Bangalore Set on Ghost Town Path

"Bangalore realty developers have lost their heads," a senior contact in one of the Big audit firms told me. "They are providing their foreign investors with dreams of 100%, returns, by claiming ownership of lands they do not have in their possession," he added.

This may well send Bangalore, known as the IT capital of India, and before this, as the city of gardens, into becoming India's first city of ghost towns. Large projects in areas like Whitefield may soon be dotted with half-completed projects, leaving investors and home buyers in a state of limbo.

Many developers in Bangalore, who cannot be named, have invested in land by buying what can be called call options. They have paid a premium (or earnest money) of Rs 2 crore for purchase of land worth Rs 100 crore, and have signed up intent to purchase, developing project reports that show them as owners of these properties.

The objective is simple. Once the foreign capital comes in, the money is used to pay the land owner. This may be one of the main reasons that was driving up land prices around Bangalore.

Now, with a serious credit contraction in the US, most of this foreign capital has slowed down, as a result of which, we could soon see many such mega projects stalled.

Bangalore, as I have said earlier, has already cracked about 40% in some areas, specifically Whitefield, and if this credit squeeze continues for another quarter, developers themselves would be seen scurrying for cover.

It is only a matter of time foreign investors get wind of this scheme, which is developed by young managers of audit firm, freelancing for 3% - called carry - and local developers.

Of course, the main objective is to list the company, and exit by palming of expensive stock in to the hands of retail investors, but with the IPO market in doldrums, its a matter of time before Bangalore becomes city of ghost towns instead of gardens.