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Good morning. In today’s edition — the problem with India’s real estate prices shooting up; the prospects of India’s tyre manufacturing companies; and India conglomerate JSW’s electric vehicle (EV) plans.

THE TAKE

India’s Skyrocketing Real Estate Prices Will Be A Problem In The Long Run

Between January and May 2024, real estate developer DLF sold close to 3,000 luxury homes across multiple projects. On each occasion, these Gurgaon apartments, adjacent to Delhi, were sold in about three days' time.

Most of these apartments sold for close to Rs 7 crore or $1 million then. Around 25% of these apartments were bought by non-resident Indians or NRIs according to reports. This isn’t typical to Gurgaon, but happening across India. 

Premium properties have seen huge demand as well-to-do Indians both resident in the country and outside snapped up real estate, bidding up prices, project after subsequent project. 

“While India’s middle class tightens its belt, cutting back on everything from tea to two-wheelers due to soaring consumer inflation, the richest 1% who own 40% of the country's wealth are snapping up homes in cities with well-paying jobs,” said a Reuters report and poll.

The poll found that average home prices in India will rise steadily in the coming years driven mainly by demand from wealthy individuals, while the rising cost of living will make owning a property unattainable for most people.

The Rich Can’t Keep This Up

Several research reports have pointed out that the affordable end of the housing segment has been slowing steadily for more than a year with people at the lower end of the economic scale unable to afford houses or even the 10-20% down payment required to apply for a loan.

Could prices and demand now be reaching peak levels?

The Reuters poll and report said that while demand is enough to sustain price rises in the short-term, property analysts believe there are limits to how much the rich can keep demand alive in an economy which is already slowing down. So much so that real estate industry watchers are worried that the creamy end might slow down on buying, presumably because they might get bored of buying property and at which point the market might fall suddenly.

On the other hand, rents are thus expected to rise even faster than house prices, by 7.5% to 10% over the coming year, according to the median range given by 11 property experts.

Need For Affordable Housing

While it is good that premium segments of the housing market have grown rapidly and going by signs would continue to grow for some time, it is time to pay attention to those who are getting edged out of the housing market, whether for purchase or even rent.

Cities like Bangalore have already seen discontent among its migrant youth after landlords started raising rents two years ago. Most of these youngsters work in IT companies at starting or close to starting salaries.

Combined with the general sense of insecurity in their own industries, rising home prices are a big deterrent to stability and thus a positive outlook for the future.

Creating affordable home segments, like the UK social housing projects or Singapore's Housing Development Board, where homes are owned by the state or run by the state but rented out to those starting out, have never really taken off in India where the need has been so high.

The lack of such housing projects has led, for example, to slums in Mumbai where the onus of survival is placed on the individual rather than the state.

Investment Distortions

High real estate prices also create other distortions in the channelisation of savings because people find it more and more attractive to invest in real estate rather than anywhere else. This locks their capital in and locks out genuine buyers as in those who would buy and stay in that house as opposed to investing in it. 

More significantly, high prices and frenzied buying also creates the impression that the economy is on a strong footing. This triggers fresh construction of housing stock. If this sounds familiar, it is what also helped create a stock of 60 million unsold homes in China as per a Bloomberg estimate five months ago. 

And that story has not ended well.

CO:RELATION

Tyre Elasticity

Investors seem more optimistic about tyre makers than the car and two-wheeler makers in 2024. Shares of most tyre companies like Apollo, MRF and CEAT have done better than the Nifty Auto index. That optimism could be short-lived. The latest monthly automobile data shows sluggish growth for auto companies in November 2024. It is common sense to imagine that the replacement market for tyres, which accounts for 75% of the total sales in India, will continue to rise as more cars are on the road. 

Prospects for tyre companies are not so good. Rubber prices are at a record high, and most tyre companies cannot pass on the rising input costs to automakers, according to a release by CRISIL, a credit rating agency. At the same time, aggregate demand for tyres will likely remain sluggish in the year, resulting in single-digit revenue growth, the agency estimates. The only respite for tyre companies is that the capacity addition is slow and unlikely to create a supply glut. Company balance sheets of tyre manufacturers are strong and this probably interests investors more than the actual performance.

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CORE NUMBER

56.5

This number represents the Purchasing Managers' Index (PMI) for November, a key indicator of the health of the manufacturing sector. Compiled by ratings firm S&P Global and financial services firm HSBC, shows that India's manufacturing sector continues to expand, albeit at a slower pace. This figure is down from a peak of 59.2 in March before gradually declining to its current level. A PMI above 50 indicates expansion in manufacturing activity, while a figure below 50 signifies contraction. In simpler terms, a higher PMI suggests that the manufacturing sector is growing, with increased production, new orders, and employment, while a lower PMI indicates a slowdown in these activities.

FROM THE PERIPHERY

— 🔌 Months after announcing the JSW MG Motor India Pvt Ltd, JSW’s joint venture with China’s SAIC Motor, India’s steel-to-power giant now reportedly has plans to manufacture electric vehicles under its own “in-house” brand. Financial Times reported JSW chairperson Sajjan Jindal saying that its planned manufacturing plant in Maharashtra’s Aurangabad will be where these EVs will be manufactured. Jindal was quoted in the report as saying, “Our idea is not to be an outpost of a Chinese company to sell products in India… We want to manufacture the products in India, value-add in India and sell in India.”

—🧑‍⚖️ India’s central bank the Reserve Bank of India (RBI) lifted restrictions on Sachin Bansal's fintech firm Navi Finserv Ltd on December 2, less than two months after imposing them. This swift reversal contrasts with the extended restrictions placed on major banks like HDFC Bank and Kotak Mahindra Bank in the past, which lasted over 13 months and seven months, respectively, according to Moneycontrol. The RBI had initially banned Navi and three other non-bank finance companies (NBFCs) from lending due to concerns over unethical practices, including high interest rates, hidden charges, and aggressive lending tactics. This development comes amid growing concerns about the risks associated with unsecured lending and the potential for consumer indebtedness.

—❌ The Indian government has abolished the windfall tax on aviation turbine fuel (ATF), crude oil, petrol, and diesel, effective immediately. Introduced in July 2022, the windfall tax was an additional levy on 'extraordinary profits' made by companies or industries, implemented in response to the sharp rise in global crude oil prices in early 2022. The tax has been controversial, with industry players arguing that it negatively impacted profitability and disincentivised production. The decision to scrap the tax is expected to benefit major oil players like Reliance Industries and Oil and Natural Gas Corporation Ltd. by boosting their gross refining margins, according to Business Standard.

—🚢 The government introduced the Coastal Shipping Bill, 2024, in the Lok Sabha on December 2, aiming to modernise the maritime sector and increase port traffic. Tabled by Minister Sarbananda Sonowal amid opposition demands to discuss the Adani controversy, Manipur unrest, and Sambhal violence, the bill proposes transformative changes for domestic shipping, Business Today reported. Key measures include eliminating trading licenses for Indian-flagged vessels in coastal trade, reducing red tape, and aligning international trade regulations with global standards. It also introduces a National Database of Coastal Shipping to enhance transparency and support maritime efficiency.

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