Why 'iBuying' May Not Work in the U.S., One Indian Startup's Alternative... and Why Banks May Be the 'FAANGS' of India

Should the flop of Zillow's (Z) home-flipping business be a warning for its competitors? Its biggest public peers among so-called instant buyers (or "iBuyers") – notably, Opendoor Technologies (OPEN) and Offerpad Solutions (OPAD), but also increasingly Redfin (RDFN) – have insisted the problem was Zillow's, not theirs. Don't be so sure. I started thinking about […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] Why 'iBuying' May Not Work in the U.S., One Indian Startup's Alternative... and Why Banks May Be the 'FAANGS' of India By Herb Greenberg Should [the flop of Zillow's (Z) home-flipping business]( be a warning for its competitors? Its biggest public peers among so-called instant buyers (or "iBuyers") – notably, Opendoor Technologies (OPEN) and Offerpad Solutions (OPAD), but also increasingly Redfin (RDFN) – have insisted the problem was Zillow's, not theirs. Don't be so sure. I started thinking about this after talking with Rohit Malik, CEO of Indian prop-tech startup Clicbrics. I first met Malik nearly 20 years ago when he was a tech-focused hedge-fund analyst in the U.S. Then he moved to India and started investing in Indian startups. And now... he's launching his own company in India, but with a different slant: Instead of buying houses and flipping them, he's buying apartments from developers and selling them to first-time buyers. In Malik's view, this is a better model and likely more sustainable than iBuying in the U.S... Central to his reasoning is the nature of real estate in India... First, there is no flipping, and affordable housing for first-time buyers has the highest volume of sales. Critically important: Almost all of these are indistinguishable apartments that sell in a range from $70 to $250 per square foot. Then there is the economics of the way real estate is developed, bought, and sold in India. All of this is tied into the unique nature of India's banking industry (there are less than 30 privately owned banks in India) and the exceedingly high interest rates developers must pay (12% to 24%). The cost is so high that developers simply can't afford to sit on units. Perhaps even more compelling: The scarcity of data on selling prices... there is no equivalent to the Multiple Listing Service ("MLS"), in India. Plus, the data that does exist is in 32 languages, making it that much more valuable. That last point is an important one... To make his business work, Malik and his team have spent a few years manually scraping data from government databases, developer relationships, aggregators of data for institutional investors, and his broker contacts. Or as he explains... This on-the-ground experience in Indian real estate is extremely hard to replicate... A new competitor would have to spend extensive time and capital to build this data set, creating significant barriers to entry. In other words, it's a model with a moat – the exact opposite of iBuyers in the U.S., where anybody with the cash, connections, and/or risk tolerance can enter the business. And where, thanks to the MLS, everybody has access to the same data. The biggest difference among the U.S. iBuyers is the algorithms used to crunch the data. But even that has limits, since algos can't see upgrades, remodels, and other improvements that can make two houses next to one another sell for vastly different prices. Something else doesn't get much ink, either... iBuying pretty much started in Phoenix for a specific reason: Thanks to the cookie-cutter approach to building homes in Phoenix, many homes [look alike]( making them easy to price. That's where this gets interesting, and more challenging. Or as Malik puts it, "Everybody got Phoenix right because it's a homogenous product and it is easy to price." Sort of like affordable housing in India. But as the iBuyers in the U.S. expand to other markets, where houses can be very different, Malik believes it will likely get harder for iBuyers – especially with pricing. "The success of Phoenix is a one-off," he told me. "That may not play out over the country." And while Zillow's departure from the market may help iBuyers for the next year or so, as Malik points out... The problem is the long term. How do they figure out margins? Think about it: The consumer is more intelligent than even three years ago. So, they negotiate a better price from them. And that's in a hot market... When housing starts to cool, Malik believes the iBuying model could find itself stretched... The biggest issue in the U.S. is overpaying for supply. If they're not overpaying for supply, they will. That's not something Malik has to worry about, because in India the developer is more than happy to give Clicbrics a good deal to avoid getting stuck with costly, unsold units. Compare that with the big U.S. iBuyers, who are throwing money at the housing market to buy share... sort of like Uber (UBER) and Lyft (LYFT) used to do with their subsidized rides. The simple reality is, at some point they need to make money. And while a fast, easy sale may be the best choice for those who are forced to move quickly, need the cash, or simply don't want to be bothered with showing their house, psychology plays a big role in how houses are sold in the U.S. Not only that... a sale can get very personal. Nobody wants to think he was lowballed. And there's always that hope that a better deal will come along. That is, after all, the American way. From the cutting-room floor... The issue of the scarcity of data in emerging markets, as it relates to real estate, is a potential goldmine for those who can gather it... Perhaps the most notable example is Brazilian