The Great Indian Land Trick

Its been sometime since I last blogged, been busy with a whole bunch of personal stuff and also being flabbergasted at how the Indian economy is being run into the ground. Anyway, here I am, but only to chronicle a pet conspiracy theory that occurred to me. It is one that I have mentioned countless time to a whole bunch of people over the last two or three years but only now putting down in writing. At the outset let me apologise for the long winded blog, but the matter is such that it required some details. In any case I do not consider this my most articulate work and hope people can wade through the messiness and get to the crux.

Let me start of with a short story of an advertisement I saw in 2010, on a large hoarding in Bandra for a property being developed in Kurla. I asked to be contacted by a sales representative thinking perhaps it was time that I invested in some real estate in Mumbai. Receive a call I did, and what a call it was. The sales guy told me the minimum price for a 1,000 sq ft flat, was Rs 50 million, approximately US$ 1 million at the exchange rates then. This was a ridiculously brazen price for an apartment in Kurla, one of ‘less nice’ suburbs, least safe as well in event of a communal conflagration. Consider this, for US$ 1 million I could get an apartment in Zurich, one of the top three most expensive cities in the world. Zurich, with its rational tax structure, excellent infrastructure, virtually zero crime, brilliant health services, public transport you can set your watch to, great education, superlative life style etc etc etc. On the other hand, spending the same amount for a flat in Mumbai, what does one get? Even if the construction is not shoddy, once you step out of the flat, you have the same bad roads, beggars and eunuchs at the car window, bribe taking government officials, high taxation, bad climate and none of the other benefits that one would associate with a million dollar pigeon hole!

That set me thinking on why a poor country like India where 300 million people live in abject poverty and many millions more near enough to not matter have such expensive apartments? What has caused this price rise? Who is buying these shanties priced like palaces?

The conspiracy theory is like this:

After the condemnable, gruesome attacks by Jihadis on the US on September 9^th, 2001, the world changed. The fight that so far was being fought somewhere else in the world and was only TV news for Americans, became a tragic reality. The US was not likely to take this lying down and launched a multi pronged attack on the terrorists where ever they may be hiding. One of the aspects of this campaign was to cut off the financial assistance to terror groups. In this regard, the US started to clamp down on tax havens and shadow banking territories. Sooner or later, publicly or privately, many succumbed and handed over secret banking data to the US.

The surprising outcome of this was that allegedly, a lot of Indians who have allegedly stashed their illegal earnings outside India came under pressure as their hidden banking accounts were also ‘inadvertently’ targeted. They have little choice but to move their money elsewhere, but where?! Perhaps Macau/ China which could stand up to US pressure was not as developed as a banking centre yet. My guess is the real urgency was not felt till until 2005 or 2006 perhaps. Anyway, so money had to be moved into something else. One option was gold, and perhaps that is one of the reasons due to which the yellow metal has jumped so much, but not so high to adequately compensate for an international central bank failure, as is normally hypothesised. Plus, not a whole bunch of gold can be bought without significant paperwork.

So the corrupt politicians started repatriating their ill-gotten gains back to India. There were two obvious choices for this money to flow to: a) the stock market and b) land. And it seems to have gone here too!

However, after the stock market crash in 2008 proved a bitter lesson in karma to such politicians. Market is of course the great leveller! However despite the really bad real situation in India the market is still holding on to the 18K-20K levels (Sensex) suggesting that perhaps atleast there is some element of management to protect the capital already invested. On a side note, this is why I am cautious of the Indian stock market in general. It has not had a cleansing crash for the economic bloopers of the last few years. So every rise is perhaps seen by this ‘black money’ as an opportunity to get out. And who do they sell to when they get out, to people like you and me, who are left holding the baby, the baby that has been artificially pumped up on steroids with no real value discovered.

Anyway, I digress…so basically for various reasons real estate was the only asset left to this black money. In fact it offered TWO HUGE advantages that neither gold nor equity can offer to this particular ‘class’ of investors: a value black hole and soaking up cash.

A lot of land in India is agricultural land that can only be bought by someone who has a ‘farmer’ status. This farmer status is an unwritten caste system almost that gets passed on as a hereditary thing based on similar land being owned by ones ancestors. Land holdings are small and thanks to economic mismanagement the owners (farmers) are usually poor and willing to sell land. The land value is noted in government records but is in my knowledge at a vast discount to the actual real world cost of buying this land. This is the value hiding. The difference between the actual cost and price paid to the land owner to acquire this land is the cash soak.

Let me illustrate:

Lets say I have to launder…sorry…’invest’…Rs1,00,00,000 (1 crore). In stock I can buy 1 crore of stock and it will show up in records as 1 crore. If I want to buy gold, beyond a point, I can buy 1 crore worth of gold for 1 crore worth of currency. But land…if the actual market rate is 1 crore, BUT value in government records is say only Rs10 lakhs, then for  corrupt person with a lot of cash in earned in bribes, this is a godsend. He can buy a crore of property by only disclosing Rs 10 lakhs or 10% of his wealth. The rest of the money 90% of it can be paid in cash, allowing him to dispose off his cash and his tax troubles/crimes to someone else! The new owner gets the land transferred to his name and converts land into N.A. (Non Agricultural) to prevent any legislated acquisition of the property by the government.

While I concede that this may have always been happening, the conspiracy thesis is that the flow of money being repatriated has caused a parabolic shift in the amount of money going into this space causing land prices to SKYROCKET!

It is the implications of this that worry me, and are multi-pronged:

Impact analysis: a blind spot: As I feared and as a senior journo confirmed to me, is that there is no central agency that monitors how much land is changing hands and how much is being converted to N.A. In fact a validation of the above mentioned theory would be if one were to see a jump in land conversion to N.A. (ex government) since 2002 or 2003. How can the government foresee or analyse the impact of something it doesn’t know?!

