Saturday, July 12, 2008

Cash Crunch Hits Mumbai's Builders, Redevelopment Plans Tossed Out

Redevelopment deals are softer than potatoes in hot water. A cash crunch has started eating in to the plans of Mumbai's builder lobby. Considered the shining story of the real estate bull run from 2004-08, redevelopment of old housing complexes has slowed down completely.

The first signs were visible when a story, of Rs 402 crore deal between Sterling properties and Vivek Society, in Vakola, Santacruz, featured as front-page headlines in local Mumbai tabloids. Each 550-sq ft owner was supposed to be offered Rs 2 crore per flat, but this this became a wet mop, when Sterling backed out, citing difficult market conditions.

The plan for redevelopment works like this: The older housing complex sells its land to the builder, who demolishes the structure, and with the enhanced FSI, builds a taller building on the same land. He adequately compensates the current owners with either larger apartments, cash or both, and then sells off the additional apartments as his profit. However, with speculators in the fray, prices had spiralled up to a point of unaffordibility, and builders are no longer willing to take the risk, since loans have become scarce, interest rates have been hiked, banks are no longer interested in funding under-construction apartments, and home loans have become expensive.

Further, with the demand for apartments slumping, builders simply are unable to take the risk. Exorbitant pricing is slowly moving out of the system.

Among the cancelled plans of redevelopment include Wadhwa Builders's Vishal Nagar in Borivili; and Pune-based Kumar Builders's Khira Nagar, Santacruz. All deals signed up last year are being renegotiated downward to the extent of 25%. Some others that have gone back to the table are societies, Flying Carpet and Tirupati, near Khar Gymkhana. Developers are even not willing to extend more than 25% additional space in the new constructions, to owners of flats in old apartment complexes. A specific case in Khar's 11th Road, society members accepted a barely 20% increase. Last year the developer was willing to shell out any amount, but the story changed six months ago.

Another stumbling block is the high stamp duty that the Maharashtra government has levied on builders wanting to transfer the plots on to their own names of societies registered in the 1980's.

Read the DNA story here


tradepoint said...

cheaper money borrowed from abroad has dried up due to slump in US real estate mkt & high prices of real estate in india.
secondly equity route has closed due to crash in indian mkts.
politicians will also pull out thier investment before elections.
difficult times ahead for developers.

dr zingaro

Makarand Kokane said...

Interestingly, builders are still now willing to bring down their quotes.. I'm a resident of Pune and currently looking for a flat.. In areas of Hadapsar and yerawda, rates shot up from 400 Rs/sqft to 3000 Rs/sqft in 5 years from 2002 to 2007. After hitting a peak of around 3000 sometime last year (6 months before sensex hit its peak), even today builders still quote the same rates! Though buying and selling activity has dropped down significantly, there is no drop in the quotes made by builders.

Recently I visited the much advertised "nanded city" which is way of the the city. They quoted 3500 Rs/sqft and all flats of first phase were sold out within two weeks! Its really hard to see the big picture when it comes to real estate. I wish there was a sensex and a nifty of real estate :)





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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