A google search for “India real estate bubble” yields 1.3m hits but a google search for “India start-up bubble” hits 10x that number – or 13.4m hits. Clearly, a lot of people are waiting for these bubbles to burst. Incidentally, both sectors share a few things in common:
1. Both sectors are huge advertisers: You simply cannot miss an e-commerce or real estate ad in the papers, online or on street hoardings. Both sectors are hungry for consumer attention and their strategy is paying off. Real-life and online conversations will always include a heated debate on one or both sectors.
2. Both sectors are huge employers: Although the real estate sector is much larger than e-commerce, both sectors now employ a lot of people directly and indirectly. Beyond their own employees, there are brokers, buyers, sellers, delivery staff, etc. whose livelihoods depend on the fate of these sectors. Any bursting of bubble will be ugly for a lot of people.
3. Both sectors are vulnerable to manipulation: While real estate is known to be rife with black money and shady dealings, frauds in e-commerce are also emerging – customers claiming refunds on mobile phones and sending back cheaper handsets, consumer brands and their dealers gaming e-commerce sites, etc. – these nudge-wink dealings, including questionable transactions by promoters, are well-known even to e-commerce investors.
4. Companies in both sectors are opaque: While many real estate companies are listed, with their annual accounts being accessible, the corporate structure of some of the larger ones is complicated. For example: DLF has a long list of subsidiaries. Indian e-commerce companies are not even publicly listed. Their accounts are not in the public domain and press reports for companies like Flipkart indicate holding companies in Singapore and multiple subsidiaries, ostensibly for tax reasons.
5. Both sectors are unregulated: While a regulator for the real estate sector had been agreed upon by the Government in April 2015, there has been no visible progress since that announcement. Similarly, a regulator for the e-commerce sector has also been talked about in the press, but there has been no further progress. Why is regulation required? For issues such as cartels, predatory pricing, standard practices, protection of consumer interests, etc. Remember how, say, insurance, banking and telecom have regulators?
Are these sectors in a bubble? There is no standard definition of a bubble. In the stock markets, there are valuation measures like price/earnings, price/book that signal bubble territory. But these don’t apply in real estate or e-commerce.
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Real estate: The case for a bubble in residential real estate is based simply on a mismatch in demand and supply. Currently, supply far exceeds demand and inventories of homes run into years of sales. Home prices need to fall significantly for these inventories to clear. This expected fall isn’t happening, or at least not as fast as people are expecting. This mismatch coupled with real estate developers holding on to astronomical prices is leading the call for a bubble in the real estate sector.
E-commerce: This sector is on the opposite end of real estate. Global VC and PE firms have invested in Indian startups. These firms are perfectly fine with e-commerce companies running into losses every year as long as revenues are growing at a scorching pace. There are different rules for valuing startups and the simple measure of return of equity exceeding cost of equity does not apply because there is no return of equity. And yet, valuations of some of the largest Indian e-commerce companies runs into billions of dollars. This disconnect between running businesses at huge losses and yet attract huge valuations has resulted in the call for a bubble in e-commerce and startups.
Conclusion: Only time will tell if these sectors are in a bubble. But one thing is clear: there are troubling issues in both sectors that are being wished away by their promoters and investors. A good, old-fashioned crisis might just sort out the winners from losers in both sectors. In the end, whether it is real estate or e-commerce, the rules of business – of earning profits and growing profitably – won’t really change. Irrational exuberance does not last forever. The tech bubble of 2000 and the real estate boom of 2007 stand silent testimony to that fact.
Anupam Gupta is a Chartered Accountant and has worked in Institutional Equity Research since 2000, first as an analyst and now as a consultant.
He contributes to the Business Standard platform, Punditry, through his blog, Beyond Markets on markets & the economic horizons.
He tweets as @b50