Tag: real estate

Verandahs

Both the houses that I grew up in (built in 1951 and 1984) had large verandahs through which we entered the house. Apart from being convenient parking spaces for shoes and bicycles (the purpose that the “hallway” in British homes also performs), these were also large enough to seat and greet guests that you weren’t particularly familiar with.

None of the other houses that I’ve lived in (as an adult, and most of them being apartments constructed in the last 20-30 years) have verandahs. Instead, you enter directly into the living room.

There might be multiple reasons for this. Like you don’t want to waste precious built up area on a separate room for guests that is likely to be sparingly used. Some people might consider a separate space to meet certain kinds of people who come home to be classist, and unbecoming of a modern home. Finally, over the last 20 years or so, not as many people come home as they used to earlier.

I’m completely making this up, but I think one reason that the number of people who come home is lower is that we now have more “third places” such as restaurants or bars or cafes to meet people. If you can meet your acquaintances for breakfast, or tea, or for a drink, there is less reason to call them home (or visit them). Instead, your home can be exclusive to people who you know very well and who you can invite into the fullness of your living room.

Now, I must confess that even before the covid-19 crisis, the wife and I had started missing a verandah, and have been furiously rearranging our large living-cum-dining room over the last year to create a “verandah like space”.

When government officials conducting the census come home, where do you make them sit? What about the painter or carpenter who has come to have a discussion about some work you want to get done? What about the guy from the bank who has come to get your signature on some random forms? Or the neighbour or relative who suddenly decides to pop in without being invited?

In either of the homes I grew up in, the verandah was the obvious place to seat and greet these people. You let people into your home, but not really. Now again, some people might think this is casteist or classist or whatever, but you don’t want to expose your private spaces to the world. With relatives and some acquaintances, though, it could get tricky, as seating someone in the verandah was too blatant an indication that they were not welcome, and could potentially cause offence.

In any case, the verandah was this nice middle place that was neither inside nor outside (Hiranyakashipu could have been killed in a verandah). Apart from seating the uninvited, verandahs meant that you could call acquaintances home, and the rest of the house could go on with its business completely ignoring that a guest had come.

In fact in my late teenage I had this sort of unspoken arrangement with my parents that I was free to call anyone home as long as I “entertained” them in the verandah. The family’s permission to invite someone would be necessary only if they were to come into the living room.

In any case, I think verandahs are going to make a comeback. As I wrote in my last post, the covid-19 crisis means that we are going to lose “third spaces” like restaurants or cafes or bars which were convenient places to meet people. And you don’t want to make a big deal of a formal invite home (including taking your family’s permission) to meet the sort of people you’ve been meeting on a regular basis in “third spaces”. A verandah would do nicely.

The only issue, of course, is that you can’t change the architecture of your home overnight, so verandahs may not make as quick a comeback as one would like. However, I think houses that are going to be constructed are going to start including a verandah once again (as well as a study). And people will start creating verandah-like spaces where they can.

One guy in my apartment works from home and gets lots of random visitors. He’s installed an artificial wall in his living room to simulate a verandah. Maybe that’s a sort of good intermediate solution?

Housing

The Bank of England’s Bank Underground blog has two excellent posts on house prices (first this one, then this one). The basic idea is that houses are assets, not goods, since the “goods” consumed is “living”, which is basically a point in time thing.

As the first of these posts points out:

You can’t buy flowers when they are cheap and store them for months until Valentine’s day. Similarly, you can’t store housing services by, say, renting two flats this year and saving one’s rental services for next year. So the price of rents is determined “on the spot” by the current balance of demand and supply of places to live. Add a load of extra people and/or make them richer and the higher demand pushes up rents. Boost supply and rents fall.

Combined with this comes the news that a friend’s parents have moved to Mysore (from Bangalore) for their retirement.

Taking these blogposts, and this piece of news, together, I’m beginning to reconsider my views on housing.

About 7-8 years back, I got “personal finance advice” that one needs to start “saving for retirement” at age 30, and one of the best ways of doing that is to buy a house. I was about to turn 30 around then, and I took this advice seriously enough to invest in an apartment in 2014. Looking at it five years on, I’m not sure buying a house for retirement in your thirties is the best idea.

For starters, India is (still) a fast-growing and fast-changing nation, so I have no clue what are going to be good places to live 10 years down the line (forget 30 or 40, at which point I’ll retire).

Secondly, my needs from a house now are very different from what they will be 30 or 40 years down the line. For example, right now, my daughter’s school is a “fixed point” (assuming I don’t want to change that), and I need a house that isn’t too far from there. As she grows up and grows out of school, this will cease to be a factor.

Similarly, the work that I do demands a certain pattern of travel in the city, and that again guides my choice of place to live. This is likely to change as the years go by as well.

Then, what I need from my house and my surroundings are likely to change as well. For example, I might want peace and quiet right now, and might be willing to take my car everywhere. At some other point in time, I might place a higher premium on shops in a walkable distance. Similarly, my preferences on entertainment activities might change as well.

