The answer should make any marketing or advertising executive shudder: Many potential customers simply didn’t understand the product—not well enough, at least, to dip into their severely limited resources to pay for it. According to a survey conducted by Vickery and other researchers, about 25% of non-purchasers gave that reason, while 21% said they could not afford the premium. Another 24% worried there was too big a chance they would not receive an insurance payout, citing reasons such as the rain gauge being too far away.
With better marketing and a few modifications to the policies—such as issuing credit for post-harvest payments—it may be possible to get more subsistence-level farmers to embrace rainfall insurance, helping soften periodic famine in some of India’s poorest areas, Vickery said.
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First Published: Mon, Jun 25 2007. 12 15 AM IST
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