Blame the Government for Real Estate Mania

The best way to dampen real estate spiral is to make capital gains on real estate compulsory and not provide any kind of exit routes. After all why should reinvestment back in to property save you capital gains tax.

When you purchase shares of Tata Steel, and sell it for a profit, you pay capital gains tax on that transaction, whether or not you reinvest the money in to Infosys or not. So, why should a person selling his apartment in Mumbai be allowed to save tax, but only if he reinvests the proceeds in to an apartment in Bangalore?

The Indian government is guilty of keeping an excessive real estate spiral in place. It has kept the real estate boom going, by providing an exit route for real estate investors, via reinvestment in property.

In order to save capital gains tax on property the government says that you can reinvest the money within one year in to real estate and avoid payment of capital gains tax. Alternatively, you lock this money in to a capital gains bonds, which pays you 5 percent each year, for the next five years. At the end of the tenure the capital and the interest becomes tax-free. The capital gains on real estate is taxed at 20 percent for long-term capital gains and 30 percent for short-term capital gains.

Who picks property at Rs 2 per square feet and sells it at Rs 2000 per square feet. It is none but politicians, especially those who are in power. The Indian government has perpetuated a constant stream of investment in real estate by introducing this exit on capital gains.

As Sam Zell said, there is no shortage of land in India, but there is shortage of zoned land, which means land freed for real estate development. This land is controlled by the government. Zoned land is never made available to individual home buyers.

Why is it, that people who can pay Rs 30,000 per square feet for an apartment are not allowed to pay Rs 17,000 per square feet for land, on which they can build their own homes.

The government's job is to focus on creating new cities, by providing infrastructure (excuse this buzzword) - in simple term, water, electricity and roads. Instead, politicians focus on acquiring cheap land, doubling FSI, and selling them at profits that even the stock market cannot provide. This is why real estate is such a darling of the chosen few in India.

Thus, it makes sense, that when one votes, it is always in the best interest of the people to ensure that one single party never remains in power for more than one term. If it is a choice between theivves, the best thing a voter can do is to divide the spoils and exercise at least one wee bit of control over the overall process.

Always vote out the incumbent government, and bring in a new one. This is the sanest thing to do. Irrespective of what the party stands for, just make sure they do not rule for more than one year.

Do not Bail Out Real Estate Companies - Avinash MKB

After yesterday's stimulus package announcement for the Real Esate companies , I read an articke in the Economic Times about real estate companies claiming that the stimulus package was not enough and that they need more.

CEO # 1 says : "They could have done more …. should have cut the steel prices mores …..."

CEO # 2 says: "Package should be annouced for loans of upto 30 lakhs and not 20 lakhs , this is not enough."

This is really juvenile behavior on the part of real estate companies. They are crying hoarse about the inadequate sops from the government, while they have done little to stimulate the uptake in real estate via a price reduction.

I am unable to understand the reason why developers are not willing to cut prices (at least by 15-20 percent). While car companies and every other company is offering discounts to sell their stocks, real estate companies are sitting pretty on their profit margins.

As per my own experience of building a house in Bangalore and also as per the contractor (who also builds many apartments on contract basis) the average cost of constructing a quality apartment is around Rs 1000 to Rs 1200 per sq ft. If you include the cost of land then it would come up to Rs 1500-1700 per sq ft.

But what's the retail price of an apartment in Bangalore? It ranges between Rs 2300 (at the lower end ) to Rs 3200 (medium) to Rs 4000 (higher end). These real estate guys are making dream margins on each project (even IT companies don't make so much).

However, on the balance sheets of real estate companies the profit margins are shown lower simply because all profits made during the bull run were invested in creating more and more land banks.

Given all these I don't see a reason why one should give bailout packages, in terms of cheaper loans to the real estate companies. I believe that the real estate companies should now pay the price for their reckless expansion.

My humble request to the PM and FM is not to give any more sops to real estate companies until they cut prices by 20-30 percent.

Write to Avinash at avinashmkb@smellthecheeseblog.com

Hiranandani Exploited Middle Class for Super Rich

Mumbai builder, Niranjan Hiranandani, exploited a middle class housing scheme in Powai to construct luxury apartments catering to the superrich. This comes across from a High Court order passed Thursday preventing the builder from selling more than two flats to one person.

In 1986, builder Niranjan Hiranandani was allowed to construct over 230 acres of land under the Powai Area Development Scheme, (PADS), in which 50 percent of the flats constructed had to be less than 40 square meters (430 square feet) and no flat could exceed 80 sq meters (861 sq ft). The objective was to allow the burgeoning middle class to benefit from the scheme.

However, in 1989, Hiranandani was provided an exemption allowing it to merge flats but the amalgamated flats could not exceed 15 percent of the total development.

However, the greedy developer built flats of area 1870 sq ft and 4925 sq ft which are currently priced at Rs 4 crore and Rs 8 crore respectively. In March 2008, a report submitted by the MMRDA confirmed the violations. However, the state government allowed the company to get away with just Rs 3 crore as a penalty.

Today's judgment came as a victory for petitioners, Kamlakar Satve and Rajendra Thacker. The judges said that the developer could carry out further construction at its own risk. The next hearing is December 18 when all parties have to file their replies.

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Dubai Debt to GDP a Whopping 148 Percent

The days of sipping black tea over puffs on shi-sha are over. There will be no more easy on Friday mornings, when expatriates would laze in the security that Dubai was India's cleanest city - considering the number of Indians here.

Many at times would argue that a European lifestyle, without citizenship and rights, was as good in the desert than one that was offered in the snowy mountains of Canada or coast of Australia or the islands of New Zealand. One could have it all here in Dubai, without the attendant niggling irritant called income tax.

Well until October, nobody cared what the GDP or inflation of Dubai was. They did not care to inform the world community anyway, as long as property prices in Dubai skyrocketed and speculators minted money with every 10 percent put down to book an off-plan apartment.

This was supposed to be Wonderland, but Alice has to wake up some day, and this day is now. When she does wake up indeed, Wonderland remains just a fantasy. And so it will be in 2009.

Millions of expatriates would find 2009 the most painful year in their history. God would indeed send the angel of death to knock them out. So many had got accustomed to easy speculation in real estate - a lot did in fact make money, only to invest in bigger and larger projects with more leverage - building their proverbial castles in the sands.

As I had said earlier, the devil has now come home to roost. Dubai has declared its debt through formal speeches of its member of the Executive Council, Mohammed Al Abbar, who said the level of debt owed by the Dubai government is $10 billion, with a further $ 70 billion owed by state-owned companies.

Dubai’s GDP is $54 billion, according to a source that releases such data, which puts Dubai’s debt to GDP ratio at 148 percent.

MHCI Chief Seeks Greater Fools in Gulf NRIs

Trust desperate real estate developers to act even more foolishly. Zubin Mehta, CEO of the Maharashtra Chamber of Housing Industry (MCHI), is seeking greater fools for his real estate industry a little too late in the day, when even the fools have lost their money.

Mehta said MCHI is targeting UAE NRIs to purchase real estate projects in India, his argument being NRIs could stand to gain up to 20 percent if they purchase now, since the Indian rupee has fallen by this value against the US dollar.

Why UAE NRIs? He said that these folks work to buy a home in India, unlike those in UK and US, who are given residential status and further citizenship in those countries. Good deals are now available, said Mehta, pointing to a depreciating rupee, discounts from builders, facilities like free parking and a stamp duty write-off.

However, Mehta would have a tough task convincing Gulf NRIs, who have already burned their money investing in the Dubai real estate market. Real estate in the Burj Tower area of Dubai is reported to have fallen 50 percent in last three weeks.

Mehta also added that he expects the Indian real estate market to perk up January. Now this is really desperation.

Times Benchmark Reflects Residential Property Slump

Times Property, the property supplement of the Times of India, Mumbai, has changed its Benchmark column to reflect the slump in residential property rates in Mumbai. Benchmark features on the front page of the Times Property Supplement of the newspaper that appears every Saturday. Data for this section is supplied by Mumbai broker Narain's Corp,

Benchmark is widely read and referred to by home buyers in Mumbai.

Despite the massive price correction, Times Property has reacted slightly slower, mainly because the data supplier Narain's Corp was reluctant to do so.

While Benchmark shows corrections in the suburbs, its South Mumbai rates are shown has untouched. However, it may take a little more time before the data supplier accepts the new reality.

The reductions in Times Property's Benchmark will bring cheer to new home buyers.

Rottenization

It has been at least four years since I read articles talking about good values and the right reasons for business success. During the last quartet of years it appears as if the belief in doing good seemed to have been lost, having got replaced by gung-hoism. Thankfully, with this global downturn, the good things should be back and good things lead to great things.

