Tuesday, April 01, 2008

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.

1 Comment:

Crazy Business Ideas said...

Guys this is very true. lets just wait and watch. India will be under a huge , huge recession - they cant even imagine. Plus the subprime default is gonna happen soon. So wait and watch...




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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