Saturday, April 12, 2008

Has Deutsche Bank Exited Unitech SPV?

An awkward story, featured by CNBC on April 8, 2008, about Lehman Brothers confirming the $500 million investment in Unitech’s SPV, has got me thinking.

This announcement had nothing new to convey. It merely said Lehman was confirming its investment in Unitech's SPV. There were no sources quoted either at Unitech or Lehman. Curiously, the other SPV investor Deutsche Bank was not mentioned at all.

So the question that comes to mind: Has Deutsche Bank reversed its decision to invest in the Unitech SPV? So, is Unitech or CNBC trying to prevent the facts by playing up another angle so as to continue the hype in the real estate scenario in India.? The CNBC story only said, matter-of-fact, that "an official announcement would be made next week".

On the face of it, it appears innocuous. However, when you consider the fact that this story in itself was about 3 weeks old, first published by the Economic Times, which talked of two SPV investors, Lehman and Deutsche, a story subsequently picked up by the global media, including CNN Money and others.

So, what was it that CNBC was trying to achieve?

I do not think that CNBC is run by fools, as most traders say. It is a well-oiled engine that works in cahoots with corporations, albeit seemingly an unwitting partner, to manipulate stock prices, with conjecture, innuendos, and mostly with things not said, rather than said.

I smell a rat in this Lehman-Unitech story, but then as one steel-trading friend said to me, I always smell rats, and that the smell is so embedded in my nostrils, that I smell rats even if there are none. May be he is right, but here is my personal take on what CNBC is trying to achieve:

  • Protect someone's stake in Unitech, because Lehman and Desutsche are both planning to exit these projects.
  • Attempting to jack up Unitech’s price to allow some large investor to exit his stake.
  • Protect and prevent a slump in the real estate market by playing positive -- even if speculative -- stories.

Unfortunately, CNBC has become a poor cousin of its US counterpart which is equally infamous for its jingoism, but has refrained from sinking to abysmal levels. Further, Sebi too has fallen short of investigating investments made by holding companies of media organizations either directly or through persons and companies acting in concert. Even a cursory study can reveal some startling facts.

Unitech had picked up slum rehabilitation land in Santacruz and Worli in 2007, the peak of the Indian real estate mania, while Lehman and Desutche had committed their investments around March 2008, when despite the subprime complications, things were not really as gory.

Sometime later, things have taken a very ugly turn. Bear-Stearns went down and Lehman was rumored to be next. So there is every reason for Lehman to conserve all the cash it has, and pull out of any investments, so as to protect itself in the US. For those who do not agree, remember how Bear-Stearns sold each and every holding in India, and remember the Orchid debacle. There were rumors about Lehman doing the same but somehow things did not pan out like this. This time, it could well be.

Since the deal making news in March 2008, real estate prices in Mumbai have dropped rather heavily, even though builders may not be be ready to cut prices and may continue to hold the their properties. Fact is, in the suburbs, new purchases have sunk 40%.

The land where Unitech is planning development is in Santacruz, near the Bandra-Kurla Complex (BKC), and at Worli,; at both places, rentals have fallen at least 30% from their heights during the real estate mania.

If indeed these two investors are going ahead with this deal, this means Lehman and Deutsche, each battered rather badly by their poor investments in US subprime, definitely have great wisdom about the Indian real estate market, and consider it cheap.

If we look at what has happened to these companies on their own bourses – Lehman was rumored to be almost filing for bankruptcy – they would really have some answering to do to their shareholders in the US about investing in the Indian real estate bubble.

Now, for one minute, if I look at this entire news story with jaundiced eyes, I can come to only one conclusion.

The entire story played out by CNBC is a desperate attempt by Unitech to leak such information and put pressure on Lehman to remain with this deal.

As the newsreader said, “An announcement is expected to be made next week,” it could well be CNBC’s way of propping the share price to allow some large investor to exit from Unitech.

This story is in fact over 3 weeks old, and was prominently presented by the Economic Times, and then picked up by the global media. Most of the quotes in the newspaper and online stories were attributed to unnamed people close to the deal – basically no one.

If Lehman agrees with Unitech’s plan, why has it not come out and said so. What about Deustsche Bank? CNBC has not said if it also agrees with this plan.

Further details of this plan are as follows: Unitech currently holds 50% stake in these two SPVs. While Mumbai's Rohan Group, with interests in industrial and residential construction has a 20-25% interest in them, the rest is held by undisclosed partners.