Take the example of Bangalore. I lived in Bangalore in the late 80's and early 90's. The city was a brilliant mix of values and great weather, heritage, history and nostalgia. Then they discovered it to be the Silicon Valley of India. All of a sudden, there was a wave of thinking about how similar Bangalore was to the Bay Area.

Indians from the US suddenly descended in to the city and set up home here, promoting the idea that one could earn salaries in the US but live offshore, in inexpensive Bangalore. The number of NRIs suddenly 'finding' Bangalore was surprisingly higher than during the tech boom of 1998-2001.

In no time, real estate became the most favored investment and locals who owned ancestral property - and those who purchased it as farmland - began to sell it at a premium to greedy but gullible NRIs. The very people who moaned about Bangalore losing its old world charm were now selling land like fresh cakes at the local Iyengar Bakery. No thought was given to infrastructure and preservation of culture or heritage, or nature.

The city, which was renowned for its flora - huge gigantic trees over hundreds of years old - was fast being replaced by the visions of the financiers, and ideas of those living in deserts and arid lands. All of this laid out in neat slices, compressed and packaged as progress. So, what has all this progress done to Bangalore?

Clogged roads, 3-hour drives to the airport and vague debates on the timings for local pubs, sponsored by the local corporate brewer. The beer capital of India did not give a thought on what laws should be put in place against those drinking, driving and running someone over in one night. This is called a mad culture of "investing in real estate", which never allows for thought on how the city should develop.

Internet, and information technology, and consequently digitalization were supposed to make life cleaner and better, for rich and poor, but what has it done. Bangalore, instead, has become another Mumbai - with its hyper real estate prices, fast deteriorating infrastructure, congested roads, pollution and crime. Good folks with good money were replaced by home loan-loaded ecstatic rodeos, riding some new wave of software jobs, airline jobs or financial services jobs, and what have you, thinking that they were writing the story for the next decade. Suddenly debt was cool, and "this is how it is in the US" was a statement for every financial misstep possible.

Flipping homes became as easy as flipping burgers. Just put down 10 percent, book a property, sell it for 20 percent profit next quarter. Another variation was: Buy an inflated property on mortgage, calculate the monthly EMI, and expect the rent to pay off the EMI. Real estate trading became the new casino, in which all could participate, without understanding it. Ever heard of options in commodities and stock? What we were seeing between 2005-2007 was real-estate option trading, without any kind regulation - a perfect resume for disaster if you do not know what options can do.

Having seen first-hand the Tech boom and bust - I know enthusiasm is great for start-ups but it does not pay in the long run. Most people confuse enthusiasm with happiness. In the Tech boom of 2000, the Internet was supposed to be the great leveler, so anyone with an Internet account and a url was a company. Venture capitalists became the new kids in town, peddling the deadly shot in to the veins of start-ups - cheap capital. Meetings were held where puffed-up child-CEOs (not very different mentally from the child soldiers of Africa) were asked business plans with specific targets for burning money. There were meetings where one was given a dressing down for not spending enough. If it was burning money in 1998 then, it was taking on debt in 2004 that was the new mantra.

Frankly, the impending rout of real estate - it has not even started, mind you - will provide a great pause for all, unless of course we are overloaded with debt, having purchased property with the idea of flipping them over in 3 months and worse still, hoping to rent it for more than the EMI. Clearly, worldwide, this party is now over!

Many ask me why I am delighted with this rout of real estate stocks. I think it comes from deep within. I despise this rottenization of livable spaces, invading, decimating and converting organic material in to concrete. It's a contradiction, that we first burn down forests, fill the space up with processed rubble and then put out ads that say: "Come live in the lush greenery". Ask those who purchased apartments in Powai (Mumbai) in 1995. How lush is their environment today?

What makes real estate dangerous is that you have the most enthusiastic and emotional fools with the least ability buying in to this. The mass participation in speculation thus causes an almost uncontrolled spiraling of prices.

The repercussions of a never-ending boom in land would have been disastrous. Where would this have led us? The commercialization of water? We almost thought of this. How about air?

Fortunately, booms and busts are self-correcting bootstrapping mechanisms. Thankfully, Nature finds its own corrective path, and as this real estate mania grinds to a halt over the next 2 to 5 years, it will allow us to find our real selves and values. By the time the next bull run starts, we would have spent years "at the grinding mill" and done our time.

However, future generations would perhaps not learn from this financial turmoil, as we have not from the earlier ones, because, as is the nature of emotional beings, we will always get mired in our own ecstasies.

Dubai Developers Invoke 'Seize Property' Clause

A new trend is emerging in Dubai, which has many developers invoking a default clause in the sale agreements, which state that if a purchaser defaults on payment of installments, the developer can keep the earlier payments as well as the property.

This is causing speculators a lot of grief, since many had paid the first deposit as a means of booking the property and had hoped to exit before the next installment.

However, Dubai lawyer Kavita Panicker, says she receives "two or three calls each day" from US-based investors regarding property purchased in Dubai. Most cannot pay the installments and are facing problems paying installments. She said these investors are happy to exit at a loss.

However, developers are reluctant to take the properties back and are invoking the seize property clause in the sale agreements.

Dubai's Estimated Debt 100 Percent of GDP

A look at Dubai's economy:

• Tourism, retail and real estate, which all show signs of being strongly affected by the present world downturn, together contribute around 30% percent of GDP.
• Financial services, hit heavily by the global crisis, contribute around 10 percent of GDP.
• The energy sector contributes only around 6 percent of GDP.
• Wholesale, transport and storage, which are also likely to be negatively affected, also contribute heavily to the economy.

The emirate's debt is estimated at roughly 100 percent of GDP.

The Mullahs Have Landed - in Dubai

Dubai is soon headed for a crisis of such huge proportions that its expatriate population has never seen ever.

A double whammy of weak crude prices - down from $150 to $50 a barrel - and a weaker US currency - petrodollars - will make its ruling Executive council scour high and low for ideas on how to fund the highly leveraged property market balloon it has created and what to make of asset depreciation. In many ways, the government has got caught in a whirlpool of its own making.

For expatriates, especially those who made laughable investments believing that Las Vegas could be created around the fringes of Islamic fundamentalism, this could be the wake-up call for a long dreary nuclear winter.

With the pain starting to ride down the nerve to common people, Dubai's success and any impending failure would get straightaway tied to the non-Islamic indulgences of the place. Financial pain gives rise to conservatism and religious extremism. With Dubai sandwiched between Shia Iran and Sunni Saudi Arabia, it could get caught in any crossfire.

The role of Dubai has never been understood; why is Dubai so powerful within the Emirates - even though it has no oil, no manufacturing base, nor has it been able to achieve Singapore's status as a port of repute. Yet, it has been able to hold up to Abu Dhabi, which owns 90 percent of the UAE's oil, and whose rulers, although more powerful, are far more low profile.

One reason that comes to mind is that Dubai is a refiner for Iran's oil, and a lot of refining margins are tied to the price of oil, which means the last four years were a bonanza for Dubai. This perhaps explains its clout. With clout, comes ambition, and with ambition a penchant for breaking rules, and Dubai has had all of it. In fact its direction toward becoming a tourism hub for Middle East revelers has always been watched closely by the Islamic right.

Dubai has no choice, because tourism in desert cannot takeoff without prostitution, alcohol or gambling. There is always talk about how activities in Dubai are frowned upon by the conservative Islamic countries. Some time in 2005 there was a rumor of some threats by Islamic extremists to bomb City Center, a shopping mall in Dubai, all of which was well-handled and overcome without alarm. Clearly, it had become evident even then that Dubai's success was getting increasingly uncomfortable for some, and sooner or later there was bound to be trouble.

However, before Islamic conservatism could get it, the credit crisis from the West got its goat. As much as charging interest is haram (sin) in Islam, this did not stop the mortgage on construction from becoming the fuel for Dubai's real estate bubble, as it goaded the desire of millions of expats of owning castles in the sand.

With bright ideas and some really grandiose schemes indeed being delivered, it was western money, and speculation drove up the market in Dubai. There was a time in 2007, when financial executives from New York, speculated on villas in Jumeirah, booking a villa one week, and selling it out the next for a profit. It was this false sense of a bullish market that encouraged lesser mortals among the expatriates to participate in the orgy. Until of course, it all blew up last week in their faces.

Finally, as the sand settles, people will begin to see Dubai what it it really is - a city of imagination but very little lastability: without natural resources, like water and fertile soul, and no oil, it looks like this time the devil has come to stay.

