Saturday, April 19, 2008

Regulatory Authority Needed in Real Estate

One of the most discussed topics among home buyers these days is whether there should be an authority in the housing industry on the lines of the SEBI, IRDA and FMC, the regulatory organizations of equity, insurance and commodities markets.

Builders and developers seem to have unbridled sway over the housing industry, which in fact is an asset class in itself. While trading in all other asset classes are regulated, it is surprising that the companies in the real estate business have absolutely no overseer.

It is not that regulatory authorities have a lot of bite, but over time they mature and do in fact regulate the market to a great extent. Have we not all seen how the BSE functioned, before Sebi came in to existence? There were always the usual threats, as there were by the brokers in those days, but they later all cooped up and went about doing their business.

Today, the real estate business looks like a concerted effort by all builders to hold prices, while acquiring cheap land from government. For the builders, this is certainly be as good as it gets -- they have become the new East India Companies of India.

Properties in Mumbai are being parceled off by the government to builders who are financed by foreign money. No harm in this, but when the end-result is properties being sold for speculation to those living abroad, who have no desire to occupy these flats, but who in turn rent it out to the hapless local masses, then something in the cycle is detrimental in nature. This trend has started to kill the city, and eventually will kill the market too. However, unless checked before it is too late, the entire city would have paid a hefty price.

These days, a person earning Rs 1 crore a year, cannot think of buying a 1000 sq ft home -- forget mentioning the word "decent" -- in South Mumbai, where properties of these sizes retail for Rs 6-9 crore at the lowest end. In places like Malabar Hill and Napeansea Road, one square feet costs Rs 1 lakh! Today it is cheaper buying a 2000 sq ft ranch in California than owning a hole in Mumbai.

If the city is out of bounds, affordability now means that affluent salaried families have to move out of the suburban limits completely. This means traveling hours to their places of work, but remaining marooned on the fringes of the city. A similar situation was seen in Japan, in the 1980's, the dismal consequences of which are very visible even today.

Truly, in comparison, the Indian home buyer was better off during the days real estate was fragmented with the underworld running the show. In those days, you would pay off black money to the builders, but were able to afford an apartment in a specific quarter of the city.

These days, the goondas are wearing suits, ties and slick shoes, carrying notebooks with Powerpoint presentations, and holding the people of the city at ransom. Ever since the realty industry has got organized and corporatized, it has slaughtered home buyers. Homes have become stratospherically unreachable in every corner of the city. In fact in the same area, homes can cost widelydifferent, without an iota of change in surrounding infrastructure. When a TV star cannot afford to buy a place in Mumbai, one wonders who is it that is buying homes in Mumbai.

We will need to see some quick and dramatic action by the government in setting up a regulatory commission for real estate. Builders are now saying that this will force them to take money in black. Is this not ridiculous that a builder-developer can actually accept this with impunity, that if the government brings in a regulatory commission, it is willing to commit a crime against the nation.

Really speaking, black money is accepted even today. The full check payments exist only for far-flung townships outside of the city. So, nothing really has changed. So, as far as the home buyer is concerned, it is high time we see a housing industry regulatory commission. If SEBI, IRDA, and FMC have done a good job in their respective industries, there is no reason why one cannot make a difference in the housing industry.

Friday, April 18, 2008

BKC Land Sold for Rs 1270 Per Sq Ft?

Who says land in Mumbai is expensive?

Parsvnath Developers has been able to procure land in Bandra-Kurla Complex, measuring 30,820 sq m, in open tender for Rs 42 crore. The project is for development of a depot for BEST, Mumbai's local transport and electricity provider.

The project involves planning, design, construction and re-modeling a fully-equipped depot, staff housing and commercial offices. This is however not the point.

Let us calculate the cost of per sq land in BKC, which is sold by MMRDA, the Maharashtra government's arm for real estate development.