Sources that CNBC claims have informed it, that Unitech, Rohan Group, as well as the other investors, would reduce their stake proportionately to accommodate 35% of Lehman. No comment has been made about Deutsche Bank.

Finally, while Unitech has 8 million sq ft for development under this scheme, Deutsche and Lehman are investing in just 1 million sq ft. Which brings me to the eternal question: Is there real estate bubble finally bursting. If builders are asking your to pay Rs 25,000 - and Rs 50,000 per sq ft why is it that Lehman is investing in just 1 million sq ft? Why not go the whole hog if the deal is so sweet.

Read the ET story here

Read the March-23 Bloomberg story quoting ET here

Read the March-23 Reuters story quoting ET

Read the March-24 CNN Money story quoting ET here

Read the March-24 Marketwatch story quoting ET here

Read the April-8 Moneycontrol (CNBC web site) here

Lessons from Japan’s Housing Bubble – V

All the king’s horses and all the king’s men, could not put the Housing Rubble up again.

The accompanying image depicts house prices post the Housing Bubble. By 2004, the Japanese housing bubble had become completely obliterated. More than $20 trillion (1999 dollars) were wiped off with the combined collapse of the real estate market and the Tokyo stock market.

A class-A property in Tokyo’s financial districts were less than 1/100th of their peak, and Tokyo’s residential homes were 1/10th of their peak, and even at this time they were considered to be listed as the most expensive real estate in the world.

One of the main reasons for the failure in containing the housing bubble was the late intervention of the Japanese central bank, the Bank of Japan, which stepped in late-1989, when it was too late and rates were stratospheric.

As with any desperate moves, the action it took was far too heavy and too fast, raising benchmark interest rates from 2.5% to 6% over 15 months. This was too much for Japan's over-inflated land and stock markets to handle, and economists say that this pulled the rug out from under both markets at the same time.

The Japanese housing bubble was a result of the availability of cheap money, at low interest rates, while the US sub-prime crisis was a result of inflation driving up the interest rates, which forced the Fed to cut benchmark interest rates from 5.5% to 2.5%.

Primarily, it is the availability of excessive funds sloshing around in the economy that causes bubbles. In Japan, business corporations themselves indulged in real estate speculation, so when markets collapsed, it wiped out company balance sheets, crippled the nation’s banks, and gave the overall economy a blow to the chin. This appears to be very similar to what is currently happening in India.

Read the first story in this series: Why is India's Housing Bubble Similar to Japan's

This article has been developed from the October 2005 issues of the New York Times. You can read it here

Lessons From Japan's Housing Bubble - IV

Bubble Survivors: Marooned in Distant Suburbs

A fallout of the housing bubble was the creation of the financially marooned.

In the 1980’s, land prices in Japan rose to such astronomical levels, that the only places people could afford were far away from central Tokyo. Many individuals were forced in to deep debt by buying poor quality homes in areas that were hours away from their offices. These were the only places they could afford.

Subsequently, when a fall in Tokyo's real estate led to severe declines in property values in the outlying areas., people who purchased these properties were stuck, and could not sell them since they now fetched less than the balance on their mortgages, taken over a decade or more ago. Many till today are trying to make the best of life in homes that are far away from work and for which they had grossly overpaid.

Read the next story in this series: All the King's Horses and All the King's Men

This article has been developed from the October 2005 issues of the New York Times. You can read it here

Lessons from Japan's Housing Bubble - III

Bubble Indicator: Mad Rush for Home Loans and Huge Debt

The rush to use housing loans to fund home purchases and retail borrowers becoming very comfortable with taking on huge debt is an indicator that a bubble may be in place.

During Japan’s housing bubble, banks came out with exotic loans that required very little money upfront and promised extremely low EMIs for the first few years.

Surprisingly, despite having seen this taking a toll on the Japanese, US financial corporations did not hesitate to devise similar debt options, to fuel the housing boom in the US, and consequently these loans were responsible for what is now famous as the Subprime crisis.

Japan’s exotic loans included the so-called three-generation loan, a 90- or even 100-year mortgage that permitted buyers to spread payments out over their lifetimes and those of their children and grandchildren.