Without the sins of the West - alcohol, prostitution, gambling - Dubai would have certainly found it a challenge to sustain its tourism story. Now, as the hype of the glamor and glitz, gets replaced by caution and conservatism, the Mullahs are now going to have all the time to take a hard look at what Dubai represents, and see how it fits in to the general laws of Shariah. With Dubai now having to increasingly depend on Abu Dhabi and Saudi money, the Mullahs have surely landed.

Dubailand Property Available for Half Price

Dubai-based Elysian Real Estate sent a text message to up to 40,000 mobile phones advertising distressed property sales. The text offered a luxury six-bedroom, six-bathroom villa in Dubailand, a multibillion-dollar luxury theme park on the outskirts of the city-state, at an advertised cost of about £3.86 million – about half its original price.

Dubai's Burj Tower Prices Crash 50 Percent in 3 Weeks

Speculators in Dubai's Burj Tower - the tallest tower in the world - are in for a rude shock. They have woken up to find that their property values have plummeted up to 50 percent, that too in just 3 weeks. According to brokers, most properties in the Burj Tower district have slumped by at least 22 percent. These were same apartments and commercial establishments that had risen 88-200 percent in the year until September 2008.

Zero premium and even discount sales have become rampant as investors rush out of sand castles and in to cash. Prices outside the tower fell from an average of AED 3,500 ($952) per square foot to AED 2,700, and on 8 Boulevard Walk, for instance, dropped from AED 3,300 per sq ft to AED 2,500 per sq ft in three weeks – a 24 percent decrease. Old Town quarter of the development had fallen 30 per cent in the past month, along with nearly 20 per cent at the South Ridges and Residences areas.

Price fluctuations in the Burj Dubai tower had been far more volatile because of the high percentage of speculators owning these properties, according to brokers. Some had since been sold at significant losses to generate cash. However, they said, the most expensive floors, such as those branded by Armani, sold at about AED 14,000 per sq ft and were holding much of their value.

Abu Dhabi’s high-end developments have also been affected. Many of the buyers appeared to have no intention of holding on to the property long enough to make the first required payments to keep possession of it. Like Al Reem Island, which had 95 percent speculators with no intention to make any payment after the deposit. Residential properties in some cases [are now put into the market] at minus 15 per cent premium.

A floor of offices that was offered in Al Shams Abu Dhabi at AED 2,500 per sq ft three weeks ago is now being offered at Dh2,100. Reem Island's properties purchased at up to AED 2,700 per sq ft are now available at AED 1,800.

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The Denial of Reality - Arvind Singhal

There is no sign of let-up in the economic turbulence all around us. While there is, finally, some realization within the prime minister's office and the key economic ministries that India is not insulated from the global economy and that serious measures have to be undertaken to prevent the Indian economy from melting down too, it is surprising to observe the response of corporate India to this situation.

As if on cue from the USA, where there is an increasing clamour for more government bailouts, many in the Indian private sector have started to make similar noises. Of all those who have been the most vocal in seeking government support, subsidy and protectionism, the case being put up by the realty sector is the most disturbing. When the recent economic boom started in 2003, land prices in posh Delhi localities ranged from Rs 40,000 to Rs 60,000 per square yard. Builders’ flats in Gurgaon for middle-income customers were being offered for booking at Rs 2,200-2,500 per square foot, while premium residential developments in South Mumbai came to market at Rs 4,000 per square foot. Office rentals in Gurgaon were at Rs 30-35 per square foot per month while in Mumbai, they hovered around Rs 100 or so. In April 2008, the same prices respectively had shot up to Rs 400,000 per square yard, Rs 6,000 and Rs 28,000 per square foot, and Rs 120 and Rs 400 per square foot per month.

While this increase, ranging from 300 per cent to 1,000 per cent, put many Indian developers on the Forbes list of billionaires, it also resulted in the destruction of the primary demand for residential and commercial property from actual users since it became unaffordable and nonviable, and brought only speculators to the market. In this situation, the noise from the real estate sector exhorting the government to facilitate reduction in the home loan rates is nothing but a denial of the reality that unless the property prices are scaled back to 2003 (or even 2005) levels — making them affordable/commercially viable for actual users once again — the realty sector will not see a boom again irrespective of the lending rates.

Contact Abhinav at abhinav@technopak.com

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Bahrain's Property Bubble Has Officially Burst

A senior professor at City University's Cass Business School, London, has said that Bahrain's property bubble has officially burst.

According to Prof Stephen Lee, the sector was grossly "inflated" sector and would would now fall in line with prices and growth rates in the rest of the world. He said it would take at least 2 years to recover.

He added that the credit crunch has already hit Dubai where if you work for a property developer you will not get a loan to buy a car. Supply will far outstrip demand, according to Lee.

He said that although the Palm Island in Dubai and Bahrain Bay, for example, will be completed, the wealthy will not invest in them, unless confidence comes back.

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Dubai Ambitious Palm Project Falls 40 Percent

The ultimate reclamation from the sea project, the Dubai Palm Jumeirah project, has seen its value erode over 40 percent since September, according to real estate brokers.

A four-bedroom villa on the man-made island developed by government-owned Nakheel, is now selling for AED 10 million (Rs 13 crore), down from 15 million dirhams.

Rehab Gouda, senior sales agent at Al Jabal Real Estate, said that prices had fallen 40 percent during the same period.

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DLF Cuts Price 21 Percent in Bangalore Project

The real estate slump is now beginning to grind harder on developers.

India's largest real estate developer, DLF, has slashed prices for apartments in its 80-acre gated community project at BTM Layout in Bangalore. Prices are down 21 percent to Rs 2775 per, from Rs 3500 per sq ft.

This means that a 1,310 sq. ft two-bedroom-hall-kitchen (BHK) flat in the project would now cost Rs 36.35 lakh, or about Rs 9.5 lakh cheaper than its initial price. The project, however, is yet to receive mandatory approval from the Bangalore Development Authority.

The project was launched to a closed set of invitees where the price was discussed. An analyst who did not want to be named said that prices could go even lower.

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Arun Nanda: Another Wishful Thinking CEO

Have you not witnessed time and again, the CEO of Parsvnath coming on CNBC and saying that there was no slowdown and there was no cash problem? Did you not see Sanjay Puri, CEO of Unitech say that analysts do not know how to value real estate companies?

Since then, all these companies have had their stock prices relentlessly banged to almost a 1oth of their 52-week highs. Now, here is another joker in the pack.

Arun Nanda, executive director of Mahindra and Mahindra said there is no slowdown in its real estate projects, even though there is slump in demand.

“We are not slowing down on any of our projects. Jaipur is rocking, Chennai is doing well, city-based projects such as Faridabad are also doing well,” he was quoted as saying on the sidelines of the India Economic Summit.

Nanda, an executive director of the company, was quoted dishing out more gems:

"Fundamentals of real estate have not changed," he said.

"We have actually got cash in the bank," he said, adding there is a huge demand in 30 to 40 lakh apartments segment. He, however, said the housing loan segment is facing problems, adding there were no funding issues for its projects and the company’s affordable housing projects are not going to disappear, but he did admit that investors are not coming forward.

“Demand has been put on back-burner and interest rates are hurting people,” Nanda said. He also informed those present that Sebi approval for the initial public offering of Mahindra Holidays and Resorts Ltd.

Sure you have heard of the proverbial deer freezing in the headlights. Or is this simple a case of self-denial?

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Stanchart Pays Rs 720 Crore in Bombastic BKC Deal

In a deal that seems to be one-off, albeit bright spark, in an industry gasping for cash, Standard Chartered paid Rs 720 crore for 2.2 lakh sq ft in an under-construction building called Crescendo. The sellers were Parinee Developers.

The rate works out to Rs 32,000 per sq ft, which is between 30-40 percent lower than the Rs 45,000 shelled out in 2007 by Wadhwa Builders.

The deal is being shouted down a one-off by brokers, many of whom say that Standard Chartered paid more than it should have. A Stanchart spokesperson said they were planning to set up their corporate headquarters at the new premises which will also have the wholesale and retail banking operations.

Commercial lease in suburban Mumbai is also slumping. Grade-A properties are now leasing at Rs 325 per sq ft as opposed to Rs 400-450 a few months ago. Office space has also fallen to Rs 300-350 as compared to a few months ago. However, even at these rates, there are no lessees available, said industry sources.

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Unitech Forced to Sell New Delhi Head Office

The morass that Indian real estate companies have sunk in to is now becoming glaringly evident. The nation's second-largest property company, Unitech, is now forced to sell its New Delhi office of over 2 lakh sq ft, to raise cash and meet demands from lenders.

Unitech had borrowed an undisclosed sum from HDFC, using the Saket head office as collateral, while HDFC sources claim this number to be Rs 30 crore.

