November 29, 2019

India’s Retirement Saga and the Unusual Love for Real Estate and Gold

Jinay Savla

Founder, Indigenous Investors

India’s Retirement Saga and the Unusual Love
for Real Estate and Gold

The reason many macro-economists fail to understand the retirement situation in India is its unique social structure and an attraction towards physical assets. With media houses too, there is a tendency to do some Excel sheet calculations and saying that everything is hunky dory and there is nothing to worry about. For Indian families, real estate and gold have been considered as safe havens for many decades now. Despite having the factor of illiquidity attached to it for many reasons (such as: real estate can’t be sold in small parts to raise cash for emergency, plus Gold is an emotional investment – selling it takes tonnes of emotional strength), the preference has always been towards physical assets which can be touched and felt.  And rightly so, as India’s financial market has always made headlines for all the wrong reasons.

In our client meetings, we often witness investors holding physical shares of companies since 1992 – the famous Harshad Mehta Scam Time. Now 99% of those companies don’t exist anymore which makes us wonder whether those companies really did exist in the first place or were simply shell companies. It’s this sort of experience amongst investors that makes them shy away from financial assets as they can’t understand what’s really happening and turn to real estate.

Another option of famous channel financing which ensured a solid interest rate of 18% to 24%, while there were some who even offered upto 40% interest rates have seen a wipe out due to Demonetization in 2016. Cash financing was given higher preference as it was used in various real estate activities such as construction, builder financing, purchasing of raw material, etc. A host of other industries that benefitted from the real estate boom were steel, cement, metals and even textiles. In my recent conversation with an owner of a small retail outlet at Hindmata, Dadar(in Mumbai), he suggested that he has never liked the stock market because channel financing has ensured he makes 24% a year on his cash, but now since his cash is blocked post Demonetization, he regrets that he never created a retirement fund using the stock market channel.

“We find several attributes of Indian households that are exceptional in the international context. Importantly, these distinctive features of Indian household balance sheets cannot be explained by differences in the demographic characteristics, wealth, or income of Indian households relative to their counterparts in other countries…A large fraction of the wealth of Indian households is in the form of physical assets (in particular, gold and real estate). This is unusual in the international context, and especially unusual for younger households, and for households in the bottom 40% of the wealth distribution, i.e., those with the lowest amounts of gross assets…Over the coming decade and a half, the elderly cohort is expected to grow by 75 percent. Only a small fraction of this cohort has saved in private pension plans.

Moreover, a large segment of the population of households in all age cohorts has not actively taken steps to insure adequate financial coverage during retirement. The need to finance adequate consumption during retirement is therefore a looming issue, and when combined with the low penetration of insurance, households appear particularly vulnerable to adverse shocks later in life.

We document high levels of unsecured debt, and perhaps more importantly, debt taken from non-institutional sources such as moneylenders. Such debt generates high costs for Indian households, and as we document later in the report, is likely to lead to households becoming trapped in a long cycle of interest repayments. We note that this phenomenon has been well-documented over the decades, but nevertheless remains stubbornly persistent.”  

– Report of the Household Finance Committee, RBI, July 2017 

Most household debt which is majorly for buying a home or office in India is unsecured, taken from friends, family, relatives and sometimes even from channel financing participants of the real estate sector. The issue about unsecured debt is higher interest payment. Which significantly dents the savings ability for Indian households and somehow it’s the least of their problems.

On the other hand, Institutional channels such as banks have regulations which restrict them and other financial institutions to issue debt such as home loans or gold loans beyond a specific level of cash flow generated by the person either through salary or their business income. Not to mention, the lack of availability of financial institutions in certain parts of India along with extensive paperwork had created a lack of trust amongst Indian households.

Most macro economists predict that financial markets will benefit largely from Indians shifting to financial assets from physical assets as knowledge of such products such as mutual funds, insurance, portfolio management services, etc. increases with time. That’s why we see AMFI promoting the campaign – mutual funds sahi hai making them a preferred vehicle for retirement.

But the question still arises whether Indians will shift their love from physical assets to financial assets?

There is no right answer for this question. The younger generation today prefers renting out a property rather than buying one, they want to travel around the world, have the best gadgets, drive the fastest cars and motorcycles which clearly is a shift from their earlier generation that preferred taking a home loan for 30 years, travel was mostly restricted to vacations and trips to native places while public transport was given a higher priority over owning a car or a motorcycle.

As the financial markets become more mature and investors start to see a stable portfolio across market cycles, there will definitely be a shift towards financializing their savings rather having physical assets which at times can be a liability when they are illiquid. On the other hand, the younger generation that is entering their traditional Small and Medium Enterprise (SME) businesses, doesn’t wish to be tied up to the tensions of channel financing where we are seeing maximum pain currently as liquidity has dried up post Demonetization and introduction of GST.

Another important aspect to be considered is that the younger generation is educated and asking the right questions. They are thinking about their retirement seriously too which was somehow not considered by their previous generations as they were too tied up in setting up their life.

Hence, we too are confident of the Younger generation having adequate financial savings as they approach retirement but the question about the generation of people that are approaching retirement still remains. An extremely high exposure to physical assets is causing problems as their Personal Provident Fund, Gratuity and Fixed Deposit money are not enough to sustain their medical and other day to day expenses over the next 20-25 years.

Just like Systematic Investment Plan, we have Systematic Withdrawal Plan wherein an investor withdraws money from their mutual funds every month. But should a person sell its real estate or gold and invest in mutual funds to receive a regular income is a focused emotional conversation that a financial advisor would need to have.

Numbers published by media houses, macro-economists and analysts are one side of the story but actually living the journey of shifting from physical assets to financial assets is the major part, sadly on which there is not much thought provided. Hence, it’s a blue ocean for financial advisors to make tide over these crises and emerge as the true Prime Ministers to their Kings / Queens i.e. their clients.