Perhaps the one redeeming factor in India is that home loans are conservative products of 15- and 20-year tenures, given only after a 5-10% down payment is made. Loans in India conform to stringent qualifying mechanisms, which may be one reason why many believe that there may not be a bubble in place.

It can be argued that a lack of exotic loans has in fact prevented a blow-up, but this does not mean it will be enough to prevent it. To take things in perspective, salaried individuals in India have been a conservative lot, who until 1991 were expected to buy a house with their savings.

This continues to be the general line of thinking, but people have become more aggressive and speculative. It is not unknown to find 25-year-old ITES employees to splurge of large homes using home loans. This has also caused the average age for home purchase to fall to 32, while in 1991, when the Indian economy opened, the average age of a home purchaser was around 38.

Nonetheless, the prime driver for real estate in India continues to remain the stock markets. One must not forget that in 1995 the per-sq-ft rates for homes were the same as in 2006. New highs were made only in 2007, driven by the large sums of monies made available to real estate companies, either through listing, or through private equity funding.

The boom of 1995 was without cheap credit and private equity, which counters the argument that the lack of exotic loans in India has prevented a housing. It is worthwhile to note that floating-rate interest loans in India are a form of exotic loans, where the EMI could increase if the RBI increases the repo rates – the rate at which the RBI lends to banks.

But when property prices dropped in Japan, homeowners found themselves saddled with loans far larger than the value of their real estate. Many fell into bankruptcy, especially those who lost their jobs or took pay cuts as declining property prices helped to incite a broader recession.

Read next story in this series: Marooned in Distant Suburbs

This article has been developed from the October 2005 issues of the New York Times. You can read it here

Thursday, April 10, 2008

Lessons from Japan's Housing Bubble - II

Myth: Prices will keep rising forever.

Too many homebuyers, lured by sleek advertising and media-generated hoopla, buy properties that they can rationally ill-afford, given their financial background and potential. However, their eyes are usually centered in to a future where they expect to sell their newly-acquired properties at huge profits, while allowing rentals to pay for their EMIs. However, when prices drop, buyers get financially battered and in worse cases even completely wiped out.

Human beings have a congenitally designed to not learn from the past. During a bubble, people don't believe that prices will fall, even though it has been proven wrong so many times before.

Another indicator of a bubble is the unbridled bidding for worthless land.

At the peak, an empty three-square-meter parcel (about 32 square feet) in a corner of the Ginza shopping district in Tokyo sold for $600,000, even though it was too small to build on.

Prices were highest here in 1989, with some fetching over $1.5 million per square meter ($139,000 per square foot), and only slightly less in other areas of Tokyo. Plots only slightly larger gave birth to bizarre structures known as pencil buildings: tall, thin structures that often had just one small room per floor. Such structures later become reminders of a different era, like the aftermath of a boisterous party.

Another indicator of a bubble is the acute scarcity of affordable housing. In Japan too, during the housing bubble, the focus was only on building commercial property and luxury apartments. In India too, currently, especially within the city limits of Mumbai, a standard 2-bed room apartments cost no less than Rs 1 crore.

By 2004, a prime “A” property in Tokyo's financial districts were less than 1/100th of their peak, and Tokyo’'s residential homes were 1/10th of their peak, and even at this time they were considered to be listed as the most expensive real estate in the world. At the end of the Japanese housing bubble, some $20 trillion (1999 dollars) was wiped out with the combined collapse of the real estate market and the Tokyo stock market.

Read next story in this series: Mad Rush for Home Loans and Huge Debt

This article has been developed from the October 2005 issues of the New York Times. You can read it here

Wednesday, April 09, 2008

Lessons from Japan's Housing Bubble - I

Why India's Housing Bubble Similar to Japan's?

A housing bubble is in place when property rates start rising at double-digit rates, and people start taking loans to invest in property, with the idea that the loan can be paid back easily and the property sold at a profit.

Once the bubble is burst, the property is worth a fraction of its purchase price and people get left behind with a negative asset, where the EMI is higher than what the asset can earn in a month. In such a situation, the balance outstanding loan cannot be paid off even if the asset is sold.