Unitech sources said that HDFC has agreed to purchase this property for Rs 450-500 crore, and that formal agreement is expected to be signed end of this month. Unitech had itself purchased this land for over Rs 127 crore.

HDFC clearly refused to comment on this.

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Realty Cos Likely to Default on Payments

Citigroup, in a note to clients, has warned that Indian real estate companies face a higher risk of payment default as access to cash becomes restricted.

The same note states that DLF, the nation's biggest property developer, Parsvnath Developers and Omaxe have shown a decline in Q2 income, as a slowing economy and tighter lending norms by banks cut out the oxygen supply.

Citigroup analysts categorically stated that they do not expect a recovery in the near term.

In another development, Goldman Sachs too said, in a separate note, that the earnings of realty companies reflect a slowdown.

New Delhi-based DLF Q2 profit fell 4 percent, while Unitech's Q2 declined 12 percent respectively.

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SBI Chairman Sees 50 Percent Correction

OP Bhatt, chairman of State Bank of India (SBI), the country’s largest bank, expects 50 a percent correction in the housing sector prices in the country.

“In India we may witness up to 50 percent correction in pricing in the mortgage markets. If that happens, it’s good news for the Indian banking system as NPAs would reduce and new business would fall-in,’’ he said at the concluding session of Ficci-IBA Conference on Global Banking: Paradigm Shift, in Mumbai on Saturday.

Bandra-Kurla Land Fetches Mere Rs 92 Crore

News that did not make it to the headlines: Land at Mumbai's Bandra-Kurla Complex was sold 50 percent lower than March 2008. Thus comes hardcore evidence of the Mumbai real estate market having slid in to a cold freeze, despite the bravado of developers. On thing is now certain: real estate companies are going to die a slow death over the next year.

The said plot of land was picked for Rs 92 core at Rs 1.55 lakh per square metre—half the price from the previous auction in March. Ahmedabad-based Talim Research Foundation, a venture of Subhash Chandra’s Essel Group of Industries, was the sole bidder, paid just Rs 2 crore over the minimum sale price. This in face of the deal five months ago, when Jet Airways (India) Ltd picked up a plot in the same area at Rs 3.52 lakh per sq metre.

Mumbai Metropolitan Region Development Authority, or MMRDA, had no choice but to award the 5,900 sq. m to the lone bidder in Talim. The plot would be used for an educational facility by the nine-year old foundation which does social science research with a focus on health, communication, micro-economics, social audit and poll studies.
In March, only three out of five plots were sold in a land auction by MMRDA when Jet Airways picked up a plot and Starlite Systems bought two residential plots at the same price. Land sales have been down since this year’s beginning compared to 2007, when city-based Wadhwa Group had bought a commercial plot in the complex at a staggering Rs 5.04 lakh per sq metre for a 16,500 sq metre plot.

Even Starlite and Jet Airways that bid for the plots in March have requested MMRDA to give them an extension of six months to pay the premium. “Developers are not willing to pay astronomical prices for a piece of land and are waiting and watching for some correction to happen,” he said. “Many developers are also under a liquidity crunch which is why they are staying away from land purchase.”

Developers are not interested in purchasing land according to Hemant Shah, chairman of city-based builder Akruti City. The general view is that those who have purchased land last year are unable to launch projects, due to the slowdown, but land owners are not willing to lower the rates, leading to a crunch.

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Parvsnath's Retail Plans Shelved

Parsvnath Developers has put its retail foray in to cold storage, citing adverse market conditions as the reason.

Parsvnath had plans for 5-10 front-end stores by this fiscal, backed by an international retail partner for logistics. The plan had included hypermarkets, food joints, and very large retail stores of about 2.5-3 lakh sq ft. Initially, the plans were to roll out stores in Delhi and Mumbai, followed by other cities. Parsvnath even formed a subsidiary, Parsvnath Retail Ltd., for its retail business and had acquired 5.5 million sq ft. of space across the country.

However, now due to the adverse market conditions caused by the global financial crisis and the resultant economic slowdown, these plans have been postponed indefinitely, and could be resurrected when market conditions improve.

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Noose Tightens Around Necks of Mumbai Developers

The massive cranes around Mumbai are fast disappearing as the real estate industry goes down in to the dumps. Where one slab per month would be raised, it is now down to one in three months. Banks have become very choosy about lending to the real estate developers as investors disappear and home buyers wait for prices to drop.

It appears to be a game of who will blink first, with builders hoping for the prices to recover, and residentual apartments still costing between Rs 15,000 per square feet and Rs 21,000 per square feet in Juhu area of Mumbai, and Malad and Goregaon still commanding between Rs 9,000-15,000 per square feet.

In Mumbai, the same apartments that were on the market for the last 6 months continue to be circulated. For example, a builder demanding Rs 80 crore for a 8,000 sq ft super-built-up apartment has not been able to sell even one unit.

A few builders who have real estate purchased prior to 2004, are making optimistic noises, however most of them, for whom the interest rate is ticking, are squirming as the noose is tightening around their necks.

Some of the news in the market is of a the brother of a prominent developer from the eastern suburbs, who has branched out on his own now, is stuck after a US-based bank allegedly stopped funding his projects in Hyderbad and Chennai. Another developer with residential projects in Goregaon, Virar and Thane finds himself pushed into a corner after taking a Rs 100 crore loan from a Kutchi industrialist at hefty interest rate of over 40 percent.

One builder, who shook the property market last year after he paid a phenomenally-high price for a plot in BKC, is also believed to be now on the edge. His investors are breathing down his neck and even the nationalized bank which funded him, now wants its money back. His desperation is now evident because he has started offering brokers a 4 percent brokerage for getting clients, said sources.

In the commercial segment, the lease rental prices in BKC has come down from an average of Rs 450 a sq ft to Rs 325-Rs 350 a sq ft over the past three months, it is learnt. Developers setting up IT parks are also getting worried as they are not getting the price they were expecting, said a broker.

According to housing experts, about $4 billion has been pumped into the Indian real estate market by FIIs and venture capital funds. Another $12 to $14 billion was to flow in within the next 18 months. This will not come anymore.

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Nagarjuna Construction Puts Future Real Estate Projects on Hold

Nagarjuna Construction Company has clamped down on future real estate projects due to current slowdown in the sector and has tempered its capital expenditure plan for 2008/09.

According to Subba Raju, vice president-finance, NCC is not planning any investment in real estate projects. "All our real estate projects are fully capitalized," Raju said. "We have put all other projects on hold. We are not launching them because of adverse market conditions."

The company will spin off its real estate operations by March 2009 in to its subsidiary NCC Urban Infrastructure, which currently is involved in building a national games housing project in Jharkhand, a unspecified project in Hyderabad and 3-4 small projects in Bangalore.

"We are not planning any investment in real estate projects. All our real estate projects are fully capitalized," Raju said. "We have put all other projects on hold. We are not launching them because of adverse market conditions."

Earlier this month, rivals Hindustan Construction Co and IRB Infrastructure also said they slow down their real estate forays, given the weak market situation.

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Emaar-MGF's Gupta Shellshocked by Real Estate Downturn

Emaar-MGF's MD Shravan Gupta appears dumbed down by the sudden downturn in the real estate business in India, and hence needs to read a book about Jack Welch, where he would learn that one of the premises for success is to "Look at things as they are, and not as they were or as you wish them to be".

The executive vice chairman and managing director of Emaar-MGF Land, appears to be making surreal statements about the importance of real estate in India, despite the fact that his company's IPO bombed early in the year, even before its launch, and was instrumental in providing one of the early clues that the real estate market in India would go in to a tailspin too.

“The present turbulence will make the real estate grow strong and it will emerge stronger after this phase,” said Shravan Gupta, executive vice-chairman & MD of Emaar MGF Land Private.

In the stock markets, you are told not to live on hope or you will die in despair.

Gupta feels the importance to the real estate sector a trifle underrated and it should be given more importance. Sure, how about the regulators coming up with a housing index which can be traded on the NSE?

Gupta's words border on being delusionary when he says that in the present scenario, sentiments were overpowering people’s thoughts rather than actual ground conditions. The effect of the global financial condition is certainly felt in India but according to him it’s not as bad as it is portrayed.

“Demand for homes does exist today," he says. Well, they do in the US too, where people still need to buy homes to live. According to Gupta, it is just that the buyer is in a state of uncertainty looking into the world around him. In his view, it is not bad loans but the high lending interest rates that are driving away the buyers and the sector is in a stage of hibernation but no real slowdown is seen.

According to Gupta, prices in some cities may have gone up on the basis of lack of supply but still in India real estate is under-priced when compared to the rest of world.