It works out to Rs 1270 per sq ft. This is the cost of land at which it has been acquired by a private developer, in Bandra-Kurla Complex, considered to be the hottest property in Mumbai. All the while, home buyers are asked to cough up Rs 30,000-50,000 per sq ft for buildings in this area. If this does not reek of some sort of connivance of government then what is?

These same developers want to build housing and commercial blocks on these lands, and sell them for exorbitant prices. Precisely why investment by real-estate fund manager, Saffron has valued the project at Rs 620 crore.

No harm in this, except that this is "organized butchering" of the 40% citizens who want to live legally in Mumbai. The balance 60% of Mumbai live in slums, and will be getting small rented apartments as compensation for their lands, which will be taken away and sold to builders at high prices, a la Dharavi.

Read the original BS story here

Thursday, April 17, 2008

Mumbai Realty Slump Becomes Very Real

They may have appeared unfazed, but they now have begun to face reality.

It is good to know that Times Property of April-12, 2008, mouthpiece of Mumbai's housing industry, has acknowledged that there will be a correction, after months of writing that there is no such thing in Mumbai.

The usual suspects quoted in the article also sheepishly accept a correction will happen, albeit they say it will be 15-20% ; at least this is 5% more to their usual cliche of 10-15%. This is a far cry from February 2008, when none of them accepted that a correction is possible.

Now, one can safely assume a expect a 50% correction in the Mumbai real estate markets -- over the next 1-2 years.

Bubbles, housing or any other, are not caused by demand from the consumers, or affordability or the existence of genuine buyers, although these are the oft-attributed reasons for any manic rise. While these factors can be contributors, the single-most reason for bubbles is too much cheap money floating in the markets, with nowhere to go. But money is going to get very expensive in the next 3 months.

The RBI will have to hike the interest rates, because there is no other way to beat the 7% and still growing inflation. The other option is to make the rupee stronger, which the RBI has always been reluctant to do. There is a view that this time both options could be used by the RBI, which can be a double whammy. With interest rates rising, more speculators would exit the markets, and builders would have to pay more on their borrowings, and consumers more on their home loans. Further, a rising rupee would hit US investments in India.

This may also be a reason for a flurry of PE investments in real estate and others in India, rather than being a mad rush for property investments, it may just be a concentration of a closing pipeline of investments, before the RBI raises interest rates and allows the rupee to further increase.

The RBI is in fact facing a piquant situation, where rising import costs are creating havoc for Indian consumers. Already the rising prices of steel and cement are hitting the roof, and those of rice and wheat are hitting the bellies.

Suddenly, the talking heads at real-estate brokers, builders and developers, as well as those who have purchased expensive homes, are now saying the correction is certain, but it will be of a shorter term nature. All of them sound more like a mother comforting her crying baby.

None of us can say how long this correction will last, and none of us know what shorter term means. We have been introxicated with 50% gains in stocks within months, so it is unlikely that our shorter term is going to be more than 3 months.

Essentially this means we are looking in the face of a longer term correction in real estate.

However, irrespective of what the yardstick may be, now not a single builder or broker is denying that we are set for at least a 18-24-month decline in property values. While all are keen on talking about the time, no one is certain about the depth of the decline. At most 20% is being quoted as the outer limit.

The general reasons why builders and brokers are putting on a brave face in Mumbai is that they believe there is a genuine shortage of supply. Fact of matter is, there is no genuine shortage. The shortage has been created by builders hoarding properties. Do a round of any builder in the Andheri-Goregaon belt, and you will see lots of flats which have been "pre-sold" to investors.

Builders also apportioning credit to the High Court order on the private forests issue for creating a shortage of homes. This is completely untrue.

The acute rise in the cost of Mumbai's real estate, as it would be in any other state, is due to a unholy nexus between Maharashtra's politicians, most of whom own swathes and swathes of property, the builders and brokers, and uncontrolled hoarding and cartelization.