Japan is an excellent example of a housing bubble that went horribly wrong, and it has a glaring similarity to what is happening in India. Read on and identify the similarities:

  • The Japanese real estate market boomed from 1985 to its peak sometime in early 1991.
  • During this time, Japan’s property prices rose much faster and more steeply as speculators used paper profits from a booming stock market to invest in property, insupportably leveraging the prices of both higher and higher.
  • The biggest speculators in Japan's frenzy were deep-pocketed corporations, and they pumped up the commercial property market at the same time that home prices were inflating.
  • Japan suffered one of the biggest property market collapses in modern history. At the market’s peak in 1991, all the land in Japan, a country the size of California, was worth about $18 trillion, or almost four times the value of all property in the United States at the time. A commonly-quoted claim was that the land beneath the Imperial Palace in Tokyo was worth more than the entire state of California.

Then came the crashes in both stocks and property, after the Japanese central bank moved too aggressively to raise interest rates. Both markets spiraled downward as investors sold stocks to cover losses in the land market, and vice versa, plunging prices into a 14-year trough. In 2005, the land in Japan was worth less than half its 1991 peak, while property in the United States has more than tripled in value, to about $17 trillion.

Homeowners were among the biggest victims of the Japanese real estate bubble. In Japan’s six largest cities, residential prices dropped 64 percent from 1991 to 2004. By most estimates, millions of homebuyers took substantial losses on the largest purchase of their lives.

By 2004, a prime “A” property in Tokyo's financial districts were less than 1/100th of their peak, and Tokyo’'s residential homes were 1/10th of their peak, and even at this time they were considered to be listed as the most expensive real estate in the world. At the end of the Japanese housing bubble, some $20 trillion (1999 dollars) was wiped out with the combined collapse of the real estate market and the Tokyo stock market.

Read next story in this series: Myth: Prices Will Keep Rising Forever

This article has been developed from the October 2005 issues of the New York Times. You can read it here

Tuesday, April 08, 2008

Why a Real Estate Bust is in Offing

Stock market crashes almost always precede a real estate bust, and there is no reason why it should be different this time.

Several analysts are waxing glory about the Indian real estate market, creating a belief that it can never collapse. However, history has proven that there is a direct correlation between the stock markets and real estate markets, with a time lag of usually 6 months to 1 year.

If the Nifty and Sensex do not make new highs by June 2008, India’s real estate market will start accelerating downward. By this yardstick, we have another 3 months before the property dream becomes really sour.

However, this doesn’t mean that all will be hunky-dory for those who have invested in property. Until then, prices will not rise; at best they will stagnate or remain in a state of limbo – both sellers and buyers won’t budge.

Whenever the stock markets have passed through boom times, demand for – and consequently prices – of property have gone high. Likewise, in depressed stock markets, property prices tend to soften.

The reason for this relation between the two markets is that, in rising markets, investors find real estate as the ideal place to park the huge gains made in the stock markets, leading to escalation in prices; conversely, in a falling market disposal of property is the quickest way to cover losses, leading to a fall in property prices.

History is replete with examples to confirm this nexus. The most glaring is Japan. It has never recovered since its real estate boom and subsequent bust of 1985–90. India incidentally is exhibiting the same pattern as the Japanese cycle.

  • Japan’s real estate market crashed in 1990 following the stock market crash. It is almost 18 years since, but the real estate market is still stagnant in Japan.
  • In 1991, post the Harshad Mehta-led market crash in India, the real estate markets also crashed and prices remained stagnant for next 6-7 years. They bottomed out in 2002.
  • In 2001, the tech-led Nasdaq crash caused the real estate market to fall around 20-30 percent.
  • The 2007-08 downturn in US real estate markets is staring at us right in the face.

The reasons for the crashes may be different, but the pattern is almost always the same. People who have lost heavily in stock markets are keen to dispose off their investments in the real estate market. Distress selling always depresses prices. Small builders facing financial shortage have to sell some of their property to meet financial requirements.

Many other individual investors, who have purchased multiple properties with their own funds or loans for speculative purposes now have to sell some of their property before prices go down further.

The question many ask is why did the fall of May 2006 not trigger a real estate crash, in fact real estate reached even higher heights since then. The answer is again in the stock markets. After May 2006, the stock market recovered within 6-8 weeks and even touched a new high, thus buoying real estate prices with it.

However, when the massive sudden fall in the Indian stock markets was seen, there were reports from Mumbai, Delhi, Bangalore, Ahmedabad and Coimbatore that clearly indicated that property prices (specifically residential property) dropped 10 to 15 percent off their highs. Fresh buying had come to a screeching halt in all major cities.

