Monday, December 08, 2008

Do not Bail Out Real Estate Companies - Avinash MKB

After yesterday's stimulus package announcement for the Real Esate companies , I read an articke in the Economic Times about real estate companies claiming that the stimulus package was not enough and that they need more.

CEO # 1 says : "They could have done more …. should have cut the steel prices mores …..."

CEO # 2 says: "Package should be annouced for loans of upto 30 lakhs and not 20 lakhs , this is not enough."

This is really juvenile behavior on the part of real estate companies. They are crying hoarse about the inadequate sops from the government, while they have done little to stimulate the uptake in real estate via a price reduction.

I am unable to understand the reason why developers are not willing to cut prices (at least by 15-20 percent). While car companies and every other company is offering discounts to sell their stocks, real estate companies are sitting pretty on their profit margins.

As per my own experience of building a house in Bangalore and also as per the contractor (who also builds many apartments on contract basis) the average cost of constructing a quality apartment is around Rs 1000 to Rs 1200 per sq ft. If you include the cost of land then it would come up to Rs 1500-1700 per sq ft.

But what's the retail price of an apartment in Bangalore? It ranges between Rs 2300 (at the lower end ) to Rs 3200 (medium) to Rs 4000 (higher end). These real estate guys are making dream margins on each project (even IT companies don't make so much).

However, on the balance sheets of real estate companies the profit margins are shown lower simply because all profits made during the bull run were invested in creating more and more land banks.

Given all these I don't see a reason why one should give bailout packages, in terms of cheaper loans to the real estate companies. I believe that the real estate companies should now pay the price for their reckless expansion.

My humble request to the PM and FM is not to give any more sops to real estate companies until they cut prices by 20-30 percent.

Write to Avinash at


Arvi said...

Couldnt agree more

Kiran Patil said...

Building basic flat cost was around 600Rs per sqft in 2003-2004, which reached 800-900Rs per sqft in 2008, but the rates went from 900-1000 to 3500-4000! isn't that fantastic. 99% of builders must have bought lands atleast 5 years before, which means they are looking at 200-300% margins on there investments! hell and still crying... prices must comes down at least 40% to be reasonable...

Jyothish said...

I am really glad that someone has written a blog about this. Builders have had their good times and made lots of money, now it time they pass on some of it to the customers. After all the money whatever the government is going to give in the name of bailout package is tax payers’ hard earned money. Giving bailout package will only mean giving more money to already cash rich builders. Since real estate is still an industry which does not have much regulation it will be really difficult to verify that the bailout package is used in the right direction. When the prices were going up builders used to say well it’s just simple economic there is more demand and less supply, so prices will obviously go up. Well the same holds true now also, its simple economic there is more supply and no demand so prices should come down.

Instead of getting the interest rates down the prices should come down. Initially the government will force banks to lower interest rates. But once the buyer has fallen into the trap (i.e. of taking loan and buying flat) they will increase the interest rate. In the end builder is the winner.

Unfortunately the builders lobby is very strong and it is very likely that the finance ministry will accept to their demand and offer bailout package. I hope this blog becomes so famous that the minister reads about it. If at all the government takes a move to help the builders we should throw them out of power because such a government will never be able to think in our interest.

Just as a clarification I am not against bailout package, but I am of the opinion it should only be given to industry which is very well regulated and transparent. And all of us know that real estate is not well regulated neither transparent. Till today also lot of the money involved in real estate is black money, which is what our finance minster is making efforts to reduce.

Karthik Kumar said...

Very well said. For long term sustainance of real estate uptake for the bulk of middle and upper middle class income, the houses that these companies make should suitably be around 1200-1500 sq ft coating around 35-50 lakhs and even less. Most houses in my locality were picked up for these prices of even lower in the year 2000-2003. Unless builders keep these sizes and prices as a benchmark and not make the bulk of their projects in houses/apartments which are 2500-3000 sq ft(and essentially mostly for Show Value - OOH,, SUCH A BIG HOUSE) costing crore plus, they should have adequate volumes and constant cash flows due to end user and even investor purchases.

Sudarshan said...

Thanks for writing about it.
This was main thing on my mind when I read about builders showing disinterest in the goverment initiative on SOPS and home loan rate reduction.
Kind of profit they are making is just mind boggeling and that is all at the cost of hard earned money of normal middle class.
they are taking this stance may be because builders have earned quite a lot till now and they can afford to stay put for some more time.
But these guys asking more from govt and not reducing home prices from their end is just height of greed if I can say it.
Home prices should come down by 50-60 % and I am sure profits they will make on that will not something to laugh at, it will be good enough for any business to survive in profitable manner.




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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