Monday, April 21, 2008

Coming Soon: Property Derivatives in India

In a move that could be a last-ditch attempt to counter the slowdown in the Indian real estate market, a clutch of Delhi and Mumbai developers are pushing for the launch of property derivatives on the NSE, reveal unconfirmed sources.

A closed-door meeting is said to have transpired between officials of Sebi and the Finance Ministry, in New Delhi, the source further said.

This may be the solution for the real-estate industry facing a serious meltdown as well as investors who are facing a double whammy due to a interest rate hike.

The launch of a derivative market in property will allow smart investors to hedge as well as rebalance their property portfolios. The new derivatives will be on real estate, and not the developer companies whose derivatives are already being traded on NSE.

The tool will also be handy for development teams in real estate companies, which are quick to use cash, but find it cumbersome to recover it from the real estate properties, due to the illiquid nature of the asset.

With the launch of these real estate derivatives, developers and builders would be able to sell their properties in the futures markets, immediately, and realize the cash, while the building takes its own time to come up.

However, many in the financial world are however wary of these derivatives. They say it would be used by companies to manipulate the prices of real estate.

Should such derivatives be launched, property prices would shoot up through the stratosphere, and make it impossible for the salaried class to buy homes in an already overheated markets. Nevertheless, it will allow speculators, hedgers and current home owners to realize the worth of their investment in real-time, by buying and selling futures and options, instead of waiting for a buyer.

This may be one reason why builders and developers could be keen on a quick launch of property derivatives. The discussions are at a very preliminary stage and no one is coming on record. However, sources say that it may soon be put up for discussion in the public space.

Posted by Eclectic Investor at 6:41 PM  

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IN PASSING

Consider how the crisis has unfolded over the past eighteen months. The proximate cause is to be found in the housing bubble or more exactly in the excesses of the subprime mortgage market. The longer a double-digit rise in house prices lasted, the more lax the lending practices became. In the end, people could borrow 100 percent of inflated house prices with no money down. Insiders referred to subprime loans as ninja loans—no income, no job, no questions asked. - George Soros in latest book


“When everything’s going up, there’s a feelgood factor and people tell each other how much their houses are going up at dinner parties,” says Professor Mark Stephens of York University’s Centre for Housing Policy. “Then the music stops, as it always does.”

“Last year, Japan was a more attractive market to put money in. If you look at the US, we can now get an internal rate of return of 25% there, so why would anyone want to come to India?” - a senior executive at an international financial services group, who did not wish to be named.

"Most people told us house prices never go down on a national level, and that there had never been a default of an investment-grade-rated mortgage bond, "Mortgage experts were too caught up." - John Paulson, trader, who bet against subprime market and made $15 billion.

The most puzzling are the real-estate projects of Parsvnath. Just have a look at the Pride Asia project near Chandigarh. They are asking almost US $300K-$350 K dollars for 2 bed room apartments. They have Villas in this project that costs more than US $1.5 million dollars. It is true that some people in India have that kind of money in India. However most of their wealth is black money and that can not be used to buy these properties. Obviously, these projects have been launched keeping NRIs in mind. - Sanjeev, comment from another site

Prachi Desai, aka Bani, the star of Balalji Telefilms's soap, Kasam Se, has been house hunting for over a year. She had almost closed a 2-BHK deal last year for Rs 1.5 crore in a Oberoi Constructions' building located at Andheri, Mumbai, but when she went back to confirm it, she was asked to cough up Rs 2.61 crore. Since then, she is still house hunting. - Mumbai Mirror

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