Wednesday November 20, 2019
Home Lead Story There’s...

There’s a lot in a Coupon! (Column: Behind Infra Lines)

A quick review of investment styles promoted by the acolytes of value investing

0
//
Currency
The Indian economy gradually works towards resolving issues in the real estate space, both on the physical inventory side as well as financial instruments space. Pixabay

Trends, both global and Indian, across the financial markets often reaffirm and, more importantly, remind us of the basic principles of business and investments. The word “basic” here implies the fundamental underpinning of business, rather than a casual reference to simplicity. Both current issues and opportunities that confront India must be analysed in terms of how capital has flowed into different sectors with varying capacities to generate income and the “risk perception” that investors have about the income- Column: Behind Infra Lines.

A quick review of investment styles promoted by the acolytes of value investing, summarised in the essay titled ‘Buffett’s Analytical Framework’ by ‘The Private Investment Brief’ (a specialist investment newsletter) is useful. Viewing an asset through the spectrum of the capital required to acquire the asset, and the consequent income the asset can generate as the yield, provide the necessary framework required. Additionally, the potential growth rate of the income streams from the asset must be factored in, to get a basic structure that can be utilised to compare asset returns.

Currency
The potential growth rate of the income streams from the asset must be factored in (Column Says). Pixabay

As the Indian economy gradually works towards resolving issues in the real estate space, both on the physical inventory side as well as financial instruments space, it is worthwhile viewing real estate investments through the simple framework mentioned above. Analysing income streams is especially true for the residential segment. While solutions are being worked upon, the crucial aspect that merits attention is for the capital allocated to distressed real estate segments, what income or cash-flows can be generated and how is this income expected to grow in the years to come.

The framework mentioned above, while simple, throws light upon precisely why the residential real estate segment is still struggling to generate the requisite investment. Fundamentally, an asset that is yielding two to three per cent of income, not adjusting for any other risks, at best is unable to compete for capital with different segments in the Indian economy, and for that matter globally. Lowering home-loan rates is a welcome step. However, such moves do not address the core issue at hand that current asset prices might still need further adjustment to truly get demand going unless one can foresee an unlikely scenario of residential rental yields doubling soon.

Additionally, an even more troubling question for the real estate sector and the policymakers to bear in mind is, why such a situation arose in the first place. Markets overshooting valuations in the face of exuberance is part and parcel of the game, but the degree of such overshooting must be reduced through cleverly designed policies to reduce the kind of over-drag the residential real estate segment has lately seen in India. Land prices, valuations at which land is available for residential real estate development, and the policies that drive the decisions need an urgent relook.

A quick comparison between the fate of the commercial office real estate segment in India versus the residential real estate segment provides a valuable insight into how vital the income component is to assets trying to attract investments. The commercial office real estate segment has seen robust investor interest over the last five years as the annual yields the assets generate (capitalisation rates) have gradually come down from the low teens to around eight to nine per cent. While the actual return varies with asset type, the key takeaway is that commercial office real estate segment in India has seen investor interest because the returns generated adjusted for the risk undertaken are competitive versus other investment avenues.

Income
India must be analysed in terms of how capital has flowed into different sectors with varying capacities to generate income and the “risk perception” that investors have about the income (Column Says). Pixabay

More importantly, the back of the envelope framework stated above is the one that lenders need to be mindful of. Of all those involved in financing projects lenders are the ones who are most dependent on project cash-flows to generate returns as opposed to dependency on speculative capital gains. The “attractiveness” of an asset from an income generation perspective needs to be kept in mind because it allows both the generation of a sensible rate of return and the creation of assets that are competitive across a multi-asset spectrum.

