Is This the Best Way to Ride the Housing Shortage Megatrend? - The 5 Minute WrapUp by Equitymaster
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Is This the Best Way to Ride the Housing Shortage Megatrend?

Apr 2, 2016
In this issue:
» Equitymaster's 20th Anniversary coming up
» FY16 a mixed year for two-wheeler players
» No more deep discounts in e-commerce?
» ...and more!
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Devanshu Sampat, Research analyst

My friend purchased a flat in the outskirts of Mumbai three years ago. He termed it a 'strategic investment'. This is what he told me back then:

  • Look, this is my strategic investment. I will be taking a home loan. This will provide me tax benefits as well as rental income. The latter will take care of 20% of my EMI. Not to mention that I am buying a ready-to-move-in house. No project delay risks as such.
  • And of course, if the property rates increase, I will sell and pre-pay my outstanding home loan. If there is sluggishness in the property market, this home will at least act as the ultimate security against unforeseen contingencies.

Sounded like a rational plan.

But as Rahul Shah pointed out just the other day, 'residential rental yields back here in India are among the lowest in the world. They stand at a measly 2% or so. That is the amount of rent you pay per year relative to the market value of that property.'

Rahul went on to ask whether one should buy a house even if he had the money to do so. An eye-widening question, right?

Purchasing a house is an emotional decision for Indians. As Sushil Kumar Sayal writes in his book Inside unReal Estate: A Journey Through India's Most Controversial Sector:

  • There's a reason why Indians are so emotional about real estate. For several generations, we have been taught that our first investment should always be a house: a roof over one's head. Everything else can wait. Apart from education, it is the single possession that Indians value the most. A man who doesn't own a house is seen as incomplete or poor.

So...the first option of playing the realty market is by buying a house. What next?

Investing in real estate stocks perhaps? Well...this sector has been in favour of late, with the government announcing various schemes and initiatives. These include smart cities, housing for all, and additional interest deduction.

Looking at the big picture, there is clearly a massive housing shortage - 19 million units in urban India and more than 40 million units in rural India according to the data available.

We recently met up with the managing director of a real estate company to get his views on the current market situation. This is what he had to say:

  • We are facing difficulty in increasing prices. Our projects are stuck due lack of clarity in FSI norms, and DP rules. Again, in one of our projects, there is a stay order; the case in pending and we lost more than one year in the process. We continue to pay our staff despite no work happening on the ground for this period.

Turns out that despite good prospects, investing in real estate companies is dicey. Debt-ridden balance sheets, an uncertain regulatory environment, and project delays create uncertainty.

So...is there another way? A third option perhaps?

There is. It is an indirect and relatively safer way (we believe) to bet on the sector.

It's the housing finance space...

The mortgage industry is still in a nascent stage in India. And companies involved in this space are in a sweet spot given the multiple long-term growth drivers.

Last month, The India Letter team recommended a housing finance company that is ready to take advantage of the massive housing shortage. What's more, the regulatory and demographic tailwinds are set to strengthen the housing finance Megatrend in the coming years.

Don't miss this opportunity.

What is the best way to play the housing market shortage in India? Let us know your comments or share your views in the Equitymaster Club.


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2.25

We are in a celebratory mood. Why? Because it's a birthday month for us. And guess what? We are turning 20 in a few days!

That's right! It's been 20 years that we have been 'An investor's best friend'. It's been 20 years that we have been empowering our readers and subscribers towards attaining financial freedom. It's been 20 years since we have not only been recommending stocks but also spreading financial literacy through our website. And we are proud to say that we have been doing all of this independently and honestly.

This is what Mr. Dildar Singh Makani, a reader and subscriber of nearly two decades has to say about his experience with Equitymaster:

  • I congratulate Equitymaster on successful completion of 20 years.
  • I have been an ardent subscriber of Equitymaster for nearly twenty years. And I too have experienced many ups and downs but what made me happy is the fact that Equitymaster was always there to give very fair and accurate predictions. I can say that success rates must have been 80% or more. That by itself is a reason for somebody to be happy about.
  • I feel happy to boldly say that not a single year passed when I could say that the money I made was less than what I paid as subscription fees.
  • I feel honored to be a life-time member of Equitymaster Reserve and will never hesitate to recommend your services to each and every investor.
  • All I can say is............KEEP IT UP!
  • Honestly, I wish the entire team a great success.

