Saturday, April 12, 2008

Has Deutsche Bank Exited Unitech SPV?

An awkward story, featured by CNBC on April 8, 2008, about Lehman Brothers confirming the $500 million investment in Unitech’s SPV, has got me thinking.

This announcement had nothing new to convey. It merely said Lehman was confirming its investment in Unitech's SPV. There were no sources quoted either at Unitech or Lehman. Curiously, the other SPV investor Deutsche Bank was not mentioned at all.

So the question that comes to mind: Has Deutsche Bank reversed its decision to invest in the Unitech SPV? So, is Unitech or CNBC trying to prevent the facts by playing up another angle so as to continue the hype in the real estate scenario in India.? The CNBC story only said, matter-of-fact, that "an official announcement would be made next week".

On the face of it, it appears innocuous. However, when you consider the fact that this story in itself was about 3 weeks old, first published by the Economic Times, which talked of two SPV investors, Lehman and Deutsche, a story subsequently picked up by the global media, including CNN Money and others.

So, what was it that CNBC was trying to achieve?

I do not think that CNBC is run by fools, as most traders say. It is a well-oiled engine that works in cahoots with corporations, albeit seemingly an unwitting partner, to manipulate stock prices, with conjecture, innuendos, and mostly with things not said, rather than said.

I smell a rat in this Lehman-Unitech story, but then as one steel-trading friend said to me, I always smell rats, and that the smell is so embedded in my nostrils, that I smell rats even if there are none. May be he is right, but here is my personal take on what CNBC is trying to achieve:

  • Protect someone's stake in Unitech, because Lehman and Desutsche are both planning to exit these projects.
  • Attempting to jack up Unitech’s price to allow some large investor to exit his stake.
  • Protect and prevent a slump in the real estate market by playing positive -- even if speculative -- stories.

Unfortunately, CNBC has become a poor cousin of its US counterpart which is equally infamous for its jingoism, but has refrained from sinking to abysmal levels. Further, Sebi too has fallen short of investigating investments made by holding companies of media organizations either directly or through persons and companies acting in concert. Even a cursory study can reveal some startling facts.

Unitech had picked up slum rehabilitation land in Santacruz and Worli in 2007, the peak of the Indian real estate mania, while Lehman and Desutche had committed their investments around March 2008, when despite the subprime complications, things were not really as gory.

Sometime later, things have taken a very ugly turn. Bear-Stearns went down and Lehman was rumored to be next. So there is every reason for Lehman to conserve all the cash it has, and pull out of any investments, so as to protect itself in the US. For those who do not agree, remember how Bear-Stearns sold each and every holding in India, and remember the Orchid debacle. There were rumors about Lehman doing the same but somehow things did not pan out like this. This time, it could well be.

Since the deal making news in March 2008, real estate prices in Mumbai have dropped rather heavily, even though builders may not be be ready to cut prices and may continue to hold the their properties. Fact is, in the suburbs, new purchases have sunk 40%.

The land where Unitech is planning development is in Santacruz, near the Bandra-Kurla Complex (BKC), and at Worli,; at both places, rentals have fallen at least 30% from their heights during the real estate mania.

If indeed these two investors are going ahead with this deal, this means Lehman and Deutsche, each battered rather badly by their poor investments in US subprime, definitely have great wisdom about the Indian real estate market, and consider it cheap.

If we look at what has happened to these companies on their own bourses – Lehman was rumored to be almost filing for bankruptcy – they would really have some answering to do to their shareholders in the US about investing in the Indian real estate bubble.

Now, for one minute, if I look at this entire news story with jaundiced eyes, I can come to only one conclusion.

The entire story played out by CNBC is a desperate attempt by Unitech to leak such information and put pressure on Lehman to remain with this deal.

As the newsreader said, “An announcement is expected to be made next week,” it could well be CNBC’s way of propping the share price to allow some large investor to exit from Unitech.

This story is in fact over 3 weeks old, and was prominently presented by the Economic Times, and then picked up by the global media. Most of the quotes in the newspaper and online stories were attributed to unnamed people close to the deal – basically no one.

If Lehman agrees with Unitech’s plan, why has it not come out and said so. What about Deustsche Bank? CNBC has not said if it also agrees with this plan.

Further details of this plan are as follows: Unitech currently holds 50% stake in these two SPVs. While Mumbai's Rohan Group, with interests in industrial and residential construction has a 20-25% interest in them, the rest is held by undisclosed partners.

Sources that CNBC claims have informed it, that Unitech, Rohan Group, as well as the other investors, would reduce their stake proportionately to accommodate 35% of Lehman. No comment has been made about Deutsche Bank.

Finally, while Unitech has 8 million sq ft for development under this scheme, Deutsche and Lehman are investing in just 1 million sq ft. Which brings me to the eternal question: Is there real estate bubble finally bursting. If builders are asking your to pay Rs 25,000 - and Rs 50,000 per sq ft why is it that Lehman is investing in just 1 million sq ft? Why not go the whole hog if the deal is so sweet.

Read the ET story here

Read the March-23 Bloomberg story quoting ET here

Read the March-23 Reuters story quoting ET

Read the March-24 CNN Money story quoting ET here

Read the March-24 Marketwatch story quoting ET here

Read the April-8 Moneycontrol (CNBC web site) here



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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

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.”

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.

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.

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

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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