It was heartening to learn that
35 international real estate developers will be showcasing their residential,
commercial, retail, hotel and leisure projects at IREX this weekend.
The
interesting thing to note was the point of origin of these offers – New
Zealand, Sri Lanka, Canada, Thailand, Europe and of course the US and the UK.
While most of
the economies exploring investments from Indian HNIs have emerged from Global
Financial Crisis relatively unscathed, I would like to outline key points that
could be helpful for those looking for a concise explanation when I say that
even these economies are experiencing bubbles in real estate and it is not advisable
to push your monies in there:
- Real estate loans dominate total individual debit in most of these countries. Hundreds of thousands of their citizens are sending an ever increasing portion of their income to banks each week, leaving them with less to live on. To the extent that a significant number of people are not even able to pay off their family home before retirement age.
- Stagnant incomes, underemployment and job insecurity are key reasons so many voters in Europe and America are now willing to embrace political aspirants outside the mainstream. Donal Trump reaching this far is just resonating this. The non-financial private debt of $27 Trillion has become a drag on economic growth. When private debt is high, consumers and businesses have to divert an increased portion of their income to paying interest and principal on that debt – and they spend and invest less. It surpasses demand.
- While in the UK, the average cost of house may have increased by 50% over the last decade, the wages have failed 10.4% – a decline matched in the advanced Western Economies only by Greece! The gulf is widening particularly in London, where the ratio has increased 3.7 to 9 times of average incomes. Japan, other parts of Europe and New Zealand in particular echo similar tones.
- Just like India, the average home price to income ratio is way high in New Zealand and Europe. Primary culprit being the floating interest rates. The same mistake was committed by American home buyers during the crash in the last decade – using adjustable or floating rate mortgages, which will reset at higher interest rates when the low interest rate environment ends. This makes Finance the largest industry in the country wherein in the banking system is dangerously exposed to the property and credit bubble.
- India is witnessing tremendous cash inflows. India attracted $44 Billion in FDI in 2015 making it the 10th largest destination globally marking a 26% increase wherein more than half was in ‘greenfield’ manufacturing projects. With manufacturing, software exports, infrastructure investments picking up, India is home to 4th largest population of millionaires in Asia Pacific region. And by 2025, this is expected to witness 105% growth.
Well, if you
were to look at the turn of events, it is not an exaggeration to say that the
companies flying-in to New Delhi to showcase their international properties are
not here to do you any favour. They need a saviour. It is much the same as
developers from Delhi NCR drive down to Bareilly, Hathras, Meerut & Kanpur
to showcase properties to aspirational, cash-rich, Grade B townizens.
While there
is apparent impetus being offered to Make in India, we should not slip away
from the other reality – Keep in India. The wealth India has generated needs to
be circulated within to keep the epicycle growing. Both on short-term and
long-term, capital gains and wealth creation aspects – India is rising and we
must keep it that way. Onus lies on each one of us.