What he suggests is that a collective force of the real estate developers should be presented before the government to implement certain uniform policies and regulations, which can benefit both the buyer and the developer.

A few months ago, the MD of Unitech had come on television to say that analysts do not know how to value real estate companies. Since then Unitech has plummetted from Rs 220 to Rs 30. The MD of Parsvnath had cockily said that there was no slowdown. The shares of his company have plumetted from Rs 200 to Rs 50.

Shravan Gupta should thank himself his company is not listed as yet.

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Dubai: A Cataclysmic Disaster Waiting to Happen

Dubai's hyperinflated real estate market is about to implode or blow up in the faces of speculators. Sales are collapsing and the global downturn in the UAE, whose currency is linked to the US dollar, is going to be a reluctant victim of a cataclysmic disaster.

Desperate sellers are now selling off their pre-booking investments at zero premium. Commissions of agents are down up to 70 percent, and six months may be just about the time that investors may have to bail out of risky real estate investments.

Real estate companies like Emaar have seen their value erode 62 percent since the beginning of the year, and the Dubai Financial markets, which is the barometer of the financial health of the country has slumped 48 percent. Colliers International earlier revealed growth of property prices in Dubai slowed to 16 percent in the second quarter of 2008 from 42 percent in the first quarter. Morgan Stanley warned in August that property hotspot Dubai could see a 10 percent fall in prices by 2010. Perhaps this was an understatement.

What makes Dubai vulnerable is that it has zilch oil, and it had charted itself a course of becoming a property and construction hub for the entire Middle East. Dubai was expecting foreigners to come in and buy up apartments and commercial space, but for a country that depends 30% on construction economy is now on a verge of a cataclysmic disaster.

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Real Estate Developers Ready to Start Price War

The daggers could be out soon, as massive loans taken from market players may start to burn holes in real estate developers balance sheets if the properties are not sold soon.

The cartel for real estate players who have been holding up rates for the last six months may soon get in to desperate mode. Real estate developers are bracing themselves for a 50% cut in their property rates. This despite the fact that real estate prices in India have fallen 20-25% over the last seven months. Industry experts at a recent TiE-Indian Angel Network summit held in New Delhi agree that further price cuts are in the offing.

Kashi Nath Group's CEO Sanjay Khanna clearly admits that those who do not reduce prices now will be forced to do this some time or the other. Ask Ashish Mathur, head of business development and marketing for Mahindra World City, who gave a resounding "yes" when asked if a 30% cut can be expected in realty prices.

Santhosh Kumar, deputy CEO of Jones Lang LaSalle Meghraj, says that a 30-50% discounts are available even now, if one is willing to pay cash down.

In the case of residential property, the rate of interest on home loans has gone up from around 7.75 percent in 2004 to around 12.75 percent now. Almost 90 percent of home buyers take the home loan route. For a person taking a home loan, the rate of interest has increased 5 percent in the last four years. If a person borrowed a lakh for 20 years at 7.75 percent in 2004, he would have to pay around Rs 96 thousand as interest eventually. At the present rates, the interest rate burden has now increased to more than Rs 2 lakh on the same amount.

The liquidity crunch has been fueled by expensive home loans, a slowing Indian economy and the global financial crises. Banks too have become reluctant to lend to the realty segment. The ing economy has had a direct impact on commercial property market. During the quarter ended September 30, commercial space demand has slowed down in all major metros, with low leasing demand in the first two quarters of the year.

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Navi Mumbai's Palm Beach Road prices slump 50%

It would be overkill to write about the fall of the real estate market which we have been tracking here since we gave a call that in February 2008, the realty market in India had made a top. It still took some time for an official confirmation of the crash in real estate prices, but today the Times of India (Mumbai) confirmed that the famous Palm Beach Road in Vashi has seen an almost 50% crash in real estate apartment prices.

For starters, this is just the beginning. Builders are willing to sell swiftly without any fuss. While a few months ago, home buyers were willing to invest by putting down payments even before the plinth was raised, today no one is ready to even consider a ready apartment.

Previously touted as the Marine Drive of Vashi, the 9 km Palm Beach Road, was becoming a upscale real estate stretch between Vashi and Belapur. Today, plauged by zero-sales and a crashing stock market, in which real estate stocks have fallen more than 90% of their high values, On paper, residential sales are still sitting pretty at Rs 7,500 to Rs 9,000 per square foot, but with near-zero sales and a volatile market, panicky developers and regretful investors are selling for as low as Rs 4,500.

Navin Makhija is a director with the Wadhwa Group, which is stuck with the biggest project—six towers of 25 floors each on Palm Beach Road. He tangentially acknowledges the slump in rates. "In these days when the global market is bad, sales are down and so is sentiment. It's natural that some will offer lower rates to sell houses," he says.

Makhija adds that for their Palm Beach Residency project, prices have been "internally lowered to Rs 7,000 to 8,000 psf. We are not going to make any sales for the next one-and-a-half months, but hopefully things will pick up", he says.

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Builders Abandon Leasing Dreams, Push for Outright Sales

Futuristic dreams harbored by real estate developers, of building castles with cheap credit of 2007 in the market, and leasing them to desperate home and office owners, are now beginning to face reality that in the end, there is indeed no free - or cheap - lunch.

This is borne out by the fact that is that real estate developers in Mumbai and even the rest of the country are now pushing outright sales of their commercial properties - offices, retail stores, hotels - instead of leasing them out. These were the same companies who were hoarding apartments in the hope of selling them at astronomical prices.

In some areas of say Mumbai city, residential and commercial spaces skyrocketed 300% as investors became intoxicated in the highs of investing in real estate. Overnight, even menials were dishing advice to their owners, having seen their slums jump up to crores in value, as companies aquired their lands to build towers and further sell them to occupants and investors.
Those dreams however appear to have fizzled out, the impact of which will become glaring by 2009.

Developers today are ready to sell properties at a rate which is seen attractive by buyers today. Their focus is now on purchase, build and sell off for immediate gains, instead of holding back on structural space and leasing them instead.

For example, Raheja Corporation has started selling off its office spaces in PUne, Hyderabad and Navi Mumbai. Even subsidiary Raheja companies are following the same strategy in Mumbai.

Another real estate company, Indiabulls Real Estate, which saw a meteoric rise in 2007, has recently started selling their office spaces located on Tulsi Pipe Road, Jupiter Mills and Elphinstone Mills.

Its pride construction, the One Indiabulls Center, which was built to have expensive leases on office space, is now being sold off piece by piece, according to reports in the market. Even Ashok Piramal group's Peninsula Land Ltd (PLL), which is developing commercial buildings in Ashok Gardens - a premium residential project comprising 2-, 3-, 4- and 5-bhk (bedroom, hall, kitchen) apartments located at upper Parel in Mumbai - is selling off the commercial building instead of leasing the property.

Peninsula Land, which had sold off 5 lakh sq ft of Dawn Mills, is now in the process of selling complete 19 lakh sq ft. Realty major, DLF too is in the process of selling a part of its big commercial establishments instead of leasing. Competitor, Hiranandani Constructions is understood to have not entered into a single land deal since the past few months.

You can read the story here

Distress Sales Await Real Estate Investors

Real estate companies have so far been booking paper losses, but after Diwali, these losses will be real, according to Nayan Bavishi, a UK investor of the Baron Group, who invests in Indian and Dubai real estate. This should lead to some sudden wave of distress sales, which would bring apartment prices to realistic levels. "Right now, it is only depletion of paper profits; wait till after Diwali and their [real estate companies]'s pockets will get eroded further."

The Indian real estate market has been hurt by a slide in the stock market, rapidly rising interest rates and aggressive demands from private equity investors. After five years of boom, real estate firms in India are grappling with lukewarm sales and cash crunches as inflated property prices and interest rates at near-decade highs scare away buyers.

"The aggression for acquiring land has disappeared. Deal volumes are down 35-40 percent," said Anuj Puri, who heads property consultant Jones Lang LaSalle Meghraj. Till last year, property firms, flush with funds from public offers or advance bookings, rushed to bid for land parcels, even at distant locations in metros, and in second-tier towns.

Even mid-size developers in India say they hold land reserves of 60-100 million sq ft, sufficient for projects planned in the next 3-4 years. But slumping demand could drive down land prices soon, leading to some distress sales, officials say. "We have not acquired an inch of land in nine months. I think by December-January, land prices should soften," Vyomesh Shah, Managing Director of Akruti City told Reuters late last month.

Akruti City, a leading developer, has not acquired any land in the last 9 months. A shortage of cash has caused delay in projects and it is likely that some announced projects may not even take off the ground. Builders are now unable to fund through advance bookings by buyers. "Developers normally did construction through booking advances for planned projects. Sales are down, so obviously there are delays," said an analyst at a Mumbai-based brokerage that has revised downward target price on sector stocks by 15-25 percent.

