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Business News/ Opinion / Real estate is not all that we require
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Real estate is not all that we require

We need all asset classes to create a balanced portfolio

Shyamal Banerjee/MintPremium
Shyamal Banerjee/Mint

The Indian Realty Flash Sale (IFRS), an online sale of properties that concluded on Sunday, was an interesting way to put some life into the sluggish real estate market, an almost pan-India issue right now. I spoke to people in Bengaluru, where I stay, and also recently visited a builder along with someone who bought an apartment at the pre-launch stage. Of the roughly 300-odd flats in the project, not more than 30-50 have got sold and currently the builder is selling the flats with a 100% buy-back option.

The contours of the deal is as follows. You pick an apartment of your choice and make the initial downpayment. The rest of the money is taken as home loan, wherein you pay the instalments but the builder regularly transfers the interest money to you. So you have to pay the principal component which will be minuscule in the early years of a home loan.

Essentially this helps the builder to lower the cost of borrowing from a good 15-25% per annum to 10-12% per annum. After six months, you can decide whether you want the buy-back option or you want to retain the apartment. If you opt for the buy-back option, the builder will buy it back from you after 18 months for 100% above your initial downpayment.

Here is another one heard on the radio one morning: pay only 1 lakh as downpayment and remaining on possession of the property. If you do not like the property upon possession, you are guaranteed 2 lakh back after 2.5 years.

Now obviously there will be fine prints to all of this, but the point is totally different. We keep arguing that we do not have enough financial capital to fund our companies, banks and infrastructure projects, or equity participation is low and mutual funds have hardly penetrated. The reasons are manifold and most of them, same as everything else, are man-made. We all are party to this and we all need to come together to solve this issue.

How is this going to be possible, if you are competing against a completely unregulated product?

Risk disclosures: All mutual funds have to advertise that “mutual funds are subject to market risk, please read the offer document carefully before investing" and even the safest of the options such as fixed maturity plans and liquid funds have to give this disclaimer. Compare this with open advertisement of 100% return in three years; financial products don’t stand a chance.

Tax benefits: The income tax department tops this benefit with additional tax incentives to homebuyers, what else does one need? In this case all this is indirectly being passed on to the builder.

Leverage: Let’s say you visit a casino that promises guaranteed returns. I am sure everyone will be excited. Now it does not stop there, the casino owner also arranges an opportunity for you to raise loans, so for your 100 you can actually bet for 1,000 and that too with guaranteed returns. Obviously nobody is asking as to who the guarantor is.

Rating: If you are a non-banking finance company, housing finance company or a company trying to raise money from the public, you have to compulsorily get yourself credit-rated by at least two different rating agencies. So if you are attracted towards a high paying low-rated corporate fixed deposit, you know that it will be risky. But a 100% guarantee from a builder just seems completely risk-free.

Given all of this, any investor will be more inclined to put more money into real estate. Though some have already got, and some will in future get, shocks when they really need the money, but this lopsided nature of regulation will just not allow money to flow out of real estate.

And like everything else, this creates a feedback loop of its own. Now even parents are telling kids to take a home loan and buy a house as that’s the best way to save and make money. But when the crisis really strikes with falling real estate prices, we will have our own version of the subprime crisis. We are already seeing that in certain parts of India as the liquidity in real estate has completely dried and getting out is just not possible.

It may sound as if I am against real estate as an investment, but I am certainly not.

My only argument is that we need all asset classes to create a balanced portfolio. If we do not tie up the rules consistently across asset classes with regulations, we will continue to have this lopsided balance sheet for individuals, banks and our economy.

Uday Dhoot is a Bengaluru-based financial planner.

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Published: 30 Jun 2015, 06:39 PM IST
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