If not for Anna..

Anna's approach of 'My way or the highway' is surely not what fits in a constitutional democracy but what the nation needs today from its leaders is some moral uprightness and not a lesson in civics!

What we need is a truly independent institution which can admit cases, probe them and prove it in the court of law without any sort of political interference. The Lokpal should become a ‘terror’ in the eyes of politicians and bureaucrats alike. The election commission & the judiciary have special places in the constitution (and the only reason politicians fear them) and something similar should be created for the Lokpal.

Agreed, this is not the end all of corruption. No one’s says that. Totally eradicating corruption is a long drawn battle and would involve work on numerous other problems in the country including poverty, education, healthcare, law and order and many more. It’s a complex question which no one institution or law is going to change. But Lokpal could be a first step in that direction.

Technicalities of the law

1) The government is trying to get away by enacting a toothless anit-corruption law which favors the powers that may. The Prime Minister, junior government officials, MPs actions inside the parliament, court judges is out of the ambit of Lokpal. So most corruption in the country (at the lower rungs of bureaucracy), bigger scams which may happen from the PMO (read bofors), cash for votes inside the Parliament etc go scot free. Then those who are caught and tried can go scot free as well if Judges are in your favor and then they couldn’t be investigated by Lokpal. This is making a mockery of the whole idea of Lokpal.

2) Selection of Lokpal members: Govt. says the selection will be made by a committee consisting of the Prime Minister, the leaders of Opposition in both Houses of Parliament, a Supreme Court judge, a high court chief justice, an eminent jurist and an eminent person in public life. The last two is eyewash, so with 3 politicians and 2 pseudo approvers in a group of 7 selectors, you know what is going to happen. In terms of eligibility, the Jan Lokpal disqualifies anybody who has held a government office in the last 2 years, the govt. obviously makes no such reference.

3) Prosecution: The Jan Lokpal suggests that the CBI’s anti-corruption wing should report to the Lokpal while the govt. says Lokpal should have its own prosecution wing – which will obviously have no experience and there will be jurisdictional and other objections raised from time to time, helping those accused. The CBI will remain a govt. puppet.

4) Then the govt.’s bill does not provide for grievance redressal of citizens, protection of whistleblowers, creation of citizen’s charters by public institutions etc.

So it can be clearly seen what the government is trying to do.

1) The Govt. was in a corner with so many corruption cases blowing up in its face and had to show its commitment towards anti-corruption initiatives. It could have taken its own sweet time but Anna’s campaign made it do things quickly.

2) If not for Anna, most of India wouldn’t have known what law was being passed. The government would have tom-tom’ed about their achievement in passing the law and we would have been mute spectators of the hog wash.

3) If not for Anna, the Lokpal would have become (and could still become) just another puppet created in the archaic structure of governance in the country. Remember what the election commission was earlier? It took 40 years and people like TN Session to make that institution what it is today. Same could happen with the Lokpal with it having real tooth somewhere in 2050 after sacrifices by countless individuals.

What this agitation will materially achieve is something time will tell but Anna Hazare has created that ‘hope’ in millions of Indians that something could be done. I see this agitation from a standpoint that the more people agitate, the more bargaining power we have with the government and more chances of catching corrupt officials in the future. That’s it.

Don’t debate Anna’s methods, no person is perfect. Something is better than nothing.

Jai Hind!

Real Estate, be Realistic!

Equity Mutual Funds Vs Real Estate investment

Disclaimer: I am NOT saying that real estate is a bad investment. What I am trying to say is Real Estate is just like any other asset class and make an informed bet when you put your life's savings into it. It may bring you handsome returns which no other asset class can but it can also give you lousy returns or worst put you in a debt trap.

The analysis below applies for “Residential Real Estate as an investment”. If you are buying your first home to live in, this is not applicable because then Real Estate for you in NOT an Investment, it’s an EXPENSE!

Returns

Equity diversified mutual funds

An equity diversified mutual funds could give you 15% compounded annual growth (CAGR) over the long term and that too tax free.
i.e. Money doubles every 5 years, i.e. 16 times in 20 years.

Some MFs (Like HDFC Top 200) have even given 25% CAGR from 1995 till today while many have not. If you do a little bit of reading, investing in good MFs and cashing out of lousy funds and investing into good ones from time to time isn’t difficult at all.

Residential Homes

Inflation Index for 1981 –> 100,
Inflation Index for 2009-10 -> 711 i.e. 6.75% CAGR

Real Estate is taxed @ 20% with indexation (considering inflation) or 10% without indexation.

So a property of Rs. 100 if becomes x in 20 years (1981-2010), would be taxed as if its cost price is 711 meaning the tax would be charged only on the appreciation above 711.

