Don't Burn Down The House

Don’t Burn Down The House

The Non- Resident Indian ( NRI), and the PIO ( person of Indian origin, meaning holding another country’s nationality now, but ethnically an Indian, or even married to an Indian passport holder), is probably feeling good about his hard currency fetching him more rupees every passing day.

Reports suggest that they are looking at investing in flats and bungalows in the seven metro cities leveraging their windfall exchange rate gains. They are also paying off loans with the arbitrage opportunity on the currency. And why not; there is never an evil wind that doesn’t blow some people some good.

The inward remittances from the Indian diaspora are accelerating with the rupee weakness. It stood at $ 69.35 billion in 2012 as compared to only $ 46.84 billion by way of the vaunted FDI per 2011-12 figures.

Inward remittances have been a bulwark for the Indian economy for long. Money in from NRI’s and PIO’s accounts for some 4% of Indian GDP. This is largely unsung, while the much sought after FDI is almost half of that!

 And such remittances are expected to grow by anywhere between 15%, already up in the first six months of this fiscal, to 25% for 2013, over the record 2012 figures.

Other beneficiaries of the currency crumbling and runaway inflation include all current owners of Indian real estate. They bought in, fortuitously, when the prices were lower and the rupee was stronger. They have ergo kept pace since then with all the rampant inflation as far as their homes and commercial properties go.

This is the good thing about the reality of real estate in India. It only plateaus or goes up in price, never down, and all of it is built in brick and stone designed to last for a minimum of 30 years. This is quite unlike the flimsy prefabs and inflammable lumber that most American homes are made of, except for the old historical “brownstones” etc. built before modern materials kicked in.

Europe has more solid homes, if smaller, as we understand them, but Americana has affected a lot of the newbie construction there too.

Prices of Indian property held fast may have doubled or trebled in the last five years and even indexed for inflation, has given owners some 20% per annum on their investment. This even as they have lived in it or rented it or held it closed up for a rainy day.  

In Mumbai, this has done even better because the premium location supply is extremely restricted, you could call it the scarcity premium. There is no scope for new product to come on the market in South Mumbai for example, except by way of redevelopment. This applies pretty much to all the metros, now considered to be seven in number, but to a lesser extent.

Property therefore can be the mute saviour in these uncertain times for many in the middle and upper classes.  We need to understand this and reprioritise our understanding of our security and savings.

Elvis Presley’s cover of Carl Perkins’ Blue Suede Shoes was a massive hit in its time.  So much so that fifty, sixty years on, most rock n roll fans still knows the song. It has some curious lyrics which attempt to underline the importance of those shoes by suggesting that any antagonist is free to “burn the house/ steal the car/ drink my liquor from an old fruit jar/” just as long as the blue suede shoes are left unharmed.

High-brow magazines such as The New Yorker have tried to make sense and significance of it, the lyrics, particularly about the obsession with the shoes, or perhaps its metaphorical stand-in. But most listeners understand the sentiment in their own way without any difficulty.

In the Indian context, particularly now, we can’t possibly worry about the shoes. We must not however compromise the safety of the house. Our future may depend on it. It will keep pace with the fuel price rises, the knock-on effect on all prices, and the depleting foreign exchange reserves and every other kind of bad economic news. Nothing else can do this.

Having said that, and now that Socialism does not hold the sway it once did, the concept of “unearned income”, with its built-in pejorative, is largely replaced by the concept of “capital gains”, a far more comfortable and respectable thing to be involved in seeking.

And with maximum rates of taxation moderated in deference to the persuasiveness of the Laffer Curve towards overall tax compliance; as well as indexed benefits for long-term capital gains, this is probably the surest bet in the country.

Long- term for property is currently defined as a holding period of three fiscal years from taking official possession of it. This could change after the new Direct Tax Code is implemented but there are many points of it being debated as of now.

Also consider that we have done away with death or estate duties completely, and wealth tax is largely ineffective, and even in the direct tax code in the works, it is much more realistic in terms of its threshold limits. Applicability for Wealth Tax will kick in after property is assessed for over 30 to 50 crores.

In most families there are of course several hands, and therefore several property owners potentially. Particularly, for what the Income Tax authorities call “self-acquired” property as opposed to the inherited piles.

Attempts to discipline builders via the new Realty Bill in the works will also push up prices if implemented.

The NRI therefore has a window of opportunity only if it is seized quickly. Otherwise the inexorable price rise will squeeze out potential buyers. New projects will be fewer and farther apart. And there will be a lot of people forced to rent as buying will be too far a stretch. But rents too are set to rise as the current ones are tending towards a fraction of the rising property values.

Redevelopment of old properties to take advantage of increased Floor Area Ratios and current finishing materials and design will prove extremely lucrative. It is the only way to turn locational advantage into a bonanza.

And all of this in a place and time when all the rest of the economy is crashing or in the doldrums. This may, of course put a dampener on transactions, but only till people realise it is the one sure shot in an uncertain business environment.

(1,074 words)

June 29^th, 2013

Gautam Mukherjee