Are Indians Asset Rich, Cash Poor or Are we Deceiving Ourselves even with Valuations of Our Assets ???

Are Indians Asset Rich , Cash Poor or are we deceiving ourselves with valuations of our assets?

Economic expansion of 2004-2014 had its own histrionic background and probably by now we are well aware of it. Opposing Politicians will always have their say when in power, while those in power struggle to find ways out to revive Indian economy.

Fiscal prudence is learnt either by nurturing it in our attitude for life and business or by force. Greed is human nature and partly a stepping stone for learning the real truth that sustainable business cannot be achieved if leaders, managers, investors, lenders, managers don’t accept it in time. You can only pace uphill but if you keep running at a high speed beyond the peak, downhill towards the valley, you ought to fall as gravity rules persists.

Private Equity, Family Offices, Business Houses from various sectors invested heavily in land from 2005-2008, followed by Banks and NBFC’s lending for development at higher valuations as market valuation without considering actual costs of land and construction, market absorbtion i.e. real demand of end-users. The growth was more of investment push than demand pull. Supply outstripped while demand faltered. As FDI funds dried up after 2008 Global Fiscal crisis while most developers promised multiple projects only on banners, posters and brochures. Banks and NBFC’s continued lending considering largest growing democracy of India has enough domestic growth in control even if there is a global meltdown with no afterthought of potentially large NPA’s in the making.

None of the large investors or lenders then questioned land sellers or developers on why most land transaction price was not a realistic (residual value of the entire project) but was actually an extortion money being extracted from en customers. Abnormal Land valuation across India is the main culprit for today’s unimaginable calmness, fuelled by the greedy land traders in last decade.

Most banks competed with other banks and continued lending for small and large projects without proper due-diligence creating more assets (loan books) for banks. As supply enhanced, while disposable income of potential customers did not grow relatively, cashflows for developers strangled; repayments of banks and NBFC’s were restructured assuming eventually cashflows will improve or more equity will be pumped in to sort out the issues.

As developers faltered on payments to some land owners, while not been able to accomplish multiple projects launched in hopes of exponential growth, having raised tons of advance from customers and investors; lenders have been left in lurch while PE investors are either stuck up with dead asset or have been left staring at negative returns while adding to the woes, ? (INR) crashed in global Forex markets from ?40/$ in 2007 to ?68-70 /$ in 2019.

While more than a decade has passed since the Lehman Crisis, banks and NBFC’s have grown with more NPA’s, Equity Fund investors have been awaiting for exits or sold their ownership in distress, land owners have invested again in land becoming “Asset Rich Cash Poor”. Only species who have filed for substantially higher IT returns in last decade are many politicians and their allies.

Land valuations have never been ascertained by other valuation processes other than market comparables which are actually deceiving as market research reports are authenticated with a bias of who pays for it.

Till land valuations and in turn asset valuations do not take a hit and become realistic numbers, impacting bank loans and thus creating distress assets, real estate business will not return to thriving pace as it began its journey in 2005.

If Developers agree to sell land, they have to pay back debt to banks and land owners (politicians disguised in various forms) take away the left over, markets can revive again. But is anyone ready to absorb shock as unlike USA or EU, Quantitative Easing (QE)is not possible with Indian ? status in global Forex market and Fiscal deficits demon raising it third eye in form of ratings.

Indian Real Estate Space is yet to see the real shock of its past karma.

Are there any solutions to the woes of ailing Indian Real Estate sector to make it jump back to a sustainable pace of growth ? Or we are happy to be Asset Rich With poor liquidity till it hits really hard on our face. Please share your thoughts in comments section.

Tushar Deochakke