Wednesday, June 11, 2008

Builders Face Cash Crunch as Real Estate Sales Slow Down

A liquidity crunch is slowly hitting developers and builders as property sales slow down, PE firms tighten purse strings, and input costs rise. All eyes are now on the Rs 1500 crore that Lehman Brothers is expected to invest in Unitech's Santacruz, Mumbai, venture [Read story here], and market speculation is that given Lehman's problems and its decisions to move out of mortgage and realty worldwide.

Builders are delaying projects and delivery since there appears to be a cash crunch in the system. Two things are compounding things further: one, rising inflation is going to force the RBI to increase interest rates, and banks will be forced to pass this on to consumers. The thing with real estate is, that once the slowdown sets in, the cycle lasts at least 3-5 years.

Investors, who had purchased apartments with the clear intent of capital gains, are now quickly palming off these properties at 15% discount to the builder quotes. Take Bandra for example. Rates varied from Rs 23,000 to 18,000, are now available at Rs 21,000 to Rs 15,000. The point to note is that this is just the beginning. Once, the rains come in, and the buyers become more objective in their purchases, these rates are likely to slide more.

While six months ago, sellers outnumbered buyers, these days, buyers have become scarce. Compounding this is that PE firms are no longer interested in investing in companies directly, and are prefering special purpose vehicles (SPVs) which are project-oriented.

Real estate companies use the percentage completion method to register sales and profits. Hence, if there is no offtake, and if input costs rise, their margins get squeezed. This means, expect writedowns in their balance sheets. With borrowing rates at 24%, those unable to complete their projects could run into massive trouble.

Read the DNA story 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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