"India is currently where China was at the turn of the millennium"
Impact Feature February 26, 2018
When SmartOwner first launched its marketplace for real estate opportunities in 2012, the Indian property market was almost entirely an analog industry, with deals, investments, and end purchases all taking place offline. At the time, the notion of a transparent online platform offering secure property opportunities was virtually unheard of. Fast forward six years and SmartOwner is at the cutting edge of India's booming FinTech industry, with clients in 43 countries and a track record of 13 million square feet. The company is the largest property marketplace in all of India and was just ranked by the Financial Times as among the 100 fastest-growing companies in the Asia-Pacific region, as well as the fastest-growing FinTech firm in all of South Asia.
Business Today sat down with Vikram Chari, CEO and chairman of SmartOwner, India's largest real estate marketplace, to discuss the direction of the Indian property market.
How did you get started?
Before I started SmartOwner, I used to run a real estate investment company in the U.S. One day, I was chatting with my friend Bala Parthasarathy, a partner in a venture capital fund, about the great returns available in this industry and he suggested that we team up and start something in India that allows people to profit from these opportunities. We looked into it and came up with the business model for SmartOwner, and now we are the largest player in this industry.
There's a long answer and a short answer to that. SmartOwner is India's first and largest marketplace for opportunities not available on the general market. In plain English, we give discerning investors - primarily HNIs - access to assets that are normally only available to large financial institutions. Our core focus is on real estate, though we're open to funding related asset-backed opportunities that meet our due diligence and return criteria.
A key component of what we do is curation - being able to identify and participate in only the most secure and lucrative opportunities. We negotiate an institutional-grade deal for a high-ticket asset, and then we bring together our HNI clients and allow them to participate in the deal. This is a major advantage for our clients as they would never be able to negotiate such a deal individually.
That's a very interesting business model. Could you explain what differentiates you from other Indian companies? Why isn't anyone else doing this?
This business requires three very different skill sets - real estate, finance and technology. Many companies have been able to crack two out of the three, but doing all three well is difficult, which is why you don't see other companies in India doing what we do. But when you look at more developed markets where real estate is an easier business, such as in the U.S., you'll find several tech companies offering a similar service, although the model may vary a bit from one company to another.
What do you think India can learn from the rest of the world when it comes to doing business?
India has very deep historical roots when it comes to business and entrepreneurship. After all, we were one of the wealthiest parts of the world for most of recorded history. But over the past couple of centuries, we have lost a step and acquired certain characteristics that make it more difficult or expensive to do business here. For example, we do not have a quick and efficient way to resolve contract disputes. This makes personal relationships and trust a very big factor in doing business, and that is not the most efficient thing for the economy. Our land laws and our system of recording title interests are also somewhat archaic, and make it difficult to develop our urban areas in an optimal manner. As these things get fixed, as I am sure they will, our economy can grow even faster.
Speaking of laws, let's turn to a hot topic in real estate regulation. What do you make of the RERA Act passed last year? Will it be effective at safeguarding consumer interests?
It's a good idea with a good intent, and I am sure it will, over time, weed out some of the worst practices of the real estate industry. But RERA's real impact will be in its implementation, and the jury is still out as it is early days yet. The Modi government has indicated that holding developers accountable and providing affordable housing are among its top priorities, so there's reason to think it will be implemented well.
That being said, it's quite likely that RERA will lead to further delays in projects, at least in the short term. Developers unfamiliar with the new regulatory environment will likely tread very carefully, instead of rushing to deliver a project and getting penalized. Some of the smaller developers without access to institutional capital will also find it difficult to operate in this environment. Some of these factors may result in a reduction in supply and therefore higher prices in the medium term.
So you see consolidation happening in the real estate industry.
In the short run, yes. Some of the smaller developers may exit their stakes in current projects to larger developers or even to funding groups. But one thing to keep in mind is that the real estate industry is truly massive and does not have very significant barriers to entry. Most of the activities of a developer can be outsourced to various service providers - legal diligence to law firms, design to architects, permits to liaising consultants, construction to contractors and even marketing to specialist marketing companies. This means there always will be a mix of large and mid-sized players who use institutional capital, and self-funded smaller players who may enter and exit the industry in an opportunistic fashion.