The current scenario in 2008 paints a picture of almost every retail investor waiting for the market to rally up to new highs and this is a huge gamble to take. If the stock markets do not make new highs, and in all probability they will not, it will be no surprise for real estate prices to drop by up to 30 -40 percent in the near future.

However, it is not just the stock market that is responsible for downturn in the property market. Other factors that escalate a crash are:

  • Rising interest rates on housing loans; these have increased from 8 to 10.5 percent in last two years, thus increasing the number of EMIs.
  • RBI tightening liquidity. RBI has tightened lending norms by raising risk weightage for real estate loans to 150 percent. A lot of speculation in real estate was because of excess liquidity in the market.
  • Rise in petrol prices and other commodities puts pressure on monthly budgets of the middle class, forcing it to postpone the purchase of homes.
  • Lack of government regulation in the market.

The above are reasons why we are primed for a real hard knock in real estate. If you do a check of the above factors, you will see that the current situation complies with each and every point. Yet, almost every person is in denial that an imminent correction awaits the Indian real estate market.

A stock market crash is just a trigger. Usually, property prices reach unsustainable levels on account of huge speculative demand, and the real estate market collapses under its own weight.

The current article has been developed upon an idea from another website. You can read the original 2006 article here

Carpet Area Bill will Bomb Old Flat Owners

The new bill by the Maharashtra government has thrown up a positive, albeit unintended advantage: it may sound a death knell for the sales of apartments in older constructions.

Prior to this bill, and bouyed by the higher prices of newer and exquisite apartments in their vicinities, owners in old buildings were charging exorbitant rates for their apartments.

In many cases, they would add 40% to their carpet areas, and quote super built-up areas. For example, an owner of a 450 sq ft apartment in a building more than 40 years old, claims an area of 610 sq ft while advertising for his property, and then demands the current rates for his apartment.

While the new rates were applicable to new skyscrapers in the vicinity, these owners had the advantage to demand higher rates. They also claimed low maintenance charges and thus were able to bulldoze their way in a overheated real estate market.

However, the new carpet area bill will change all this. It will make sales of all apartments on par, while builders of new constructions to charge for additional facilities and spaces. Owners of apartments in old constructions will not have this luxury to claim super built-up areas and charge a premium.

Many experts apparently are missing out on the argument that once a society is formed, additional areas and facilities -- like passages, lift areas, terrace, balconies, parapets, ledges etc. -- are owned by the co-operative housing society and not the owner of the apartment. Thus, owners of old apartments claiming super built-up rates is not justifiable.

While no one expects the new bill to bring prices down, it will certainly make things more transparent for the buyer, but the best effect would be visible in the sale of used homes.

Sterling Backs Out of Kalina Deal

The Rs 46,500 rate (almost 10 times the residential rate for the area) that Sterling Biotech was reported to have been paying for a seedy building in Kalina, a flood-prone area of Mumbai suburbs, seems to have fallen through, if the Mumbai Mirror is to be believed. (read Sterling's Realty Excess)

This development follows the 30% drop in Bandra-Kurla Complex area. Obviously, Sterling could have realized that it was paying a ridiculous sum for land, simply because it was adjoining BKC. However, sources indicate that this may also be a ruse by the members of Vivek Apartments, the building in question, to deflect attention from the deal.

According to the Mumbai Mirror, Sterling has written to the society citing due diligence and advice of the legal team, as reason to call off the deal. It has asked a return of Rs 25 lakh earnest money, paid when this Rs 403 crore was agreed to. However, sources say that earnest monies are like call options and are not expected to be returned in the event of a deal falling through due to the buyer.

The cancellation of the deal may have stunned residents - some of whom have been quoted as saying, "If its too good to be true, it is." Many had paid Rs 8000 a sq ft to book new apartments in a new construction nearby, paying almost twice the prevailing rate. Now they may have to do a distress sale.

None of this appears to be putting sense in to residents who are in a state of shock. Many have said that other builders were willing to negotiate - however, this may be more wishful thinking than reality.

In a scenario, where stock markets have burned down 50-70% of investors money, it is highly unlikely that excess profits would flow in to the real estate market. Bangalore has already exhibited at 40% decline, and is slowly turning in to a buyer's market. Mumbai could be next.