Most real estate firms are still getting by with advance bookings done 18-24 months ago, a sustained lack of demand in the coming quarters may worsen the situation.

Read the Reuters story here

South Mumbai Slumps; Jolly Maker Flat has no Takers

An apartment in Jolly Maker Apartment I and II, has no takers despite a 27 percent price cut.

Located in the prime residential area of Cuffe Parade, in the southern part of Mumbai, this flat - measuring 1,700 sq ft carpet area - was priced at Rs 18 crore in January 2008. Today, even at a discounted Rs 13 crore, the apartment remains unsold. [pic: World Trade Center and IDBI Tower, located near the JMA I and II]

Investors who rode the wave of the great Indian real estate juggernaut of 2004-2008 are now wringing their hands. Not just individuals, but even corporate speculators, unrelated to the realty business, who were lured in to real estate speculation, are now stuck.

Consider another case of an apartment that Siemens India put up for an auction sale in June 2008. With a base price of Rs 4 crore, the auction received 3 interests, two of whom bid Rs 3.75 crore each - in what appears to be a coordinated bid - lower than the base price. In better times, Siemens would have had a choc-o-bloc room with bidders vying to outdo each other. Forget a significant premium, Siemens had to contend with a lower price.

Cut to individual investors, who picked up properties at severely high premiums in areas like Noida, Gurgaon and Greater Noida, as well as in Mumbai and Bangalore. Almost all of them, loaded with floating rate interest loans, are now facing higher interest charges, as the value of their properties are slipping. They all face the prospect of a negative equity, where the monthly EMI is higher than the monthly return that such an investment would face in a riskfree bank deposit.

Declines of up to 30% are already being seen in many areas of the cities. Even areas which are usually considered hot and insulated from price cuts - like South Mumbai - have seen a 15% decline. The major victims of these declines are investors - those who purchased homes with an intention of selling them to genuine users for hefty prices. In Delhi and its suburbs, nearly two of three residential transactions are resales.

The main attraction for investors was the fact that property returned 200-300% for those who invested in late 2003 to early 2004. Investors would take loans, book the apartments, and sell them off before the year was through. This does not appear to be the option any more, and with less interest from new investors, demand has tapered off, leaving investors stranded with high loans and declining value.

The lack of interest is affecting residential developers too. Residential projects are usually self-financing in nature, meaning developers use the money they get from customer advances to fund the development. This money is used by builders to build projects, making their investments virtually riskfree. With investors shying away from new realty projects, developers are finding it tough to get finance for their projects.

The high cost of raw materials is also impacting developers, who are now focusing on completing projects rather than signing on new ones. Investors continue to hold on to their properties, latching on to the ubiquitous hope, that prices would rise.

Discounts abound the realty space. Apartments at Parsvnath City in Dharuhera near Delhi, have a list price of Rs 1,800 per sq ft, but even with a discount of 4% buyers are hard to come by. In Bangalore, a 2-bedroom apartment located in Indiranagar, purchased for Rs 29 lakh, three years ago is now available for Rs 34 lakh, 20 percent less than what it cost six months ago.

However, there does not appear a respite in sight. Another 15 percent correction is expected by property market consultants, and with exhibitions of distress sales of apartments planned by real-estate service providers, it may soon be a bonanza time for bargain hunters.

Read the Livemint story here

Bandra Aparment Rates Sink to Rs 16,000 Per Sq Ft

The hottest real estate area in Mumbai is now facing a cooling real estate prices. After having commanded over Rs 25,000 per sq ft in 2007, apartments in Bandra are being quietly sold for Rs 16,000 and Rs 14,000 per sq ft.

While premium areas, like Pali Hill and Carter Road, which have celebrities living in them, are less affected since they have celebrity value attached to them, the less glamorous areas of Bandra, are facing the onslaught of sinking real estate rates.

In fact, some broker sources are expecting apartment prices to sink to between Rs 13,000 and Rs 14,000 per square feet. Apartments in TDR (transfer of development) buildings have even been sold for Rs 12,500 per sq ft.

A small developer in Juhu, scrounging for cash, has even put on offer apartments at a discount of 35% to current market rates.

Even Mahim, located next to Bandra, used to command between Rs 14,000-Rs 16,000 per sq ft during the height of the real estate mania, which ended early this year. Today apartments are being sold at Rs 12,500 per sq ft on the higher side.

A knowledgeable builder has asked his friends to hold on to any purchases of property until the next year. He said that property prices in Mumbai are slated for another 20% drop once the monsoons are over.

A lot of builders are hoping that the fortunes of the stock markets would turn, and that new buyers would come again in to the property market after the rains, and during the festive seasons of Diwali and Christmas. However, even they are now beginning to see the reality and are exiting in a low-key manner.

A few months ago a developer had purchased an old industrial estate in Lower Parel area. Tenants are still waiting for the builder to come to them with a proposal to vacate the premises. It has been months, but in so far, noone has come forward.

Read the DNA story here

Cash Crunch Hits Mumbai's Builders, Redevelopment Plans Tossed Out

Redevelopment deals are softer than potatoes in hot water. A cash crunch has started eating in to the plans of Mumbai's builder lobby. Considered the shining story of the real estate bull run from 2004-08, redevelopment of old housing complexes has slowed down completely.

The first signs were visible when a story, of Rs 402 crore deal between Sterling properties and Vivek Society, in Vakola, Santacruz, featured as front-page headlines in local Mumbai tabloids. Each 550-sq ft owner was supposed to be offered Rs 2 crore per flat, but this this became a wet mop, when Sterling backed out, citing difficult market conditions.

The plan for redevelopment works like this: The older housing complex sells its land to the builder, who demolishes the structure, and with the enhanced FSI, builds a taller building on the same land. He adequately compensates the current owners with either larger apartments, cash or both, and then sells off the additional apartments as his profit. However, with speculators in the fray, prices had spiralled up to a point of unaffordibility, and builders are no longer willing to take the risk, since loans have become scarce, interest rates have been hiked, banks are no longer interested in funding under-construction apartments, and home loans have become expensive.

Further, with the demand for apartments slumping, builders simply are unable to take the risk. Exorbitant pricing is slowly moving out of the system.

Among the cancelled plans of redevelopment include Wadhwa Builders's Vishal Nagar in Borivili; and Pune-based Kumar Builders's Khira Nagar, Santacruz. All deals signed up last year are being renegotiated downward to the extent of 25%. Some others that have gone back to the table are societies, Flying Carpet and Tirupati, near Khar Gymkhana. Developers are even not willing to extend more than 25% additional space in the new constructions, to owners of flats in old apartment complexes. A specific case in Khar's 11th Road, society members accepted a barely 20% increase. Last year the developer was willing to shell out any amount, but the story changed six months ago.

Another stumbling block is the high stamp duty that the Maharashtra government has levied on builders wanting to transfer the plots on to their own names of societies registered in the 1980's.

Read the DNA story here

Citibank Puts Indian HQ on Sale, Stanchart to Follow

The tarpaulin has collapsed over their heads in the US, that they are now trying to sell their offices in Mumbai and send money back home.

Foreign banks have put their offices on the Mumbai real estate market as a serious downturn awaits the home mortgage business in the US. The option-ARMs (home loans that start with very low or zero EMIs and then reset to very high rates after a few years) are set to revert in December 2008, thus accelerating the number of foreclosures, as home buyers, who were virtually lured in to ludicrous home purchases, find they are sitting on negative equity. This means the value of their property falls below their purchase price.

On sale is Citigroup Center, located in the Bandra-Kurla Complex in Mumbai. This 2 lakh sq ft tower is expected to fetch Rs 500-800 crore, if market sources are to be believed. This means the price per sq ft is Rs 25,000 to Rs 40,000 at the highest end. However, it is unlikely that even this price may be achieved. Citibank is loud-mouthed when it palms off homes at exorbitant prices to NRIs, like it made sure it splashed the news in all the papers, when it sold a flat in Nariman Point, Mumbai, for Rs 97,000 per sq ft, but when it sells its own property, it is rather tight-lipped, which is to be expected.

The 8-storey structure will however be leased back by Citibank. The bank has been on a selling spree for the last few months, in an attempt to shore up capital for its beleagured US headoffice. Citi's CEO Vikram Pandit has pledged to sell off over $400 billion in assets over the next few years. Citi has also sold property in Tokyo Japan for $445 million to rival JP Morgan, and has leased it back. Over 45 branches have been closed in the US.

Another bank that has put its Fort office on sale is Standard Chartered Bank which has a 40,000 sq ft office space in the Fort area of Mumbai.