One of the advantages of the rising influence of institutional capital in this industry is that it is accelerating the pace of professionalization of the industry. The industry's free-wheeling days are mostly behind it, and over the next decade or two, the standards of this industry will change dramatically. While this may require some short term adjustment, there's no doubt that, in the long run, Indian real estate will become a more stable, secure asset class. A good thing, too, as 300 million people are expected to move to Indian cities by 2050.
You mention short term shifts in the real estate market. Do you think housing prices will come down over the next year or so?
Ours is a large country and each city will have its own dynamic, but if you look at the underlying economics of this industry, all indications are that prices should rise, not fall, both in the short run and in the long run. In the short run, RERA is going to create a significant reduction in supply as the industry adapts to the new regulation. RERA also encourages developers to rely on institutional capital rather than customer payments to fund a project. This will increase capital costs. Similarly, the penalties under the law are going to ensure greater regulatory compliance and perhaps launches further into the development cycle, which will further add to interest costs.
Construction costs, although not growing as rapidly as in the past, will continue to increase. Adding to this is the elephant in the room that is seldom discussed. Over the next decade or two, India's increasing demand is quite likely to affect the global economy in a similar manner as the China-fuelled commodity boom of the early 21st century. Our economy has reached a global scale in terms of size, and our accelerating growth rate is no longer going to have just local or regional consequences. This could have a significant impact on global commodity prices, further pushing up costs.
All of these factors point towards increasing prices rather than declining prices.
Interesting. Diving a little deeper, what market segments do you see being the most and least volatile?
The two parts of the market that are the most difficult to predict are the top and the bottom of the pyramid. The top end has always been volatile because prices are driven as much by emotion as by economic fundamentals. But today, the bottom end of the market - affordable housing - has also become an area to watch. On the one hand, the government is doing a lot to increase supply in this sector, and most of those changes do in fact help improve supply and demand. However, construction cost is one area that is going to make such projects risky - except for developers with deep expertise in quickly executing low-cost projects at scale and on budget. This is a very difficult thing to do in this country, due to the unpredictability of a variety of things, such as title issues cropping up, and permits and the zoning rules changing without notice. Given the risk of cost overruns, as well as a ceiling on the sale price, it is going to be interesting to see how well these affordable housing projects perform from the developer's standpoint.
The segment that I see as the safest and most attractive is the mid-market: the so-called premium apartments, where properties are sold for under Rs. 1 crore. Supply seems to be coming down in this segment due to RERA and the new emphasis on affordable housing, yet the country's economic growth is accelerating, resulting in many people moving into this market segment. These people will not want to live in affordable housing.
I don't think it's going to be all that impactful on real estate as a whole - certainly not as significant as the passage of RERA or GST. One announcement that may end up having a positive, if indirect, impact is the reintroduction of long term capital gains tax on stocks. This decreases the tax differential between stocks and property, making real estate comparatively more appealing.
Looking beyond 2018, what's your five year prediction for the industry?
Five years down the line, I think you'll see a much smoother, more professional, more efficient real estate sector. Once laws like RERA really come into full force - and they will, over time - many of the fly-by-night operations will be relegated to the past.
Demand will continue to increase over the next five years. India is currently where China was at the turn of the millennium, and the sheer number of people who will need quality homes is staggering. In a lot of ways, I think this will be one of the greatest wealth creation opportunities of our lifetime.
Very nicely. We've been advocating transparency, efficiency, and ease of doing business since the day we opened, so all these changes are beneficial for us. We've actually been reviewing a larger number of deals than in the past, which reflects the higher number of opportunities in today's market. We've got a number of very exciting developments in the works, which fit very well into the changing market. For example, we hope to be launching an AIF in the second quarter of this year, which will allow us to expand beyond project-specific opportunities and allow us to have a fund that can seize any opportunity that comes our way. We're also looking at asset classes outside of traditional real estate, such as co-working spaces.
Thank you, it's been my pleasure. My overarching thought is this: India has an incredible future ahead of it, and the next two decades are going to transform us into one of the world's major economic powers, similar to the scale of China today. This is a once in a lifetime opportunity for both us Indians and people around the world to contribute towards, and profit from, the betterment of over a billion people. I think investors throughout the world should take advantage of this unique opportunity - I don't know when another such opportunity will arise.