Because of the taxation, for real estate to match the expected MF returns, it should grow by 16.65% CAGR over 20 years.
i.e. 2 times in 4.5 years, 16 times in 15.4 years

This is when you have all the money today, in cash.

BUT

Unlike MF Systematic Investment Plans (SIP), Residential Housing is mostly bought with leverage, i.e. with a housing loan of average rate 10% which comes to 7% because of the tax benefits

So For Real Estate to match MF returns, it should grow by 16.65 + 7 = 23.65% CAGR over 20 years.
i.e. 2 times in 3.26 years, 16 times in 13 years!!

Buy real estate if you think it will be 16 times in 13 years.
i.e. the 50 lakh flat you are buying should be 1 Cr in 2013-14, or 8 Cr in 2023 !!!


Rentals

Rental income is minuscule compared to the property value. A 50 lakh (1000 sq. feet) 2 BHK flat in Pune may give you 10k at best, i.e. 1,20,000 per year.

Expenses:
Society Charges: Rs. 2 / Sq. Feet per month (Rs. 24000 per year)

Property tax: Rs. 4 / Sq feet per year (Rs. 4000 per year)

Maintenance / Repairs: Rs. 2000 per year

So Net Rental Income: 120000 – 24000 – 4000 – 2000 = 98,000 per year which is 1.96% per year which is also uncertain as flats remain unoccupied at times.

Interestingly, this rental income does not get compounded as it gets used for other expenses.

Risk

Real Estate has some inherent risks which are significantly more than equity mutual funds

1. Leverage
In Buying a home, you are on a debt of your lifetime, an Equity MF SIP is without debt.

2. Liquidity (How fast can you sell your investment and at what price when you want to) You may think Rates in a locality have risen from say 2500 to 5000 per sq. feet. But that does not mean you can sell your flat at 5000 rate. Just try it!

3. Diversification (not all eggs in one basket)

4. Price Discovery (Getting the right price in the market and not being fooled by a one off price by someone, somewhere)

5. Legalities & Possession (Eventualities like encroachment, irregular records, double selling of a single property etc)

6. Ease of dealing (Buying, selling, storage, renting and broker hassles)

Equity Risks are also great. Managing that risk is a topic in itself but most of it is being transferred to the Mutual Fund; you need to manage the rest.


The ‘Permanent source of income through rent’ argument

It is argued that a house would give me permanent source of income at retirement through rental income.

If you have 50,000 per month to invest,

Option 1:

Buy a house with a home loan at average rate of 10%. Grow it by 23.65% CAGR. Then get 2% rental yield at retirement pre tax.

Option 2:

Put that money thru a SIP in equity. Grow it by 15% CAGR. When you approach retirement, get all accumulated money slowly into debt & bank FDs and get 6 % post tax yield on your money.

No prizes for guessing which is better!

Both asset classes are co-related over a long term

If you believe Real Estate is going to grow no matter what, why do you believe so? The value of Real Estate could be thought of derived from two things.

1. The shelter it provides
2. The access to economic activity it provides

So, the second point actually gives us an idea why property in Mumbai / Pune is growing the way it is today. In the long term, if India grows at 8%, there will be tremendous economic opportunity created which in turn will make real estate costlier everywhere, more so in areas which provide better economic activity.

Enhanced economic activity in turn means growth of companies and hence growth of equity markets and also growth of jobs & salaries.

Speaking of averages, if you think equity markets may fail to give you returns over a 20 year term, don’t expect your real estate to give you returns as well. May be don’t expect your job to be there as well. And then what will happen to your home loan?

Look at Real Estate & Equity returns in USA or Japan over the last 20 years. And you will see clearly what I want to say.

Equity markets and Real Estate markets in the end are both dependent on the Indian growth story.


Conclusion


1. If you want to bet on Real Estate, understand that you are taking a BET, just like any other asset class (like stocks, bonds, Gold etc.).

2. Analyze, understand and invest. The property ought to become 2 times in 5 yrs (if you have cash) or 3.26 yrs(Loan) and 16 times in 20 yrs(cash) or 13 yrs(loan) at least!

3. Don’t over leverage. Too much loans can bring you down.

4. Treat Real Estate as any other asset class. If you wanted to buy 50 lakhs worth of stocks today, won’t you be targeting 15% CAGR over a long term? Think the same when you buy real estate.

5. Real Estate is for real, but the gains may or may not be, beware!

All this requires disciplined investment. Period. Saying that I require a ‘Home Loan Stick’ to make me save 50,000 per month, or it requires an illiquid house as an asset so that I do not sell it off like I would a mutual fund is making a fool of yourself.

Happy Investing!

