Marcellus: Three Degrees of Disruption in Home Buying in India

Published on: 18 April, 2019

The rapidly growing sharing economy, and the availability of easy credit for pursuing ‘dreams’ and ‘desires’, together are shaping the attitude of young Indians towards buying assets. The impact is most visible in the waning demand for assets that demand long-term financial commitments and where options exist to delink usage from ownership. We are already seeing the changed attitudes impacting car buying and home buying. As these changes disrupt the housing property market, businesses will need to adapt their models accordingly. In parallel, exciting new business models will emerge.

If there is an award for the Business Buzzword of the last decade, ‘Disruption’ would surely be a frontrunner for the prize. A lot has been written about how several different businesses, from city transport to credit cards and from enterprise IT to insurance, have either been already disrupted or are facing severe threats from new business models, especially technology-enabled ones. These industries are seeing what we can call the ‘first-degree’ impact of disruption. Shopping online is a direct threat to the traditional retail model as is use of payment wallets to credit cards. The interplay of the first-degree effects in different industries over time is likely to drive derivative effects in completely unrelated businesses. One such business is likely to be residential real estate.

There are changes we are seeing in two disparate industries, the outcomes of which will shape how future generations will think of buying property.

First is the evolution of fintech models, that are rapidly changing how and, more pertinently, who consumes credit. Using data as obvious as your borrowing history, to data from your browsing and search history and phone contacts list, new age lenders are making credit available to a much wider set of people and for a much wider purpose than banks traditionally have. Today you can borrow money for a destination wedding, with the lender exhorting you to not let money be a constraint in getting the finest venue, outfits and caterers! And you can follow that up with a loan for the honeymoon as well. My favourite is LazyPay, which can give you a 2-week interest-free credit when you order food (among other things) online. Elders in my family would pity my mother if they hear that I am borrowing money for dinner!

While today the biggest users of such loans are the millennials i.e. those who achieved adulthood at the turn of the millennium, as these products become more widespread, adoption amongst the post millennials (Generation Z; those born in and after the 1990s) will only rise with time. A typical post millennial starting out on a career was born post 1991, in an India with no artificial supply constraints, and hence has not known deferment of gratification that the older generations grew up with. If the Gen Z can fulfil a desire and there is someone ready to help them with the funding, they are more than willing to consider it. Talk to a 25-year old and you can hear stories of how some of his/her friends are regulars at the Sunburn music festival in Goa, or have been to Singapore for the F1 weekend, and have aspirations to travel to Germany for Oktoberfest.

Simultaneously, the other disruption that is shaping consumer behaviour is the sharing economy. We are already seeing privately owned cars being replaced by Ola or Uber for daily commutes. Car ownership has been seeing a significant downgrade in priority in the millennials’ consumption bucket list. Why buy a car and get in to a long-term commitment for EMIs, insurance, maintenance etc. when a chauffeur-driven vehicle is available anytime and anywhere.

Fast forward a decade and we will have a whole generation of people who’ve come to realise they don’t need to own an asset to use or enjoy it. And even if they were to think of buying an asset, is there room for another monthly instalment in their budgets, after having spent on an exotic vacation and for the latest iPhone? Buying a large ticket asset such as real estate then seems to be an impossible task, especially in the metro cities where property prices are unaffordable for most white-collar workers even today. A generation conditioned by the conveniences of a sharing economy, and the ubiquity of cheap credit that spurs consumption, will have a detached attitude towards home buying, a purchase/investment which once upon a time was seen as a milestone for Indian families. Millennials and Generation Z will see lesser merit in buying a home and greater sense in renting one, especially given the huge differential (4-5x) between rents and an EMI for a loan on the same house. They would rather spend the difference on consumer durables or holidays or even invest it. Other demographic changes, such as higher mobility (for jobs across cities) and late marriages will also increasingly shape the demand for residential property – owned or rented. Some of these trends, in varying degrees, have been seen in the US and China too,

That does not imply that the younger generations will forever stay in rented homes. Just that they will feel no pressing need to make that a priority i.e. they will postpone their home buying. And it doesn’t take long for such behavioural changes to impact share prices – we are seeing the effect that just 6 years of Uber’s operations in India have had on demand for cars in India.

This is the second degree or derivative disruption that will be felt in the residential housing industry and will require adapting the current entrenched business models to changing buying behaviour. If more people are likely to rent homes in the future, residential real estate will acquire hues of commercial property development, where developers are also landlords. However, given the poor yield in residential real estate (3% at best), developers currently have no incentive to own property. Therefore, for reviving and sustaining interest in residential housing as an attractive investment, either yields must increase materially, or home prices need to correct massively – both of which will be hugely disruptive.

More people renting homes will also impact businesses such as real estate classifieds (and websites that offer such services), movers and packers, furniture rentals among others. Owners/managers of these businesses will see a third-degree impact and will have to think of the extent of disruption that will hit them and how resilient their business model is to such changes. At the same time, new business models will make deeper inroads. Either way, the next decade is set to be exciting for the housing property market in India.

Salil Desai is a Portfolio Counsellor at Marcellus Investment Managers.
If you want to read our other published material, please visit http://marcellus.in/resources/

Note: the above material is neither investment research, nor investment advice.Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services and as an Investment Advisor.

Copyright © 2019 Marcellus Investment Managers Pvt Ltd, All rights reserved.