Monday, September 29, 2014

The real estate sector in India and its national security implications

The real estate sector in India is booming and in the rush of euphoria that follows - it is easy to lose sight of the crucial national security implications of such an issue.

The real estate market is typically a large fraction (12%-18%) of any national economy. In most countries, the real estate market grows at a CAGR of 3-4%. The value of a property typically triples every 30 or so years. Deflated correctly the growth rate of the market is usually proportional to the growth of the population over the same timescale. In the developed world this typically turns into a real growth rate of 1-2% with the value growing very slowly to about 2 times the real price in 30 years.  Compared to this - the stock market in a developed country typically grows at around 10% per year. The bond market typically grows at a few percent 4-6% per year.  Generally speaking any shift in the valuation of real estate has deep impact on a nation's economy as it effectively sets the scale for the risks that any player in the economy is willing to tolerate.

The Indian real estate market is reporting very high levels of growth. Anecdotal numbers in Indian cities are reaching 12-15%. Numbers being reported in the rural belt are much higher. This is comparable to the returns that can be obtained in a well managed portfolio in the Indian stock market. While this may be completely understandable given India's demographic dividend, it poses a significant threat to India's national security as 15% of national economy is now exposed to poorly quantifiable risks. In the near term these risks present as rapid shifts in consumer confidence and increased volatility and liquidity demands that appear and disappear with little or no warning. This kind of thing makes the economic "ride" very very bumpy for investors. Every real estate transaction in India is thus accompanied by a "black" cash-only component which can fluctuate with no visible cause whatsoever.

Compounding this short term risk is the long term risk posed by a catastrophic lack of infrastructure. At the most basic level land transactions in India are poorly policed. There is insufficient data to build a clear title and most acquisitions come with subterranean risks. A vast market in "benami" properties (false deeds) and "gair kanooni qabza" (illegal land grabbing) exists. Even rental income can be unstable as the legal relationship between renter and landlord is poorly audited and neither side enjoys a real sense of protection. Core infrastructure like communication (road/rail/etc...), water, waste management, and electricity is very very shaky. Higher level infrastructure like health security, environmental management and social security is unstable. This risk is persistent and it defies detailed comprehension. If you thought mortgage backed securities on sub-prime loans in the US were bad... you have no idea how bad the Indian equivalent of that is.

One response to such volatility and sub-surface risks is a narrow-minded culture of inwardly investing i.e. putting private money into community oriented real estate development. People simply invest money property so that "their kind of people" can live in a "safe and secure" location. Every effort is made to "secure" the land, and drive away "investment risks" ... like you know - "those people who are not like us....". If that means having private armies, making alliances with criminal lords, or encouraging rioting against peer competitor communities - so be it.

Another response is the short term volatility rider who deliberately feeds instability by investing in a way that profits only himself/herself but leaves everyone else in the lurch. This means influencing a local market to move in a desired fashion using any means possible - including having private armies, making alliances with criminal lords, or encouraging rioting against competitor's investments.

So there is the bottom line - an appealing market for an Indian investor is the real estate market and the only sense of investment security this person will have is through - having private armies, alliances with criminal lords and encouraging communal rioting.

The whole country is gradually becoming a carbon copy of Juhapura-Vejalgad in Gujurat. The poor Indians who happen to be "different" from whatever the dominant social group in the area is... are getting shafted.

Where has this happened before?... ah... post Versailles Germany comes to mind. The rapid fluctuation in the value of the German currency created a massive valuation crisis in the economy which spiraled rapidly in depression era Europe. Was it a real surprise when an out of work Austrian painter emerged from the woodwork to large crowds and collective chants of  "Deutschland uber allez"?

Was it really a surprise when the first thing out of his mouth for was "Deutschland den Deutschen..."?

Ideas of lebensraum are a hair away from re-emerging in the Indian public debate.

The thing to bear in mind - is that you don't need gas chambers to commit genocide. 6 million people would merely amount to the third decimal place in India's current population.