P.S. I just used some basic concepts like compound interest, income tax and risk/return trade off to analyze the real estate asset class. I may be wrong and would be extremely glad if somebody points out logical errors in the argument. All figures used are approximate.

Road Trip II: Raigad Coast

In October of 2009, we planned to have a biking expedition from Pune to Alibag, Kashid and Murud which is some 160 Kms away. That time we had to cut short our trip due to an emergency and visited only Nagaon and Kashid.

What couldn’t happen in 2009, happened in 2010. I, Nilesh, Alok and Bhagyashree set out for Road Trip II. The Plan: Pune – Srivardhan – Harihareshwar – Murud – Kashid – Alibag – Pune all in 2 days !!

Check out the snaps here !

We started on the morning of January 25^th, 2010. After having a sumptuous breakfast of pohe and tea at Chandni Chowk, we set out towards Mulshi. We had decided to take the Pirangut – Mulshi – Tamhini Ghat – Nizampur – Mangaon – Morba – Mhasala – Srivardhan route. This can easily be traced through google maps. This is the shortest route into the konkan plains from Pune. After a few snaps at Mulshi Dam and maneuvering through the lonely but beautiful Tamhini ghat, we reached Morba for some tea. Tamhini ghat is extremely lonely and with no visible help of food/fuel or repairs in sight for a long time, it is advisable to cross this section only during day time.

We finally reached Srivardhan at 12:30 PM after travelling 160 Kms. We checked into a home stay for Rs. 450 a room, had some nice fish thali at a local restaurant (Prasad Vichare) and headed for Harihareshwar which is 20 Kms away. Harihareshwar has a famous temple. While the temple is a simple place, there is way through the temple to top of a hill from where you get a spectacular view of the Harihareshwar beach on one side and rocky formations on the other. We also spotted some dolphins from there! As Harihareshwar beach isn’t safe for bathing, we headed back to Srivardhan before sunset to bathe in the sea and enjoy the sunset. It’s amazing that one doesn’t get bored of the beaches how many a times you see them. As the cool sea winds started to soothe our bruised asses, we knew there’s more coming tomorrow :)

We woke up the next day to the sound of children singing patriotic songs early morning. That is when I remembered that it was Republic Day. It is this law of the land which prevails which is allowing us to make such a trip a success!

There are two ways to go from Srivardhan to Murud. One is to reach Dighi Port (20 Kms) and take a jetty to Rajapuri (20 Mins) from where you can go to Murud (another 10 Kms). This is obviously the shorter route. But because of the uncertainty of timings of the jetty, we took the longer route (totally by road) to Murud which is around 60 Kms. The road from Srivardhan to Murud was the most beautiful road in the whole trip. While the initial patches were bad, later on the road became smooth and with the sea view on the left, the bike ride was fantastic!

Murud is a long beach. While the surroundings are great, the beach suffers from deposits of black silt. I would recommend not bathing in this beach as you would get dirty in the silt as you get out of the beach. We had some refreshing lime soda at the beach and then did some beach biking! Yes, as the beach is long and the sand is stiff, you can ride a bike on this beach. After our outing, we decided to have lunch at one of the beach side restaurants. While the food there was good, the service was pathetic. We started for Kashid beach around 2 PM which is just 20 Kms away.

I was horrified looking at the crazy Mumbai-Puneites at Kashid. While the approach road was chock-a-bloc with MH 01 and MH 12 vehicles, the beach resembled something like Juhu! Inspite of the crowd, the beach was good to have our second dip in the ocean J We managed to climb up a nearby place to have a look at Kashid beach from the top and man, what a view it was! I am sure none of the general public knew about this place and we patted ourselves for how smart we were ;)

Now it was 4 PM and it was time to head back. We went towards Alibag, took the city bypass, fueled up once again and headed back at 5 PM. This time we took the Pen-Khopoli-Lonavala route as it was getting dark. While the Pen-Khopoli-Lonavala route was serene, smooth and full of natural beauty, Lonavala – Pune was an example of modern infrastructure at its best making us cruise past 70-80 Kmph to reach Pune by 8 PM. After having some nice Paratha’s at our favorite ‘Aunty’s Parathas’ in Pashan, we came back to the hostel.

It was a bike trip like I had never done before. We travelled for 483 Kms in 2 days visiting 4 beaches and covering the entire Raigad coast. Yes, we felt the pain in the ass more than once but it was all worth it!!

Acknowledgement: While I keep on hearing stories of how GPS is all so helpful in the US, in the absence of any such thing in India, I must say Google Maps has done a fantastic job for helping us plan the trip to perfection with most major towns, roads, turns and distances mentioned accurately. Our trip wouldn’t have been as easy as it was without Google maps :)