Tuesday, April 15, 2008

PE Investors Turn Wary of Real Estate

India’s real estate industry would like you to believe that the country’s real estate scenario is perfectly under control and that foreign investor interest is not waning at all.

However, some trends belie the fact that a good amount of wariness has crept in to the investor space too, many of whom are now opting to invest in SPVs – specific investments in projects, which are easy to monitor and exit – instead of a stake in the company.

The common refrain some months ago was “land bank”. Companies acquired land, and then determined the amount of construction possible on this land. They put a future price per sq ft to the amount of space to be constructed, and used it as a measure to determine the current value of the company. Companies were then listed based on these valuations.

How different was this from the manic 1990’s when Internet companies were valued based on future revenues? Millionaires are being created in real-time, based on future, and imagined, earnings of their companies.

However, the nose-grinding devastation of Emaar-MGF’s IPO suggests that Indian retail investors are no longer buying in to skyscraper-like projections of real-estate companies. Neither are the East-Asian investors. DLF and Indiabull’s REITs which were to be listed on the Singapore stock exchange were withdrawn some time ago.

It clearly means that institutions, investors and retail traders cannot, at least for a few years, think of buying in to real estate IPOs and flip it over on listing day. By the time the market is back on its feet, SEBI would have in place a circuit filter on Day 1. At present, there are no circuit filters applicable to a new stock on its first day of listing.

Thus, there is no reason for real estate buyers, to buy into highly priced properties, which are being sold through large glossies in the newspapers. When the BSE Realty index has fallen 46%, real estate will soon follow. And this is just the beginning.

Posted by Eclectic Investor at 12:13 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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