Also Read: Netflix Plans to end Support for Old Roku Players in December

As the Indian economy looks to provide the next phase of investment-driven growth and tide over a real estate led developer and NBFC crisis, an eye on the cash-generative capacities will be essential to ensure a sustainable and value-generative investment environment. Going forward, investors must assess the income-generating ability, and so must the lenders, while the policymakers must look at framing policies that help improve the attractiveness. (IANS)

Next Story

To Meet Increasing Demand Africa Needs to Quadruple Energy Investments

Africa's overall population is set to exceed 2 billion before 2040, accounting for half of the global increase over that period

0
Africa, Energy, Investments
The number of people living in Africa's cities is expected to expand by 600 million over the next two decades, much higher than the increase experienced by China's cities during the country's 20-year economic and energy boom. Pixabay

Africa is set to become increasingly influential in shaping global energy trends over the next two decades as it undergoes the largest process of urbanisation the world has ever seen, a new report from the International Energy Agency (IEA) said on Friday.

‘Africa Energy Outlook 2019’, a special in-depth study, finds that current policy and investment plans in African countries are not enough to meet the energy needs of the continent’s young and rapidly growing population.

Today, 600 million people in Africa do not have access to electricity and 900 million lack access to clean cooking facilities.

The number of people living in Africa’s cities is expected to expand by 600 million over the next two decades, much higher than the increase experienced by China’s cities during the country’s 20-year economic and energy boom.

Africa, Energy, Investments
‘Africa Energy Outlook 2019’, a special in-depth study, finds that current policy and investment plans in African countries are not enough to meet the energy needs of the continent’s young and rapidly growing population. Pixabay

Africa’s overall population is set to exceed 2 billion before 2040, accounting for half of the global increase over that period.

These profound changes will drive the continent’s economic growth, infrastructure development and, in turn, energy demand, which is projected to rise 60 per cent to around 1,320 million tonnes of oil equivalent in 2040, based on current policies and plans.

The new report is the IEA’s most comprehensive and detailed work to date on energy across the African continent, with a particular emphasis on sub-Saharan Africa.

It includes detailed energy profiles of 11 countries that represent three-quarters of the region’s gross domestic product and energy demand, including Nigeria, South Africa, Ethiopia, Kenya and Ghana.

Also Read- Xiaomi’s Foldable Phone may Come with Five Pop-Up Cameras

The report makes clear that Africa’s energy future is not predetermined.

Current plans would leave 530 million people on the continent still without access to electricity in 2030, falling well short of universal access, a major development goal.

But with the right policies, it could reach that target while also becoming the first continent to develop its economy mainly through the use of modern energy sources.

Drawing on rich natural resources and advances in technology, the continent could by 2040 meet the energy demands of an economy four times larger than today’s with only 50 per cent more energy.

Africa, Energy, Investments
Today, 600 million people in Africa do not have access to electricity and 900 million lack access to clean cooking facilities. Pixabay

“Africa has a unique opportunity to pursue a much less carbon-intensive development path than many other parts of the world,” IEA’s Executive Director Fatih Birol said.

“To achieve this, it has to take advantage of the huge potential that solar, wind, hydropower, natural gas and energy efficiency offer. For example, Africa has the richest solar resources on the planet, but has so far installed only 5 gigawatts of solar photovoltaics (PV), which is less than one per cent of global capacity.”

If policy makers put a strong emphasis on clean energy technologies, solar Photovoltaic (PV) could become the continent’s largest electricity source in terms of installed capacity by 2040.

Natural gas, meanwhile, is likely to correspond well with Africa’s industrial growth drive and need for flexible electricity supply.

Also Read- This Novel Flying Robot can Clean Glass Curtain Walls in High-Rise Buildings

Today, the share of gas in sub-Saharan Africa’s energy mix is the lowest of any region in the world.

But that could be about to change, especially considering the supplies Africa has at its disposal — it is home to more than 40 per cent of global gas discoveries so far this decade, notably in Egypt, Mozambique and Tanzania.

Africa’s natural resources aren’t limited to sunshine and other energy sources. It also possesses major reserves of minerals such as cobalt and platinum that are needed in fast-growing clean energy industries.

“Africa holds the key for global energy transitions, as it is the continent with the most important ingredients for producing critical technologies,” Birol said.

African countries are on the front line when it comes to climate change, meaning the continent’s energy infrastructure planning must be climate resilient.

“Even though Africa has produced only around two per cent of the world’s energy related CO2 emissions to date, its ecosystems already suffer disproportionately from the effects of a changing climate,” Birol added. (IANS)