Tag: different kinds

Home Equity

I’m looking to purchase a house. However, the amount of cash I have with me will not suffice to completely fund the house. Given that I’m confident of earning that difference amount in the future means that some bank will give me a mortgage, and I will thus finance my house with debt. Question is why I can’t finance the house with equity instead.

Let’s say the house I want to buy costs Rs. 1 Crore and I have with me Rs. 50 lakh. Instead of taking a loan for the balance Rs. 50 lakh, why can’t I sell equity instead? A consortium of investors can be invited to invest the balance Rs. 50 lakh in exchange for a 50% stake in the house. Rather, we set up a company that owns my house of which I own 50%, and every month I pay a rent to this company. As and when I get additional funds I start buying up additional shares in the company that owns my home and soon I’ll own it completely.

So who will be these people that will invest the balance 50% in my house? They are going to be dedicated real estate investment funds and their business will be to invest in minority stakes in properties of different sizes and in different parts of the town and country. This they are going to fund via a bunch of funds that allow ordinary investors to take exposure to real estate.

Currently there is no way I can invest in real estate except for taking on a large mortgage and purchasing a whole house. If I’m saving up money to buy a house some day and want to invest it in a way that will help me partially hedge against increase in real estate prices (something that I’m unable to do today) I simply buy units in one of these real estate funds. On the other hand, if I sense there might be some problems with my property (let’s say it is ripe for acquisition by the government for some road widening purpose, let’s say) I can sell some part of it to some of these real estate firms, thus reducing my risk of ownership.

These real estate funds can offer a variety of funds that invest in different kinds of properties in different proportions (like you can have a fund that invests 50% of its money in housing, 30% in commercial real estate and 10% in farmland, say). This allows ordinary investors to get exposure to real estate without any large down payments or mortgages. And reduce the risk of owning property in a particular place (let’s say I’m concerned that property prices in Bangalore might fall while those in tier 2 cities might go up. I will simply sell stock in my Bangalore house and invest the money in a fund that invests in houses in tier 2 cities, thus hedging myself).

Why is such a structure not popular already? In fact, I don’t think you have such structures anywhere in the world. One problem in India is the massive transaction taxes on real estate which makes the market illiquid. If that goes, is there anything that prevents us into getting into a culture of home equity?

An Illiberal Society

Every few months or so a bunch of (mostly) Bangalore-based liberals go up in massive outrage all over the interwebs. On each occasion, the trigger for this would have been a bunch of cops raiding some bar, and imposing a new set of rules. The last time this happened, it was about cops randomly checking black-skinned people for drug possession and pushing, leading to pubs banning blacks from entering, altogether. This time, cops have instructed that pubs not play “loud, western music” and banned live music from pubs.

Already, pubs and even restaurants in Bangalore have to close by 11 pm and there is no dancing allowed (again because “dance bars” are banned). A bunch of pub-goers hanging outside a few minutes after 11 is an open invitation for the cops to enter the pub and try collect some hafta. The problems are plenty, but the biggest problem is that there is no political solution in sight.

The problem here is that however vocal and loud the liberals may be, they still don’t make up enough numbers in terms of the city’s population to make a difference. The fact of the matter is that the large majority of the city’s population (even if one were to consider only the middle classes into account) is either not bothered about these pub rules, or actually supports the new rules that the police make from time to time.

Firstly, it is not possible in order to have different rules for different kinds of pubs. So whatever rules govern say Fuga need to also govern South End Bar at the end of my road. Secondly, a large number of pubs are in residential areas, and for good reason – you do not want to go too far when you need a drink. There is some difference in terms of licenses between wine shops and bars (the former can’t “serve” liquor) but most wine shops double up as “standing bars” anyway. Hence, it is likely that you’ll have a bunch of drunks patrolling the residential streets late every night.

Thirdly, and most importantly (though I’d like the “police reforms” specialists at Takshashila to weigh in), the police force in the city is massively understaffed and underpaid. It’s not possible for our cops to make sure that despite the presence of walking drunkards, the streets are going to be safe. It will take a massive political effort in order to change this. Hence, given that it is not really possible for the cops to police the streets effectively, they resort to signaling.

By forcing all bars to shut down at a certain time, they signal to the population that they get things under control every evening, and there wouldn’t be much nuisance. The rules regarding dancing are an attempt by the police to somehow extract money out of pubs, since dance bars are officially banned (I don’t know why), and they can use the same set of rules to harass the discotheques. Loud music is again to gain credence among neighbours (remember that most pubs are in residential areas) that they’re doing something about the “menace”. The ban on “loud western music” is inexplicable.

This police harassment of bars is not a standalone problem, it’s part of a bigger problem in terms of police reforms. As a stand alone problem, though, given the small proportion of people it affects, I don’t foresee a good solution. What needs to be done is to aggregate all stakeholders who are affected by this – regular pub/discgoers, pub owners (very important), liquor companies, people selling cigarettes and bondas late in the night, and collectively lobby for change in regulation. It’s not going to be an easy battle, considering that a large proportion of the city’s population is conservative, and will be up in arms against any change in rules. It won’t be an easy task either, since liberal but lazy parties like me (who prefer to get wasted at home) will also not lend support.