Trailing a BEST (an acronym for the local public utility) bus in Mumbai the other day, I noticed an advertisement by a real estate company pasted on the rear. I had never heard the name before, but then, good times give birth to new ventures and so on.
The advertisement showed several skyscraper-like structures jutting out from different corners. The text said the firm had developed scores of projects all over, both in the residential and commercial space. It also said, prominently, that the firm had a "land bank" of over 3,000 acres.
Two weeks ago, I met someone who runs a speciality chemicals business in collaboration with an international firm. He said business was good and all of that but now they were exploring ways and means of developing the land bank they had in the firm. "We are in talks with investment bankers," he said.
All this got me searching for a definition of the term 'land bank,' since it's something I've seen only in recent months. Or, more precisely, ever since the construction firms jumped onto the initial public offer bandwagon.
Land banking as I could fathom refers to the practice of purchasing land with the objective of holding on to it till it is highly profitable to unload it. Since it's a tangible asset, the benefit of buying and selling land or investing in companies who do so is seen as a sounder opportunity.
All very good except that the term bank is somewhat unusual except in its literal sense. For all practical purposes, land banking seems to be a highly speculative activity where the returns mostly appear to flow from increased speculation and price bidding rather than inherent "performance".
It also struck me that the term was being somewhat loosely used here, obviously to convey the existence of large amounts of land on a firm's books, rather than the organised activity of buying it, holding it and then selling it at huge profits.
Anyway, I do recall an occasion when a few companies (including a prominent pharmaceutical one in 1993-94) did try and develop land or buy and sell actively for no other reason than a) it was already there b) it looked too juicy an opportunity to pass on. But the results were a total disaster. Not only did land prices crash but the stock markets too gave a thumbs down.
Which brings me to the point. It's now evident that the real estate markets have begun to cool off. Possibly this coincides with the time period terms like land bank started becoming fashionable.
Most bankers are saying loan enquiries have dropped at least 20% in cities like Mumbai in recent months. High rentals (an outcome of high property rates) have also dampened demand. Properties in the sub-Rs 1 crore (Rs 10 million) bracket are the most affected.
Banks finance close to 70% of all property bought, particularly residential. This figure was 50% barely a few years ago. A tightening of interest rates (which could get even tighter soon), coupled of course with skyrocketing prices, is a key cause for the slowdown.
So real estate might get cool off a little bit. Or prices might even drop steeply as they did after the 1994 peak. There could be many after-effects to this but the point here is a little larger.
The problem is that while a demand-side solution has been partly found and to the detriment of fresh borrowers, the supply side does not seem to have been touched. Not really since 1994, at a city, state or a national level. Incredibly, most people (including policymakers) seem to watch soaring realty prices with pride rather than a problem of overheating that needs to be fixed urgently. By the time they wake up, it's a little late.
So while we may or may not see a powerful correction, we run the risk once again of ignoring the supply side. I have not understood the post-1994 real estate bottom enough to hazard a guess as to why it happened. Suffice that it was not supply-led. This time, chances of a supply-driven fall are higher in some regions. But a demand cutback is clearly set to be the biggest driver.
One real estate expert I spoke to said the solutions were as old as the problem. The Urban Land Ceiling Act, land locked up in litigation, encroachment, municipal laws and more fundamentally, the inability to disperse population with better infrastructure. Simply put, the scale of the problem is so daunting that one wouldn't know where to start.
Land renovation efforts like Mumbai's Slum Rehabilitation Authority (SRA) are caught in a mess of corruption and deceit with few real beneficiaries in sight. Most development in the city seems to take place with scant regard for carrying capacity and surrounding infrastructure. A drive through Mumbai's suburbs is illustrative. Every city has its own such stories.
It must be terms like land banking which cause the mandarins in the finance ministry to wake up and think about slapping a service tax on commercial real estate lending.
Or, removing the pass-through tax benefit for real estate venture funds. Seen one way, it puts pressure on those in the business of real estate. But taxes on rentals put greater pressure on those who rent property. One would reckon, the latter are worse off.
The solution is to sit down and work out comprehensive supply-side solutions, however daunting such an exercise might be. This is typically done by the states and local civic authorities, who don't do enough.
But it does not help that the government uses monetary tools to the best (or worst?) possible effect while leaving genuine home seekers at the mercy of other forces. We must not allow another cycle of crazy price rises to set in. Or land banking to become the next new hot industry. Whatever it really means.
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