80% Decline in Primary Realty Sales

There is an 80% decline in primary realty sales in India, according to Unitech's vice president (Sales and Marketing), Bhaskar Basu, who has upped the advertising of Unitech Grande, a 347-acre project outside of Delhi. Unitech is trying hard to lure buyers. for this project, which was started 8 months ago.

“Speculators are exiting real estate. Therefore, promotional activities have increased these days to woo buyers, who are the actual users now,” said Omaxe chairman Rohtas Goel, who has just launched a luxury apartment project.

“All developers will have to work harder now. And that’s why the visibility of promotion campaigns has gone up. Everyone is trying to grab a piece of the shrinking market,” said real estate consultancy Knight Frank India chairman Pranay Vakil.

Desperate times call for desperate measures. One builder in Mumbai is trying to make "brokers" out of customers. If you have picked an apartment or a plot in some grand scheme, you can convince your friend to buy too, and coolly pocket 2% as commission from the builder.

The times would be getting harder, is what the writing on the wall says. After years of frenetic sashaying, builders and developers are now scraping their best to close deals.

The focus of builders has now turned to high-earners in the banking sector who get their bonuses around this time. If this fails to enthuse executives, it would mean another step lower for the real estate industry.

Read the original ET story here

Tuesday, April 15, 2008

PE Investors Turn Wary of Real Estate

India’s real estate industry would like you to believe that the country’s real estate scenario is perfectly under control and that foreign investor interest is not waning at all.

However, some trends belie the fact that a good amount of wariness has crept in to the investor space too, many of whom are now opting to invest in SPVs – specific investments in projects, which are easy to monitor and exit – instead of a stake in the company.

The common refrain some months ago was “land bank”. Companies acquired land, and then determined the amount of construction possible on this land. They put a future price per sq ft to the amount of space to be constructed, and used it as a measure to determine the current value of the company. Companies were then listed based on these valuations.

How different was this from the manic 1990’s when Internet companies were valued based on future revenues? Millionaires are being created in real-time, based on future, and imagined, earnings of their companies.

However, the nose-grinding devastation of Emaar-MGF’s IPO suggests that Indian retail investors are no longer buying in to skyscraper-like projections of real-estate companies. Neither are the East-Asian investors. DLF and Indiabull’s REITs which were to be listed on the Singapore stock exchange were withdrawn some time ago.

It clearly means that institutions, investors and retail traders cannot, at least for a few years, think of buying in to real estate IPOs and flip it over on listing day. By the time the market is back on its feet, SEBI would have in place a circuit filter on Day 1. At present, there are no circuit filters applicable to a new stock on its first day of listing.

Thus, there is no reason for real estate buyers, to buy into highly priced properties, which are being sold through large glossies in the newspapers. When the BSE Realty index has fallen 46%, real estate will soon follow. And this is just the beginning.

Monday, April 14, 2008

The Commercial Property Bubble of Mumbai

Mumbai is in the middle of a "commercial property" bubble which is making residential properties unaffordable to even the "affluent salaried class" here. The government is making a Bandra-Kurla Complex (BKC) of the entire city.

It may be worthwhile to investigate if there is anything in the law that prevents commercial towers from coming up on lands meant for residential occupation. If there is, it can be the ultimate pinprick for this commercial property bubble of Mumbai.

The question many are asking, why is it that builders are still hanging on to their rates, when there is no marked demand from home buyers for the past 3 months, and when even brokers and developers admit that the sale of residential apartments have fallen 30-40%. What caused this immense maniacal rise of property prices up to 300% in 3 years. Why is it that in the same location, the cost for an apartment varies 100%, given the cost of land is the same?

The reason that every real estate expert and non-expert is ever so willing to dish out is the simplest: huge consumer demand. A pent-up demand for homes, further compounded by the High Court order on private forests lands. Sanctions on builders that have encroached on forest land, in areas such as Thane, Mulund, Bhandup, etc., they proffer has compounded the shortage in residential apartments, thus peaking rates further.

