Government is giving away money. Just not to you

Commercial Real Estate on the rise and the government's plans to recapitalize banks. Big words, Big promises, all covered in today’s newsletter straight from Bengaluru☁️.

That’s where we work btw...

Anybody say Office Space?

Okay, there’s something really weird happening in the Real Estate sector. And we need to discuss this ASAP.

So when people often talk about Real Estate they make two important distinctions Commercial Real Estate🏢 and Residential Real Estate🏘️.

Residential Real Estate is the housing sector. And as much as it pains me to say this, housing prices in most places have been plateauing for quite a while now. Meaning investing in residential real estate hasn’t been a worthwhile endeavor for most people of late.

Also, developers across India have been selling houses at ridiculously high prices. This isn’t because there is some unmet demand creeping up , instead they are forced to sell houses at higher prices because their profit margins are already wearing thin. So it’s a train wreck all in all.

What’s ironical is that Commercial Real Estate, on the other hand, is booming with excitement. We are talking about office spaces and corporate buildings. There’s so much money coming into this space that it’s not even funny. PEs (Private Equity) alone invested about $ 1 Billion💰 between January and March this year and most of it went to Commercial Real Estate.

So why exactly are people jumping on the commercial real estate bandwagon now?

Well, the details are sketchy at best but we can try and reason why "smart money" could potentially be excited about all this?

Around 90% of the demand for office space comes from the tech and service sector. So logic dictates that big investors see a lot of demand coming from these places over the next few years. In fact, this is also part of the much-debated narrative about India’s great demographic dividend i.e. the large working-class population that will supposedly take the economy by storm. And they’ll want to work in cozy offices, wouldn't they? I mean who’d want to work in a foundry when they can sit in comfy co-working spaces?

Whether they’ll have enough opportunities to do so is another matter. But investors and Commercial Real estate developers are preparing for the future anyway and it’ll be really exciting to see how all this pans out.

Also, if you want to know more about the residential real estate sector you can read our detailed coverage here.

The Big Stimulus

On Friday, Miss Nirmala Sitharaman announced that the government was about to set aside ₹70,000 crore of its budget to recapitalize state owned banks.🤯

Translation: People need money. They need banks to lend this money. And banks are running short on funds. So we are going to pump in the money right now.

Nice rhyme don’t you think? Anyway on to the story.

A dummy’s guide to Recapitalization

The Government of India bears a large burden on its shoulders. It owns or part-owns most big banks in this country. State Bank of India, Bank of Baroda, Punjab National bank, you name it and the government has a stake in its well-being. Unfortunately though, banks haven't been doing all that well, off late. They’ve been lending a lot of money to people who aren’t exactly gung-ho on paying them back. Despite desperate measures by the banks, government and the RBI to retrieve some of these funds, they haven’t had much success on this front👎🏼.

And as such, banks are sitting on a large pile of “bad loans” — bad because these loans are unlikely to be paid back in full and they don’t know what to do about all this🤦‍♂️.

I mean, think about it. They have had to part with a lot of money they could have otherwise used to lend to other people. And considering the economy is currently in such a fix it would have been awfully nice if we didn’t have to deal with this problem.

But we do and it’s mostly the government’s problem. So how could you try and get these banks up to speed so that they can resume their normal lending operations without having to worry about being constrained by lack of funds?

Well, it doesn't take a genius to figure this.

You give them the needed funds so that they can go about their business as usual. And since it's on the government to do the needful they have promptly decided to give a select set of banks about 70,000 Crores to fix this gargantuan mess. At least they’ve promised this much for now.

Quote for the day

Also, fun fact. When the government says it's going to spend 70,000 crore what they are actually saying is that they are about to spend some of that juicy taxpayer money i.e. your money on this little operation. So maybe this quote makes sense, Eh?

Btw... PSU means Public Sector Undertaking like Government owned/part-owned stuff (Air India, BSNL, State Bank of India) Get it?

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Until Tomorrow then...