Taking all this into account, making a housing decision now on where I want to live 15-20 years down the line is futile. There are simply too many variables and any decision I take now will only lock me in to something that is possibly not optimal.

From that point of view I need to look at my needs over the next 10-15 years (when things will change, but maybe not by that much) to make my current investing decisions. This includes rent/buy/sell decisions, taking into account whatever I’m optimising for now, and will in the next few years. And if I’m setting aside money to “buy a house for retirement” now, I should simply just focus on saving and growing that money so that I can make an informed decision at a time when it matters, and matters are more clear.

Why Real Estate Prices are High

World over, high housing prices seem to be a problem. They’ve always been an issue in India. They are an issue in the US, where millennials are not able to afford houses to live in. In the UK as well, rising housing prices mean that today’s young are unable to buy up houses. The global phenomenon that is driving all this is the drive towards increasingly large cities.

Going by first principles, there are two major components that determine the cost of a house (note that I said cost and not price) – the cost of the land and the cost of construction. It can be safely assumed that the latter hasn’t increased at a rate dramatically higher than inflation over the years.

Yes, there are bubbles and busts in prices of commodities such as steel and cement. Houses nowadays are being built largely to better specifications and quality than earlier homes. In places like the US, modern houses are  bigger. But all this is balanced by technological innovation which makes stuff cheaper. So on an average, the increase in construction costs over the years is not dramatic.

That implies that the massive increase in price of housing the world over is driven by  increasing costs of land. Some scaremongers will try to tell you that this is due to there being too many human beings in the world, and we are soon headed for a Malthusian collapse. However, the land needed for housing is small, compared to say agriculture, so regular transfer of land from agriculture to housing should take care of this. So why are land prices increasing so much?

It has to do with the distribution. During most of the 20th century, manufacturing being the base of the economy meant that a lot of smaller cities and towns flourished. These cities and towns were either located conveniently enough to tap raw materials or markets for industrial goods, or were helped by the fact that land requirements for industries meant that big cities would get expensive very soon for industries, driving development to smaller cities and towns.

As the share of populations in manufacturing falls, and more people move into services, the larger cities gain at the expense of smaller cities and towns. This means the distribution of demand has changed massively over the last 30 years or so. Rather than demand being more or less uniform over cities, nowadays most of the housing demand is spread over a few small cities.

And these cities aren’t able to keep up. Supply in some cities such as San Francisco and Mumbai, are constrained by regulations on how much can be built. Other cities such as Bangalore or Houston have expanded radially, but housing in the far suburbs is much less attractive than closer to town (due to increased transport costs), and there is only so much supply in “convenient areas” of towns.

This changing pattern of urbanisation is leading to rapid increase in the prices of housing in places that people want to live in. And so millennials are being priced out, unable to buy homes. The distribution of jobs across cities means they don’t have the luxury of “settling down” in smaller cities and towns where housing is still affordable. And until the larger cities hit their limits of growth and businesses start moving to smaller cities (thus creating newer hubs), this housing shortage will exist.

 

The land above the tracks

Almost exactly a year ago, we were on our way from Vienna to Budapest and ended up reading the Vienna Hauptbahnhof Railway Station some three hours early. It had been snowing that morning in Vienna (it was April 1st, and supposed to be spring), and not wanting to go anywhere in that shit weather, we simply got to the railway station. It didn’t help matters that our train (which was coming from Munich) had been delayed by a further hour.

We were not short of options for entertainment in at the railway station, though. In fact, it hardly looked like a railway station, and looked more like a mall – for there were no tracks to be seen anywhere. We spent the four hour wait shopping at the mall (it was just before Easter, so there were some good deals) and having breakfast and lunch at what could be considered to be the mall food court. And when it was time for our train to arrive, we simply took one of the escalators that went down from the mall, which deposited us at our platform.

Each platform had its own escalator going down from the mall, which had been built on top of the railway tracks. It can be considered that the entire Vienna Hbf station was built on the “first floor”, making use of the land above the railway tracks. Land that would otherwise be wasted was being put to good use by building commercial space, which apart from generating revenues for the Austrian Railways, also made life significantly better for passengers such as us who happened to reach the station insanely early.

This is a possible source of revenues that Indian Railways would do well to consider, especially in large cities. The Railways sit on large swathes of land above and around the rail tracks, especially at stations (where such tracks diverge). Currently, the quality of experience in Indian railway stations is rather poor. If a swanky mall (and maybe other commercial space) were to come up above the tracks, it could completely transform the railway experience.

There will be considerable investment required, of course, but given the quality of real estate on which most Indian railway stations sit, it is quite likely that private developers can be found who will be willing to invest in constructing these “railway station malls” in return for a share of subsequent rent realisation. There is serious possibility for a win-win here.

