Big, Big Pockets

India’s most overlooked asset class is changing – for the better. Our resident India expert, Sala Kannan, takes us through the motions of buying real estate in India…

A trip to a real estate agent’s office in Chennai, India, was quite an eye-opener. We arrived five minutes early for our appointment. Outside the agent’s office building, we saw a man in white pants and a white shirt. He was lazily pacing up and down, his white flip-flops slapping loudly against his feet.

I rolled down our car window and asked him, "Is this Mr. Natesan’s office?"

"Natesan, yes," he replied in English.

"Is he in? He’s supposed to show us some properties."

"Myself Natesan."

OK, I thought to myself, flip-flop man here is our real estate agent. Natesan was a small man with an ample handlebar mustache. And his white flip-flops were at least two sizes too big. And really loud.

"Follow me, madam, I show you land," he said.

"Sure, but don’t call me madam."

"OK, madam," he replied, and flip-flopped to his motorbike.

India’s Housing Market: Selling a Lot of Houses

In just four decades, India will be the most populous nation on Earth. India’s middle class alone will be 983 million strong by 2015. And already, one half of India is under the age of 25. Now that is a powerful dynamic. And India’s demographics alone will be its greatest asset. This is a young and increasingly wealthy nation. Natesan will be selling a lot of houses.

"See that house, madam? Big cinema star living there," Natesan explained as we stood on an empty plot of land under the afternoon sun. Many wealthy Indians and Indians abroad have bought land or built beachfront houses in this part of Chennai.

"Everyone got big, big pockets, madam, plenty money. Business being good." Big pockets, indeed. India’s net income has doubled in the last 10 years. Everything is more affordable. In fact, India is the second largest mobile phone market on Earth. It is also home to the world’s second largest two-wheeler market.

"Past years, clearing title not important, madam. But now we are being very careful. Lot of foreigners coming to live here." Natesan explained as we walked a sandy pathway by the beach to another property.

In recent years, Natesan’s trade has changed. Unclear titles, poor building standards and ridiculous tenancy laws have historically plagued Indian real estate. That is why foreign investors have stayed away. Today, Natesan maintains better records and goes to great lengths to ensure that the title on a property is clear. The government is even considering computerization of land records.

Foreign direct investment is now allowed in real estate. And the sector is truly coming of age – financial institutions have filed for permission to introduce $1 billion worth of real estate mutual funds in India.

India’s Housing Market: The Difference Between a Bubble and a Robust Market

Does all this activity mean the Indian real estate market is in a bubble? Scarred by the devastating collapse of the dot-com era, we in the United States like to cry bubble at any asset that’s appreciating in value.

But there is a difference between a bubble and a robust market. Let’s compare India with the United States. Are Indians consuming more house than they can afford? No. In India, the ratio of the total value of mortgages to the GDP is only 2%, whereas it is 52% in the United States. That means in the United States, for every $100 we produce, we owe $52 as mortgage. Indians, however, owe just $2.

Has Indian home buying sent prices through the roof? Hardly. Over the last 10 years, real estate prices have almost remained the same in India, with the exception of a few large cities like Bombay and Bangalore. Median real estate prices in the United States, however, have risen nearly 15% in the last 12 months alone.

Are Indians taking out mortgages simply because rates are low? Interest rates are a healthy 4.3%, an 18% decrease from 2001. In the United States, interest rates were slashed a whopping 83% since 2001. Indians are using higher incomes (far more than lower rates) to buy homes.

The Indian housing market, unlike the United States’, is not thriving on an artificially propped-up fiscal structure. Growth in the housing sector has been mainly income driven and only partially interest-rate driven. Indian net income has increased nearly 100% over the last 10 years.

As Marc Faber puts it, "The most overlooked asset class is Indian real estate, because it is so difficult to develop, given the regulatory environment. The world still has lots of opportunities, and real estate in some unusual areas is an attractive proposition." India is now trying hard to ease its regulations and encourage foreign direct investment.

And the investment is coming. Driven by the information technology and outsourcing booms, more and more foreign companies are setting up shop in India. Five million square feet of retail space is being developed. And over $25 billion will be spent on urban housing.

At the end of our meeting, I told Natesan I would keep in touch. He dusted the sand off his feet and perched on his motorbike. "This is better than America, madam," he yelled as he drove off.


Sala Kannan
for The Daily Reckoning

September 29, 2005

P.S. Real estate is not the only overlooked asset class in India. I have found at least three other undiscovered and under researched investments in India. And these aren’t the overvalued outsourcing and IT plays everyone is chasing after. I am working on a special report right now. Watch this space for more India insights…

From India and a graduate of the University of Cambridge, Sala Kannan boasts connections with economists and industry insiders worldwide. An expert on global economic trends, she’s especially well versed in developing nations, such as India, Brazil, Argentina and China.

We continue our report from Argentina. The going is hard, sometimes, but no exertion is so great, dear reader, that it keeps us from reckoning on your behalf.

"This is the tourist circuit," said our guide. We had been driving for hours on a dusty dirt road. We had passed no more than one or two cars. If this was the tourist route, we wondered how desolate the lesser routes must be. There were no gas stations, no restaurants, no tourist spots that we could see…and hardly a single tourist.