Citi, AIG Pull out Rs 1500 cr from Akruti

Citi and AIG which were to invest Rs 1500 crore for a 16% stake in Akruti City (previously called Akruti Nirman) have now dumped the developer and pulled out. The main argument was the high valuations that Akruti was demanding, which -- given the current scenario -- they two PE firms were reluctant to agree with.

In January, Citi and AIG had proposed to pick up equity in Akruti through a preferential allotment, where Akruti would place up to 10.7 million shares. But the BSE Realty index has crashed 46% from its peak of 13,647 recorded on January 14.

After the deal was announced on January 23, shares of the company had touched a record high of Rs 1,399 during intra-day. Since then, there has been a sharp decline, which touched a low of Rs 682 on March 24, or down 50% in two months.

Read the ET story here

Monday, April 07, 2008

Smart Man Sells his Apartment 30% Cheaper

Praveen Malhotra is a smart man. And this is the kind of person we are looking for to trigger a collapse in the overheated Mumbai real estate market.

Malhotra lives in an eastern suburb of Bhandup in Mumbai, and had invested in a 2-BHK apartment overlooking the lush forests of Sanjay Gandhi National Park, where greedy builders had usurped forest land and built multi-storied structures flouting the Maharastra Private Forests Act.

Malhotra sold his apartment for Rs 27 lakh, almost 30% cheaper than what he purchased it for investment purposes. Malhotra has sensed that most buildings that have come up during the last real estate mania were based on the premise of unmitigated cash from foreign investors and a unbridled rise in real estate prices.

We are used to stock market manias and busts -- do not forget that tulip bulbs in 1600's Netherlands were sold for equivalent of today's $30,000 -- but the Indian real estate bust, which has started in 2008, is going to hurt people more than the 1929 stock market collapse hurt US investors. We are talking EMI defaults at the individual level and not at corporation levels.

Back to Malhotra, he feels that it is best to get out of the market before the rates go for a toss. He has even found a nice way to protect the interest of the buyer. He has signed a power of attorney agreement wherein the new buyer is a "custodian" of the flat until the Supreme Court gives the final verdict. The buyer of course is taking a huge risk, because obviously he is sinking Rs 27 lakh of his own money, since banks have stopped funding these properties.

Of course, when any bubble bursts, the first emotion is denial. And we are hearing exactly the same things. Builders in these forest lands are buying back flats at a discount of 15%, obviously trying to cash in on the panic. But remember that fools come in all shapes and sizes.

All registrations on forest lands are banned by the High Court, and hence those who are buying these apartments may in fact be catching what is known in stockmarket parlance as a "falling knife". The end result is only bleeding losses. Wait for some more time and these apartments could be selling for even less than 20% of current prices.

About so far 10 cases of Malhotra have been cited, but this is just the beginning. Give it a few weeks, and a 100 more will come to light.

Do not expect any resurgence in the stock markets to support this. A CRR hike is in the offing, no matter how much the RBI tries to stave this off. George Soros, legendary trader, as well as Warren Buffet, legendary investor, says the US dollar is going to sink. Where do you think new money is going to come in from?

Read the TOI story here

Ranbaxy Making Hostile Takeover in Orchid

Although there is no confirmation from Malvinder Singh, MD of Ranbaxy, the huge rise in Orchid from Rs 106 to Rs 220 points to an definite attempt of a hostile takeover in Orchid., which news sources say is Ranbaxy.

Orchid Chemicals crashed 40% in one day, one reason being that promoter K Raghavendra Rao bought up 7% stake using margin money from brokers Indiabulls and Religare.

When Bear Stearns - which owned a substantial chunk of Orchid - pressed a distress sale, the brokers made a margin call which Rao could not honor, and hence they pressed sales to recover their money. The net result was Orchid crashed 40% and more. It has since bounced back, but now with FCCB holders not inclined to exercise their options at significant premium, Orchid is bound to remain with a lot of debt on its books.

Rao, who is also managing director, and other promoters now own 17% of the company and their rather foolhardy method of investment, belies all financial sense. Their objective was to stave off any hostile takeover - and it was easy for a outside investor, since 17% is hardly any reason to give 100% control to Rao and C0. over management. While Mr Rao has cleared his dues to these two firms, he still owes nearly Rs 65 crore to FIs and his current stake is pledged to them.

However, Rao is in a bigger soup. If the financial investors who own 37% of the company support Ranbaxy, then Rao may no longer be a dominant force in the company.