real estate startup Loft, where data is equally opaque. A financing in March valued the company at nearly $3 billion. Meanwhile, La Haus in Colombia and Mexico – two countries not known for their transparency in real estate data – raised $100 million in funding last summer, some of it coming from Amazon (AMZN) founder Jeff Bezos. There has been less enthusiasm in India, but Malik is betting that Clicbrics can help change that. In January, he plans to launch a new website with considerably more of his proprietary data. He also recently added Scott Forbes, chairman of Cars.com (CARS) and several U.K. companies as a director. For 15 years, Forbes had also been chairman of Rightmove, the U.K.'s equivalent of Realtor.com. When it comes to real estate in India, Malik says... It's a big business. It's like the used car business, but disorganized and not to scale. Autos and two-wheelers have gone online in India, and this year the auto space has four unicorns as people are gravitating toward buying cars online. Real estate is next. Seems obvious. --------------------------------------------------------------- Recommended Links: [FREE REPORT: 'The 1,000% Secret']( A former Stansberry subscriber has handed our firm two different ten-baggers using a new type of company. It has almost no revenue, no product, and no employees, but it could 10X your money if you know how to find it... beginning with a $9 stock we urge you to buy immediately. [Click here for a FREE special report](. --------------------------------------------------------------- [America's top stock cop just issued a massive warning to investors]( A major shift could be coming for the stock market, perhaps soon. Why won't the mainstream media tell you what's coming? [Find out right here](. --------------------------------------------------------------- Speaking of India, why are its banks being compared to the 'FAANG' stocks in the U.S.? In the U.S., FAANG refers to Facebook (FB), Amazon, Apple (AAPL), Netflix (NFLX), and Alphabet's Google (GOOGL). Could the equivalent in India be... its banks? That's what former hedge-fund managers Amit Anand and Manny Singh are counting on. In October 2020, they launched the Nifty India Financials Fund (INDF), which invests in Indian financials, with a special focus on its privately run banks. (For those keeping score, according to ETF.com, only 12 Indian exchange-traded funds ("ETFs") exist, period.) INDF has a mere $10 million in assets and is extremely thinly traded, but the price of the fund has leaped by more than 40% since it started.  The key, the exceedingly personable Anand told me, is the fund's focus on banks... It's like an open secret: If you invest in India, go through private-sector banks. Most hedge-fund portfolios invest in India through banks. One reason is that banks are a proxy for economic growth... and while investors are still wary of it as an emerging markets powerhouse, India is expected to continue to grow rapidly. It's expected to leapfrog Japan and Germany by the end of the decade to become the world's third-largest economy. But another reason is the banking structure in India, where no private-sector banks existed until 1992. Now there are 22, which Anand says are growing fast, with revenue surging more than 15% a year... Now they're taking share every year. They're 37% of the banking system belongs to private sector. One reason for their rapid growth: Unlike the government-run banks, management at private banks is incentivized to grow. As a result, they're far more technologically advanced, with 90% of the transactions taking place through their apps. This photo from the fund's investor deck tells the story...  Source: Nifty India September 2021 Investor Deck As a result, most of Nifty India's assets are concentrated in the country's top four banks... including one that focuses on consumers, another on corporate capital expenditures, and one that focuses on real estate developers. Given the dynamics of the Indian market and the lack of competition, the all-important net interest margin – the spread between loans and deposits – averages around 4% to 4.5%. That's massive, especially when compared with the U.S., where they've fallen below 3%... to the lowest levels ever. The fund itself has a dividend yield of slightly less than 1% – low for a bank ETF, but it's the result of reinvesting profits into the business to fuel further growth. Beyond that, the broader financial services industry is also booming. The reason, Anand says... About half of the credit in India is consumer credit – people buying their first home, their first car, getting their first credit card – which is the primary driver of overall credit growth. As a result, he believes Indian financials are poised to return about 30% per year for the next two years. There are obviously risks, notably currency related, but also a resurgence of COVID-19... a push by the Indian government to flood the market with cash, leading to a lower net interest margin... and perhaps the bigger wildcard in India: Corporate governance issues at major borrowers, leading investors to flee. But as many large investors are already pulling money out of China, it has to go somewhere, and at least some of it is starting to find its way to India. As always, feel free to reach out via e-mail by [clicking here](mailto:feedback@empirefinancialresearch.com?subject=Feedback%20for%20Herb). And if you're on Twitter, feel free to follow me there at [@herbgreenberg](. My DMs are open. I look forward to hearing from you. Regards, Herb Greenberg November 30, 2021 If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2021 Empire Financial Research. All rights reserved. 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