Food scarcity: In the absence of any data with me, I quote a link: http://infochangeindia.org/agenda/battles-over-land/the-nuts-and-bolts-of-appropriating-agricultural-land.html with the caveat that I dont guarantee its accuracy or claim to know the intent of the author. The link claims: “Between 2002 and 2007, about 90,000 hectares of agricultural land across 25 mandals in and around Hyderabad have been diverted for real estate speculation and mega-projects. Another 63,000 hectares across 20 mandals of Ranga Reddy district have been lost over the past 10 years. These figures have been reported in a paper published in the August 4-10, 2007, issue of the Economic and Political Weekly by V R Reddy and B Suresh Reddy who estimated that a mind-boggling 5 lakh hectares of agricultural land have been lost in Andhra Pradesh in recent years. The authors feel this is a conservative estimate”.

My biggest question is not why this land was converted, but whether the government knows about this, does it have an idea how much land can be safely converted without impacting food security. Does conversion of 1 lakh hectare of land in say Year 1, impact the government’s view on whether similar permission will be given in year 2? Has the government prepared any study regarding this?

Poverty and cultural impact: While a few farmers, mostly those who had some sizeable holdings and some relationship advantage in a geographical area have been able to milk this cash hoarding by turning into land brokers and entrepreneurs, this dastardly business has in my unstudied opinion, a vast populace of farmers untouched. What does a farmer whose ancestors have tilled a small plot of land for generations do once that land is taken away? Ok, if there is a factory built on that spot, he may take some employment there, but is he skilled to do it? If the land is going to be used to build residences, then maybe he does masonry work during construction, but what about after? Will he not fall prey to unemployment and poverty? More so if he has spent the money he received unproductively, then he is left with nothing. What does he turn to? Does he not become an easy target for ‘coercive’ religious conversion?

Housing impact: With a relentless black money inflow artificially inflating land prices, the price of land, the most basic raw material for housing has shot up. With commodity prices (cement, steel, energy etc) also on an uptick, cost for housing has gone up. With the result that builders (that are used to supernormal profit margins) are unwilling to look at mass housing or affordable housing seriously as a business model. A simple journey from Mumbai to Pune will tell you about how many projects are “exclusive”, “opulent”, “luxurious”, “second homes”, “bungalows” etc etc. Not too many for housing in a country where 100s of millions are middle class to poor! That just doesn’t make sense. With property prices at ridiculous rates (as I mentioned in opening comments) the number of investors they attract (versus users) appears to have shot up. Does everyone think that property prices will keep going up? Japan, anyone?

What about the vast numbers that will not be able to afford to move out of their parents home and start a life, family because the rates are so high. Surely, land in India can be in short supply, in fact: “A little arithmetic shows this is not the case. If you place 1.2 billion people in four-person homes of 1000 square feet each, and two workers of the family into office/factory space of 400 square feet, this requires roughly 1% of India’s land area assuming an FSI(floor space index) of 1. There is absolutely no shortage of land to house the great Indian population.” http://www.firstpost.com/investing/japan-to-india-busting-the-biggest-myth-of-investing-in-real-estate-921239.html

In a country where there is a ‘housing shortage’ of 20-30 million units (Source: http://pib.nic.in/newsite/erelease.aspx?relid=56880) what is the reason that I read this statement in a report: “The inventory level has almost doubled in the last three years. In the National Capital Region, the inventory level reached 31 months at the end of March 2013 against 15 months at the end of March 2010, while in the Mumbai Metropolitan Region the inventory level has jumped from 17 months to 40 months. In Hyderabad, it reached 49 months in March 2013 as compared to 23 months in March 2010, according to data by real estate research firm Liases Foras. Inventory denotes the number of months required to clear the stock at the existing absorption rate. An efficient market maintains an inventory of eight to ten months,” a news report in the Business Standard points out.”?!

Housing inventory is 3 to 5 TIMES higher than the level it should be at should at in an efficient market. Real estate firms might be loathe to cut prices due to the high cost of land paid and/or some extra ‘commitments’ that no one likes to talk about! Is this a validation of the theory outlined above?

So how does this situation resolve itself? One, way is economics, as alternative shadow banking jurisdictions develop, the new ‘flow’ of money into real estate will slow down, after easier to transfer black money from one foreign location to another, than risk bringing it to India. The money that is already invested in land in India, will need to be moved out, but with land being a sticky asset, this will be a slow process. Also, this will likely put a lot of pressure on land prices in India. So if I was a land investor, I would probably hold on to the pulling the BUY trigger yet.

Second way is through, a price crash. Eventually unrealistic asset prices crash,it might happen expeditiously or via death by a thousand cuts route, as was the case in Japan. My guess is this will be triggered by builders trying to offload property that they can no longer hold. So if it does take this route it will begin in the apartment pricing stage. Already builders are feeling the heat and are offering some discounts etc. In fact if you look at real, inflation adjusted pricing it can be argued that price action is already happening.

The third way, is through government action. If new, honest government comes into power and is serious about tackling the menace of black money, it should set up a land transaction monitoring organisation that will track anyone trying to quickly sell out his/ her land to escape scrutiny. Secondly, such an organisation can examine all land transactions where land was subsequently converted to N.A. Track the seller and his income and use that route to get to the buyer.  In fact, if properly executed, this third way will simultaneously trigger way 1 and 2 described above.

 

Anyway, I just wanted to get back to blogging after a long hiatus and hence describing an idea that has been going on in my head for years. Notably, this is a conspiracy theory and possibly wrong. When I mention politicians or black money this only refers to those people who are allegedly corrupt and should be defamatory for the honest lot. As always, this is a work of fiction and no intention to hurt anyone.