It is amazing that at a time when a lot of foreign financial companies are taking billions of writedowns, Barclays Bank chose to pay a rent of Rs 1 crore per month for 15,000 sq ft of office space located in CeeJay House, in Worli, Mumbai.

Read the TOI story here

Why I Feel It's Not Time to Sell - Sainik

Analysts and fund managers are all asking us to be cautious and the bravest of the brave are asking us to nibble, by putting in around 10-20 percent of capital to work. Technical analysts are going berserk, saying they expect 2600. I read that if Nifty breaks 3800, we go straight to 2600.

But, hey, wait a minute, what is this I am hearing? Were we not being told that the Nifty at 6000 was cheap and one could buy with a 3-year timeframe in mind. All over we would be hearing the most pessimistic downward target of 5000 at worst, or best, depending on whether you were long or short. Today those targets have been halved.

The markets are driven on two pivots: fundamental and technical, i.e money flow. Surely, money was flowing inward at 6000 Nifty and it has reversed at 3900. However, at 12,750 Sensex, the PE for the Sensex would be around 12, with an expected EPS of 1050 for March 2009. Very rarely has the Sensex traded below 12 PE in the past. If we touch 9000, the Sensex would trading at 8 PE, which would be a lifetime first.

It is said that those who forget history are condemned to repeat it. At Sensex 12 PE, you are being asked to sell, and when the PE was more than 25, they were asking you to buy. Think and decide whether you want to believe the analysts or should you be using common sense instead. As they say, common sense is not commonly found.

The author is a stock broker of the NSE.

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Unitech's Santacruz Project Scaled Down

If there is ample money and good valuation in the private sector, as opposed to the public markets, why has Unitech's Santacruz Koliwada project scaled down half to 1 million sq ft?

Sanjay Chandra, Unitech's managing director said in a CNBC interview, that there was better valuations for real estate in the private equity segment than public markets. This comes at a time when after much dithering, Lehman has agreed to invest Rs 750 crore in to Unitech's Santacruz Koliwada project in Mumbai.

What has gone unnoticed is that Unitech has cut back the size of the project by 50 percent. The original deal between Unitech, Lehman and then Deutsche Bank, was valued at Rs 2,000 crore for 2 million sq ft, for which Unitech had already invested Rs 500 crore. This works out to be Rs 10,000 per sq ft for land and construction. Lehman and Deutsche Bank were expected to get a minority stakes each in the project for bringing in together Rs 1500 crore.

Due to the conditions in the marketplace, as well as Lehman's own problems in the US, the project appears to have been scaled down to 1 million sq ft. In this Lehman has infused Rs 750 crore, the same amount of money it had committed for the original plan, but has taken in a 50% stake in the SPV. Deutsche Bank had earlier backed out of the deal.

So, why is Unitech not getting another private equity fund to finance the balance 1 million sq ft. Several stories are being fed in to the media that Lehman may invest $700 million in other projects by Unitech. This seems a bit contradictory.

Read the CNBC interview here

Video here

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Mumbai's Real Estate Cookie Finally Crumbles

Mumbai's real estate cookie finally crumbles. Despite the bravado displayed by builders, brokers and advisors of the real estate industry, Mumbai builders face dire straits. In fact, this trend is a pan-India phenomenon. There is almost Rs 20,000 crore that has been lent to builders by Indian banks, and chances are that with defaults on interest payments, banks could consider foreclosure of these properties.

Mumbai's builders are now displaying interest-rate defaults, and have also started borrowing loan-shark money on high interest rates. Construction which had become snail-paced is now resulting in delayed delivery. Like it or now, Mumbai's developers are facing what is just the beginning of the toughest times ahead.

With speculators having exited the market, and retail investors facing a prospect of another interest rate hike, waning enthusiasm abounds India's real estate industry. Retail investors are no longer interested in the real estate market, and with the stockmarkets having taken a serious downturn, profits are no longer available for parking in to real estate. Even Indian politicians, who park their slush funds in real estate are now demanding their money back, and builders are in a quagmire.

This is a transition from being stressed to being distressed, one industry observer said. In fact, even big names including DLF, Emaar-MGF, Sobha Developers, Unitech, Omaxe, Parsvnath Developers, Hiranandani Group, Ansal API, BPTP Developers and TDI Group, are all finding it difficult to complete their projects.

A Mumbai-based family-owned developer has backed out of purchasing the Hindustan Composites land at Vikhroli, which it had agreed to purchase for Rs 700 crore, just a month ago. It has also walked out of the 3.5 sq ft land at Pramanik Landmark land at Goregaon. [Read the story here].

A developer, who has built popular landmarks in South Mumbai, and in far-off western suburbs, has overstretched itself beyond Rs 1200 crore. Another Mumbai builder, who had recently purchased a BKC plot may also burn his fingers. [Read who purchased the land here]. To recoup the cost of land and construction, each office would have to be sold at Rs 54,000 per sq ft, when the prevailing rate is Rs 32,000 per sq ft, and falling further.

A Delhi-based developer, which was to develop the BEST depot has started defaulting on its interest to bond holders. [Read BEST depot story here]

A Delhi-based developer giant has said it no longer interested in the 100-acre plot at Kanjurmarg, which it was in discussions to purchase. Further, Emaar-MGF has taken a bridge loan at 30% interest per annum, to complete one of its projects.

Read the TOI story here and the ET story here

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The Untold Stories of Long-term Investment in Property

The following has been sourced from responses to an opinion on a newspaper web site.

I am a so-called high earning person (Rs 15 lakh p.a) (1 lakh = 100,000), yet I am unable to buy any property in Mumbai. Let us look at the economics of purchasing a home, from the buyer's point of view, which articles in all the so-called "free press" never mention.

A 2-BHK flat currently costs around Rs 70 lakh to Rs 1 crore (1 crore = 10 million), in the areas of Mumbai, spanning Andheri to Malad. Even I chip in Rs 10 lakh upfront and take the base price of Rs 70 lakh, the EMI comes to around Rs 62000, which I would have to pay for 20 years, effectively making the cost of the house around Rs 1.5 crore over 20 years.

Every person in a middle level job like mine knows that he simply cannot last in that job for 5 years, let alone 20 years. So, how do I buy that house? The economics simply do not support the current prices, although speculators and the "free press" are trying their level best to create such an image.

In the US, home prices more than 3 times the annual median salary is considered a bubble zone, but here in India, prices are easily in excess of 5-7 times the annual median earning capacity, yet nobody is talking of a housing bubble. The only solution is for consumers to be united and simply refuse to buy for the next 6-12 months.

Last, but not least, builders are misquoting the cost of construction at Rs 1200-1500 per sq ft. The cost of an average construction is Rs 800 per sq ft and not what columnists are writing. Woodwork is the most expensive part of the construction, and builders in India do not provide this as part of construction. I say this on the basis of my personal experience, having built a house in New Delhi suburb. Surely builders, with their experience and scale, can perform far better in lowering this cost. I leave it to people to decide what should be a fair price for both builders and consumers but it certainly is not 6000-12000 per sq ft, existing in Mumbai.

Builders who have amassed fortunes over last 2-3 years and now are stuck trying to sell homes at atrocious prices. What is long term, may I ask. Logically if you buy property now, it has to be long-term, as you are buying at the peak of a cycle, rather call it all-your-life's term, since you would be servicing the EMIs as you grapple with a negative home equity in the years to come. Ask anyone in the metros or Tier-II cities who has bought property over last one year, and they will tell you how difficult it is to sell and make money. With high inflation and economy showing signs of slowing down, it is best to wait for another year and not get bogged down by greedy builders wanting to get rid of their properties at higher prices. Just wait, and like every other market, property will crack too. We will see more realistic levels (30-40% correction) if we dont get carried away by talks that are aimed at propping up the market.

Unknown writers, Ravi and Raj, responding to an article. You can read the original ET story here

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Kotak Realty Pulls Out of Rs 600 cr Deal for Hafeez Contractor House

The much-touted purchase of Hafeez Contractor House has fallen through, with Kotak Realty Fund withdrawing its Rs 600 crore offer.

The 2.5-lakh sq ft commercial property, being developed by Orbit Corp, has been on the pre-sale block for some time now, but slackening conditions are making investors back out. The result is that rates have fallen Rs 5000, from Rs 28,000 per sq ft.

The Kotak deal has been called off," said Orbit's chief financial officer Ramashriya Yadav confirming the development to a newspaper. Located in Lower Parel, Mumbai, the property was first offered to JSW Steel and JSW Power Trading for Rs 360 crore. However, Orbit wanted more and hence the deal was called off. Later, in September 2007, JSW Steel, JSW Power Trading and JSW Investments bought Orbit's commercial office space in Kalina, in suburban Mumbai, for Rs 807 crore.