On the other hand, the scenery was spectacular. But by late afternoon, half of our intrepid party was worn out. They had seen enough snow-capped mountains, rows of plain trees, vineyards and cattle ranches for one day. But we had one more property to see: a ranch so remote and desolate even the owner didn’t quite seem to know where it was. Was it 250,000 acres or 400,000 acres? Was it to the top of the mountains, or over on the other side? No one seemed sure. Besides, the questions were irrelevant, a bit like asking how drunk we had gotten on Tuesday night; there was no point in being precise about it.

We reached the edge of the property as shadows began creeping out over the valley.

"From here on, everything you see is part of the ranch," said our guide. We looked out the window. As far as we could see, across the broad valley, with its huge cactus trees and sparse grass…all the way over to the peaks on the other side, there was a lot to look at, but nothing much to see.

To get from the entrance of the ranch to the farmhouse, took us about half an hour of furious driving. There, on the side of the mountain, was a little man-made oasis…with rows of what we took to be gum trees (but were something altogether different) set out in broad alleys. The compound was marked out by these trees and by stone fences, called ‘pilkas.’ There was a reservoir to catch the water tricking down the mountain, and even a fruit orchard.

The house itself would have been Spartan even to the Spartans. It was built of solid granite…a stone as cold and forbidding as the valley itself. On top of the stone was a roof of earth. We gathered that the area must get little rainfall, or else they have to put fresh mud on the roof after each rainy season.

The house was not attractive. Nor was it made more fetching by the woman who greeted us at the door. She had a friendly smile, but we could barely see it. She was not wrapped up like she was expecting a blizzard, but more casually, as if this was the way she dressed everyday, indoors. She wore a large winter coat, a ski cap and a muffler that hid half her face, which turned out to be an act of kindness on her part. Neither she nor the house itself seemed suited to the climate. There was a courtyard at the center of the house; it would have been attractive with plants and garden furniture. But it was as barren inside the house as outside, and almost as cold. An ordinary plant would have withered from the cold.

More news from our friends at The Rude Awakening…


Eric Fry, reporting from Wall Street:

"If the earth is running out of cheap oil, should we care? Or should we trust that the faceless ‘they’ will find a solution before rising energy costs begin to cramp our cushy American lifestyle?"


Bill Bonner, back in Argentina…

*** "Before the hurricanes touched down, it seemed logical to see energy stocks as vulnerable to a pronounced consumer spending decline," Justice Litle told us this morning.

"A slowdown in energy consumption, brought about by a tapped-out consumer and slower growth in Asia, could have taken the speculative wind out of energy stocks’ sails. I was sympathetic to this argument pre-Katrina and said as much in my warnings to expect a possible liquidity implosion and sharp correction – which would be viewed as a buying opportunity once played out.

"Some are still expecting a sharp correction in the energy space, with the recent inflows of capital building toward a potential speculative blow off. After the combination of Hurricane Katrina, Hurricane Rita and developments in Japan, however, one has to wonder whether such a correction is still due. While not ruling it out, I am no longer sure we will see one anytime soon."

*** Whoever owned the ranch house must have missed the courses on "how to make a million dollars on real estate." He had a fixer-upper on his hands. But he showed no interest in fixing it up. The walls had not been repainted. There were no vases with flowers in them; no soft music; no rich fabrics, carefully arranged to look spontaneous; no open house; no balloons. The man was no expert on flipping houses, in other words. As in other parts of Argentina, people here seemed unaware that there was a worldwide real estate bubble.

The woman, we were informed, was the caretaker; maybe the owner had frozen to death and been stuck in a closet.

There was nothing elegant, convenient or comfortable about the place. The closest store of any sort was a 45-minute drive. From the look of it, there was nothing to be had in the little store in any case.

We turned a spigot to test the water in the house. It ran, cold.

"There’s hot water, too," said the woman proudly, as if the place just had it installed. "You just have to make a wood fire in the kitchen stove…it heats the water." Our interest in plumbing was suddenly and unexpectedly brought to life. Yes, there was a pipe leading from the side of the kitchen stove over to the kitchen sink. And there it passed through the wall to the bathroom. Well, let us say water closet, for it had water (we could tell from the brown stains and mold) and it was in all other respects like a closet. Again, no one had told the owner to update the bathroom and put in granite countertops. The whole house was built of granite…except for the countertops, which were of rusty metal.

Still, there is something charming and appealing about owning a stretch of land almost as big as a New England state. A man stands a little taller in his leather boots than he does in flip-flops. He breathes a little easier out under the big sky than he does down in the suburbs. And out here, he doesn’t have to worry about parking…or neighbors. He can open his bedroom window and shoot off a howitzer…or get roaring drunk and fall asleep in the driveway. He will simply freeze to death. No one will complain or notice. The nearest neighbor is at least a half an hour away.

Go ahead, have the loudest party you can imagine. Honk your horn in the middle of the night, or strip off your clothes and run naked down the valley. Only the cattle will think you are crazy.