We will be continuing to share our subscribers' experiences with us over the next few days.

2.55 Chart of the day

Auto sales data for the month of March 2016 and FY16 has started to pour in. Today, we will look at data released by the two-wheeler players. The year gone by has been flat one for the industry. For the full year FY16, market leader Hero MotoCorp's sales volumes remained flat, while they rose marginally for Honda and TVS Motors. For Eicher Motors, FY16 was a brilliant year; volumes were up by about 52% YoY. In the process, the company's market share rose to 4.2% of total volumes sold in the country (2.8% in FY15).

A Mixed FY16 for Two-wheeler Majors

Two-wheeler companies witnessed a slowdown because of the slump in the rural market given the poor monsoons - a sign that things are not as hunky dory as some are making it out to be. In fact, this slowdown in spending trend is one that has been seen across industries - including FMCG and consumer durables. However, since rural markets form about forty percent of the two-wheeler sales volumes, this data trend does become an important economic indicator to keep an eye on to gauge the trend. We will continue to keep to keep you updated on this as time goes by.

3:20

Indian e-commerce companies running rampant with discounts have just received a warning from the government. This comes on the back of the government on Tuesday allowing 100% foreign direct investment (FDI) in online retailing of goods through the marketplace model.

This will help in legitimising existing Indian e-commerce companies' business models. But as part of the new rules, the government has also prohibited marketplaces from intervening in product pricing. Further, it has put a 25% cap on the total sales originating from a group company or one vendor.

This may be bad news for consumers. But it will be music to the ears of brick and mortar retailers who have been contending with falling footfalls due to customers flocking to these websites lured by the discounts. That said, we wonder if the government may be doing disservice to the concept of a free market by intervening in such matters.

3:55

Global markets ended mixed this week. US Fed Chairperson Janet Yellen's statement that the Fed would be cautious while hiking interest rates were treated positively by market participants. Despite weak economic data from around the world, markets have remained resilient largely due to the assurances by central banks that easy money policies will continue for the foreseeable future. The US Dow Jones Industrial Average was up 1.1% for the week.

However, the European markets were down this week. The British FTSE, the German DAX and the French CAC ended down 0.7%, 1.6% and 3.2% respectively. Asian markets were mixed. The benchmark Chinese index was up 0.5% for the week while the Hong Kong was down 0.8%.

Crude oil prices fell 4.5% this week as tensions between Saudi Arabia and Iran have led markets to believe that OPEC will be unable to arrive at a deal to limit oil supplies.

Back home, the Indian markets were up 1.3% for the week. The markets rallied on the anticipation that the Reserve Bank of India (RBI) may cut interest rates at its policy meeting on 5th April.

Please participate in this poll and let us know your views on whether the RBI should go for a big rate cut.

Performance During the Week Ended 1st April, 2016

4:50 Weekend Investing Mantra

"The competitive nature of corporate acquisition activity almost guarantees the payment of a full - frequently more than full price when a company buys the entire ownership of another enterprise. But the auction nature of security markets often allows finely run companies the opportunity to purchase portions of their own businesses at a price under 50% of that needed to acquire the same earning power through the negotiated acquisition of another enterprise." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Devanshu Sampat (Research Analyst).

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1 Responses to "Is This the Best Way to Ride the Housing Shortage Megatrend?"

Alphones

Apr 2, 2016

The housing shortage is from middle class to the poor, whom cannot afford to buy a house even below Rs 10 lakhs, as they are either unemployed or their salaries are inadequate to pay for or even to get a loan.
The only solution is to educate them to have small family among the middle class and poor. This shall help in the long term. There are several charity organisations existing, however cannot handle as the population is very high. Who will go from door to door and explain this to the poor ?????

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