Earlier, Kotak Realty Fund was in talks with Orbit to buy the property for Rs 600 crore but talks have fallen through.

The Hafeez Contractor House, with the capacity to house 500 offices, is now under construction and will be completed in two years.

According to a Lehman Brothers report, Lower Parel is expected to get as much as 5 million sq ft of office space in the next two years. This could cause prices to soften in this region. Till January, Lower Parel was commanding Rs 28,000 to Rs 31,000 per sq ft for prime office space. However, after the slowdown, the rate has fallen by about Rs 5,000 per sq ft, said an analyst from a brokerage firm.

Orbit was keen on pre-selling the Hafeez Contractor House to ensure smooth cash flows for its current projects, and it had expected that in two years several other projects would be competing with it.

Read the DNA story here

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Builders Face Cash Crunch as Real Estate Sales Slow Down

A liquidity crunch is slowly hitting developers and builders as property sales slow down, PE firms tighten purse strings, and input costs rise. All eyes are now on the Rs 1500 crore that Lehman Brothers is expected to invest in Unitech's Santacruz, Mumbai, venture [Read story here], and market speculation is that given Lehman's problems and its decisions to move out of mortgage and realty worldwide.

Builders are delaying projects and delivery since there appears to be a cash crunch in the system. Two things are compounding things further: one, rising inflation is going to force the RBI to increase interest rates, and banks will be forced to pass this on to consumers. The thing with real estate is, that once the slowdown sets in, the cycle lasts at least 3-5 years.

Investors, who had purchased apartments with the clear intent of capital gains, are now quickly palming off these properties at 15% discount to the builder quotes. Take Bandra for example. Rates varied from Rs 23,000 to 18,000, are now available at Rs 21,000 to Rs 15,000. The point to note is that this is just the beginning. Once, the rains come in, and the buyers become more objective in their purchases, these rates are likely to slide more.

While six months ago, sellers outnumbered buyers, these days, buyers have become scarce. Compounding this is that PE firms are no longer interested in investing in companies directly, and are prefering special purpose vehicles (SPVs) which are project-oriented.

Real estate companies use the percentage completion method to register sales and profits. Hence, if there is no offtake, and if input costs rise, their margins get squeezed. This means, expect writedowns in their balance sheets. With borrowing rates at 24%, those unable to complete their projects could run into massive trouble.

Read the DNA story here

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Praful Patel's CeeJay House Bills Barclays Rs 725 per sq ft

Recently, this blog had reported a story about Barclays Bank paying Rs 725 per sq feet for office space in a building called CeeJay House, located in Mumbai's Worli area. [Read the story here] At the time, one could not find the story online, but today this blog was able to locate it online on the Economic Times website.

The ET story had some additional information, which was not available in the TOI version. This is what reporter Nauzer Bharucha has written in the ET:

The landlord of CeeJay House, located next to Poonam Chambers, is none other than civil aviation minister Praful Patel, who incidentally occupies a residential duplex spread over 35,000 sq ft with a swimming pool in this building. On Wednesday, when TOI contacted Patel to confirm the deal, he said he would find out and get back to us. After that, he could not be reached despite repeated attempts to contact him.

So, now you know the shenanigans of the players in the real estate business.

Read the ET story here

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Emaar-MGF Stake Sale at 50% Discount; IPO Plans Put Off for 2 Years

Emaar MGF, whose Rs 690-per-share IPO was dramatically called off has sold its equity for Rs 300 a share, less than half the IPO target. This was done during the conversion of the preference shares sold to private investors at Rs 300 a share which were to be offloaded during the IPO to retail investors. Now, the same preference shares have been converted to equity at Rs 300 a piece.

Emaar-MGF is a collaboration between Dubai, UAE-based Emaar Group and New Delhi-based MGF Ltd. The IPO, had it been successful at Rs 690 per share, would have raised Rs 7,000 crore for Emaar-MGF, and would have taken its total valuation to Rs 66,000 crore. EMaar-MGF says it may not return to the IPO market for another 18-24 months .

The Emaar-MGF IPO fiasco should serve as a lesson for bleating goats and braying donkeys, who had been danching in the revelry that surrounded Indian realty companies. Most of these companies are more han 50% down from their highest peaks last year. In fact, there is nothing special or different about real estate as an asset class.

During the orgisastic dance pre-January 2008, investors were willing to pay any premium for real estate shares. Like the warm rush of heroin that rises in the addict's bloodstream, retail investors savored the big bold headlines in the newspapers and colorful supplements, pumping their savings and investible money in to shares of real estate companies. The high of Indian real estate had intoxicated everyone, for it was believed that property prices would rise straight from the waters of the Arabian sea to the peaks of Mount Everest.

However, someone forgot to factor in global warming, or so it seems.

Read the Livemint story here

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Unitech Project Hinges on Lehman's Rs 1500 Crore

Unitech's 97-acre project in Santacruz, Mumbai, from which Deutsche Bank had exited , may have just one investor - Lehman Brothers, itself a beleagured financial entity, if US reports are to be believed. The success of this project now hangs balance on Rs 1,500 crore, which Lehman is expected to confirm by June 15.

Unitech's plans to convert the Santacruz Koliwada area in to a residential-cum-commercial hub may take a beating if Lehman Brothers refuses to put down this cash. Earlier, Deutsche Bank which was a co-investor, became disconcerted about the valuations and refused to be part of this deal Now, however, it is reported that Lehman will put in the Rs 1,500 crore by itself.

Sources in the Mumbai real estate market say that Unitech had purchased this land when the prices were at its peak, and when property prices were expected to scale right up to Mount Everest from the shores of the Arabian Sea. Unitech had paid up Rs 500 crore for bagging the project, but could not muster the balance Rs 1,500 crore. Thus, it had approached the two banks for an SPV arrangement, wherein it offered stake for cash. Deutsche Bank however backed out. [Read the story here]. Lehman may now negotiate a higher stake on revaluation of the project profitability. Besides, it may not fund Unitech's Worli project.

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EMI Holidays: India's Subprime in the Making

An eerie trend is rearing its ugly face as builders get desperate to prop the flagging sales of apartments. In an echo of what caused the subprime crisis in the US, builders are now luring home buyers with loan options that resemble the exotic mortgages of the US.

Trends reported in Delhi point to EMI holidays, where you book an apartment by paying 10-15% down payment of the apartment's cost - determined by the builder - and arrange for your bank loan. Once you have your bank loan in place, the interest component would be paid by the builder until the flat is ready. Once possession is handed over, usually 18-24 months, you begin paying the balance EMIs.

Even in a seemingly straightforward home loan industry in India, loans can take on subtle flavors not easily visible to the borrower. There are all kinds of caveats loaded in to the agreements which emerge only in the event of a dispute. The EMI itself comprises a capital component and an interest component, which is determined by the bank.

Typically, an EMI holiday means no EMI is to be paid by the borrower until the possession of the apartment is given. This basically means the borrower does not have to pay the capital component until the apartment is in his possession. This non-payment of capital will obviously attract an interest which will be calculated and added on to the balance EMIs, which kick in after possession - there is indeed no free lunch. Home loan borrowers are seldom clear about the underlying structure of these loans.

Now, as far as the interest component of the EMI goes, this would be 'happily' shelled out by the builder. At 10% per annum, it is a steal for all builders, who now have ready access to the cash, since under RBI regulations, real estate funding is not automatically available from domestic banks.

EMI holidays have apparently impressed local Citigroup analysts, Ashish Jagnani and Aditya Narain, who have written glowing reports that such ideas would boost transaction activity. Perhaps they should consult their global chief, Vikram Pandit, who is sulking and brooding about how to make good the $400 writedowns Citibank had to endure, arising from similar kind of loans, which the bank had encouraged in the US.

In my view, EMI holidays are an indirect way of providing builders with funds, and an means to keep housing prices at current ridiculously high levels. Since the RBI has tightened its noose around banks lending for the real estate sector, they have come up with such schemes which contravene the law without transgression. Reports say that such trends are mostly a Delhi phenomenon, but this is not entirely true. HDFC Bank in fact offers a similar scheme for Nahar's Amrit Shakti Project in Powai, Mumbai. [Read the story here]

Experts and industry watchers have clearly sent out the message that EMI holiday schemes are simply a ruse by builders to sell their current inventory of apartments at exorbitant prices. Once you take a loan, home buyers would simply find themselves locked on to a rate, and with the prospect of a decelerating market, it is clear that anyone who buys property at current rates is looking at years of sliding property values.


Read the HT story here

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