January 16, 2017
A merchant is someone who buys low and sells high; which is what John Pierpont Morgan told his stockbroker when he stepped in to buy shares in the immediate aftermath of the Wall Street Crash. He knew that Ford Motor Company would survive the Crash and he could see that its shares were at an all-time low. So he bought when almost everyone else was selling and he made a fortune.
What does that tell us about investment? Well, a lot of things obviously but two things in particular. First of all, that market volatility isn’t necessarily a bad thing; it can create the troughs and lows that make trades and whatever commentators might say, the very last thing that investors want is a market that doesn’t move. And secondly, it tells us that we should be prepared to look in unexpected places for the trends and events which stimulate trade; investors will buy low, and if prices move lower (all other things being equal) this will act as a stimulus to trade; you can’t make money selling high if you didn’t buy low in the first place.
So the recent experience in Indian retail property markets should help us to draw some valuable lessons.
It has been a fact of life for many years in India that a whole block of potential homeowners has never had a chance to buy a property of their own; prices have been too high and most have had to content themselves with renting rather than buying. The result has been a significant pent-up demand, just waiting to be released at a point when retail housing stock becomes marginally more affordable; but we may just be witnessing the arrival of that threshold point and it has come about through a series of economic factors; some of them surprising and most of them inherently difficult to predict.
First, take the Demonetisation policy announced by the Indian Government last year.
Prime Minister Modi’s Administration is committed to clamping down on secondary market cash hoarding through a ban on the circulation of Rs 500 and 1000 notes. Many developers and sellers in the Indian retail property market have traditionally insisted on having a cash component in the sale price; and the ban on circulation of high denomination notes will necessarily have a chilling impact on the secondary market, reducing retail prices. Rohit Gera, Managing Director of Gera Developments had no doubt on the market impact of the Government’s Policy: “Sales which involve the exchange of cash will be affected….this will impact land prices too”.
Secondly, take a look at Interest Trends across the subcontinent; there is a marked downward pressure on rates which ought to help to loosen up demand, making finance packages affordable for many families in India who couldn’t afford to buy before. So the expected retail price reduction which demonetisation is widely expected to bring in its wake will be met by a likely increase in an across the board ability to buy. It is a classic supply curve intersection.
Thirdly, we have the fact that there are now many more property developers across the subcontinent that are turning, often aggressively, to the Affordable Housing Sector (in particular new urban areas which have experienced rapid and largely unregulated population growth). This might be expected to open up a new stock of retail housing; at just the time when prices are softening and demand starts to build. The Chairman and Country Head of JLL India, Anuj Puri, described the likely outcome of all that succinctly last week: “Not only are prices down but developers have also introduced schemes and initiatives which will make deals more lucrative”.
All of which, taken together, should mean more property deals at marginally lower prices in areas of pent up demand (specifically recently urbanised areas across India). On the assumption that they have telephones wherever JP Morgan has gone, he might just be putting in a call to his broker.
Red Ribbon CEO, Suchit Punnose said:
The article makes an interesting point. I have heard such a lot of comment in the popular press over recent months (and particularly since the Brexit Referendum in the United Kingdom) about markets wanting stability and certainty, but that’s not always how things work out in practice. Market changes will often create opportunity even when they seem on their surface to signal a softening in prices and the impact of the Government’s Demonetisation Policy on Indian Retail Property prices seems to me to be a case in point. Looked at in the round together with current interest rate trends on the subcontinent and changed strategies amongst developers, these are fascinating developments and well worth keeping track of.
This is also a classic example of how an awareness of macroeconomic drivers of change, creates an opportunity for those with relevant insight. Combining relevant policy changes with large-scale demand, is the perfect cocktail for innovation and opportunity for investors. As Seneca (Philosopher & Nero’s tutor) was reputed to say “Luck is where the crossroads of opportunity and preparation meet”.
This is, I believe, yet another demonstration of the fallacy of the “Mumbai Property Bubble” school of thought. Adherents to that particular theory would be better occupied looking at developments over the past year in other property markets across Asia where there really has been an actual bubble, China in particular.