As the Vienna Hbf website puts it,

The BahnhofCity Wien Hauptbahnhof features 90 shops and restaurants occupying 20,000 m² of floor space. A fresh food market, textile shops, bakeries and cafés are designed to make BahnhofCity a meeting place. During the week, it will be opened until 21:00 and many shops will also open on Sundays. Excellent public transport links and 600 parking spaces complement the offer.

An idea well worth considering for the Indian Railway Ministry.

Blockchain and real estate

Based on the title of this blog post, you might assume this might be about Honduras, where there is a proposal to use the blockchain to store land records. The problem with Honduras is that there is no “trusted third party” – nobody even trusts the government, for example, so the best way to store land records is in a decentralised hard to tamper manner.

Over the last few days I’ve been reading up a bit on blockchain and bitcoin and how it works and so on. I haven’t yet got to the math – that it is described as “proof of work” irritates me no end (given that work should be evaluated on output rather than input).

So I see that what makes blockchain secure (apart from the miners having to agree on every transaction, and securing bunches of transactions using cryptographic hashes) is that every block contains within itself a hash of the previous blocks. In other words, the entire sequence of transactions is maintained.

The way “normal currency” (like cash) works is that only possession matters, not history. So the fact that there is a hundred rupee note in my pocket means that I can spend that money, and nobody has a track of how that hundred rupee note reached my pocket. This makes the system insecure since if a pickpocket picks this note, there is no proof (apart from possibly catching him in the act red-handed) that he picked it from my pocket.

With bitcoin, on the other hand, there is a record of how each bit of currency (no pun intended) ended up where it ended up. So even if someone were to magically “steal” my bitcoin, the historical records show that this legitimately belongs to me, and that makes it secure.

This reminds me of the paperwork involved when we bought our apartment in Bangalore last year. Normally you would imagine that a certificate indicating that the title currently rests with the current owner is enough to conduct a real estate transaction. but lawyers and bankers here are not satisfied with that.

The paperwork for the apartment I bought went back sixty odd years, when the land on which the building was built was first “allotted” by the City Improvement Trust Board. If I have to sell this apartment on, along with the certificate that I own this apartment I’ll have to furnish copies of this entire history going 60-70 years back. And the way property deals are done here, I don’t expect the system to change.

So this is what makes real estate such a prime candidate for using blockchain. Not only is a third party (such as the government department that stores land records) not trusted, it is a standard practice to include the entire history of every land or property going back several years. A sale transfers ownership, but in terms of paperwork, a layer gets added, not replaced.

This shows why real estate is such a prime candidate for moving to blockchain for storing transactions. It is ironical that a small and crime-ridden country such as Honduras is showing the way on this. It is time for countries like India to consider similar uses. But first, we will need to digitise existing records and make sure there is exactly one owner for each piece of property, and blockchain can’t help us with that challenge!

Revenue management in real estate

Despite there continuing to be large amounts of unsold inventory of real estate in India, prices refuse to drop. The story goes that the builders are hoping to hold on to the properties till the prices rebound again, rather than settling for a lower amount.

While it is true that a number of builders are stressed under bank loans since banks have pretty much stopped financing builders, this phenomenon of holding on to houses while waiting for prices to recover is actually a fair strategy, and a case of good revenue management. Let me illustrate using my building.

There are eight units in my building which was built as a joint venture between the erstwhile owner of the land on which the building stands and the builder, both receiving four units each. The builder, on his part, sold one unit from his share very soon after construction began.

Given the total costs of construction, the money raised from sale of that one apartment went a long way in funding the construction of the building. It wasn’t fully enough – the builder faced some cash flow issues thanks to which construction got delayed,  but since he managed to raise that cash, he didn’t need to sell any other units belonging to his share. He continues to own his other three units (and has rented out all of them).

The economics of real estate in India are such that the cost of land forms a significant part of the cost of an apartment. According to a lawyer I had spoken to during the purchase of my property (he also has interests in the construction industry), builders see a significant (>100%) profit margin (not accounting for cost of capital) in projects such as my building.

What this implies is that once the builder has taken care of the cost of land (by paying for it in terms of equity, for example, like in the case of my building), all he needs to do to fund the cost of construction is to sell a small fraction of the units. And once these are sold, there is absolutely no urgency to sell the rest.

Hence, as long as the builder expects prices to recover (when it comes to house prices, builders are usually an optimistic lot), he would rather wait it out (when he can realise a higher price) than sell it currently at depressed prices. Hence, downturns in housing markets are not characterised by an actual drop in prices (few builders are willing to drop prices) but by a drop in the volume of transactions.

While there might be a large number of housing units that remain unsold, it is unlikely that there are apartment complexes which are completely unsold – there will be a handful of bargain-hunting early buyers who would have bought and funded the construction of the complex. And given the low occupancy rates, these people are losers in the deal, for it will be hard for them to move in.

And it is also rational for the builder to invest in new projects even when they are currently holding on to significant inventory. All they need to do is to find a willing partner who can contribute the necessary real estate in the form of equity. And new projects will inevitably find the first set of early buyers looking for a bargain, irrespective of the builder’s track record.

And so the juggernaut rolls on..