Read a related ET story here

Sunday, April 06, 2008

Editorial: I Hope the Shit Has Hit the Ceiling

No newspaper has yet captured the trepidation that has enveloped the thousands of home buyers who were picking up second and third homes in the hope of renting them and making fast and easy money.

The game plan was simple: take a 15-year loan at 10-12% and have the rent fund the EMI. It was so simple that even housewives had become ace investors in real estate. Accidental millionaires now waxed eloquently about how astute they were in investing in real estate, when all they had done was simply put their money in to a home, because banks had started offering a measly 5-6% interest on fixed deposits.

Further, builders and newspapers issued colorful supplements on how great it was living in polluted cities like Mumbai as long as your place had some patch of shrub and a lot of glass and plastic and as long as they had names like Eden, Amrit, Luxuria, Palazzo; as long as there were buyers who believed that by purchasing these places, they were actually moving to the Himalayas, South of France or Italy. This, when all over the world, and especially the US, homes were dropping 15% each month. The general view going around in India, and loudly cheered on by the likes of ICICI's KV Kamat and HDFC's Keki Mistry was that we do not have a subprime issue in India. It appears that now we do.

Noone had anticipated that powerful builder lobbies would begin to lose their battle to environmentalists and the High Court. After all, they have been champions of bribing the BMC, government officials, ministers and bulldozing their ways through all opposition.

What will it be like a year from now in Kandivili where people have purchased flats at Rs 6,400 a square ft and now can neither register, complete their loans, nor sell it to anyone else. A grim mound of decay seems to be the final destination for Bhoomi Valley and Sun City, two of the projects that now face a bleak future.

Two hundred flats in Bhoomi Valley but only 7 have been occupied. Two hundred and fifty in Sun City and none occupied. The High Court orders of March 24, declaring all these projects on forest lands as illegal has put investors in a state of limbo.

Civic authorities have suspended any further issuance of No Objective Certificates post the court order, and harried buyers are banging on the doors of builders for their possession certificates. Further, banks have suspended all loans to buyers who have purchased on these lands.

The fear in the eyes of builders for once is very real. There are the usual denials: that the government does not know what it is saying, that the court will not rule against hapless home buyers, that there is an election in the offing and no government can afford to upset the voters.

What they have not bargained for is that in a city if 17 million, there are good 16.5 million who cannot buy a home because rates have spiralled to beyond ludicrous levels. That a few 500,000 can afford to sacrifice their lakhs of hard earned income for the larger good of the rest. After all, is this not what good democracy is all about: the majority simply wins irrespective of what is right or wrong.

I believe the courts must simply abide by the Constitution, and encroachment of forest and natural resources is a serious offence. I hope for the good of all of us that as far as this real estate mania is concerned, the shit has finally hit the ceiling.

IBM Bangalore has Started Retrenching

Insider news confirmed today: IBM has started retrenching in Bangalore. The software bust has started.

Buy Mumbai Flats on Carpet Area Only

Goodbye super built-up area. Long live transparency, if it can survive the first gasps of breath. Once again, despite some typical obfuscation, the Maharashtra government appears to be taking some steps to make home sales more transparent for the buyer.

On Monday, the Maharashtra Legislative Council will pass a bill, which will make it mandatory for builders to sell homes on a carpet area basis, rather than the ubiquitous measures called "built-up", "super built-up" and in some cases "super super built-up" areas. Things are so ludicrous that one contact in the building industry said that builders could soon be charging for floating particulate matter in the air around Mumbai.

For those who don't know, super built-up area is basically the area that is occupied by the lift, passages, balconies, ledges, parapets, terrace space etc, which builders claim as part of the apartment.

The tragedy of super built-up for the home buyer was that while these spaces are either part of design extensions or areas of common use, you pay the same rate for these non-utility or common use spaces, as for the living space within the home. There is no justification for charging a price of say Rs 5,000 per square feet, for the apartment, as well as for the passage outside.

The new bill will make things more transparent for the buyer, who usually cannot understand or argue against the super built-up component.

Although the new bill does make allowances for promoters to charge for common areas and special facilities in proportion to the carpet area, this in itself may not be a bad idea. Gymnasium, badminton court, tennis lawn, party room, etc., will henceforth not be charged as part of the apartment, but as charges for additional facilities.

No one expects prices to come down because of this new bill, but every home buyer can now expect a modicum of clarity.


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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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