However, a cursory look will prove this incorrect.

A scan of advertisements, for homes in these areas, makes it clear that investors and home buyers have no interest. Instead of a pent-up demand, there is a simmering trepidation, that a home purchase may result in a confiscation of property. Brokers are actually advertising, "Not on Forest Land, "Clear Title Deed," etc in an effort to lure back buyers. So, the HC order creating a shortage does not hold water.

Given this scenario, what had taken and is keeping prices high in Mumbai?

The answer is simple: Excess money.

This overdose of cash is not the one that PE firms investing in SPVs for specific projects in Mumbai. This is one that builders are paying societies to vacate their old and dilapidated buildings, so that commercial towers can come up in their place.

Not a bad idea at all, except that allowing commercial property to come up on residential lands is actually the virus that has been hiding for too long. It is logical for builders and developers to focus on the most profitable areas of business, but it is up to the government to control and regulate excessive greed and exploitation.

The Maharashtra government is allowing builders and developers to buy out old residential buildings, and construct commercial towers on them. It is a well known fact that commercial property fetches up to 3-4 times the rate for a residential apartment, in peak times, and at least twice in stable times.

Quite obviously, builders are focusing on commercial property, paying up to 3 times the residential rate. The objective is simple: Pull down the old dilapidated structure and build a sky-high commercial property. Purchase cheap TDR from other slum redevelopment projects and add this on to this tower. Since the new structure is usually in the luxury segment, builders command at least twice prevailing commerical rate.

This has caused a unique situation. Slum dwellers, and those living in old one-room tenements, chawls etc., are being paid 3 times the residential rates and asked to vacate their properties. Now, these individuals, armed with excess cash do not mind paying twice the rate for a residential apartments in the same area,-- it's free money, in any case, said one such owner -- keeping 1/3rd of the new-found wealth in the bank.

An istriwala (one who irons clothes) was paid Rs 80 lakh to vacate his 100 sq ft hut in Bandra-Kurla Complex, where a new Tata project is under development. Another, who refused to budge was paid Rs 1 crore a few months later. Such is the mad rush for building commercial property.

This has set in to motion a vicious cycle, starting with every person claiming that his apartment is now worth the new rate paid by the builder, thus jacking up residential rates in the area. Seeing the neighbor with his millions, others are running up to banks, signing up mortgages, coughing up the premium and investing in properties, convinced it would either be picked up for commercial redevelopment, or at least see at 20% appreciation due to it. New builders come in, pay 3 times the new residential rate, thus taking rates up even further.

This vicious cycle has been responsible for the housing bubble in Mumbai. If left unchecked, we are not so far away from what happened in Tokyo in 1990's when the housing bubble of the 1980's was punctured, and Tokyo has never recovered till today.

It is a different story if new commercial areas are being developed, like Nariman Point and Bandra-Kurla Complex were built in the 1970's and 1990's respectively. But it makes no sense making a BKC out of an entire city.

It is time the Maharashtra government to step in , or risk being booted out.

Sunday, April 13, 2008

Foreign Banks Exit Own Mumbai Apartments

Desutsche Bank and Citibank, which are being quoted in newspapers as pouring heaps of private equity money in to projects of real estate developers, are themselves abandoning their residential properties in Mumbai.

Deutsche Bank is the same bank which has been reported as co-investing $500 million along with Lehman Brothers in a Unitech SPV.

Of course, no one expects them to give us the real reasons for selling these properties, but a change in the compensation structure is being quoted, along with the fact that these flats are located in "distant" South Mumbai, far away from the bank's current locations, and hence no senior directors want to stay in these houses.

However, until 3 months ago, Citibank itself had sold a property in NCPA Building in Nariman Point for Rs 34 crore, and has now put another residential property on Altamount Road for sale.
CB Richard Ellis (CBRE), the broker handling this transaction, has fixed a floor price of Rs 32,000 per sq ft.

It would be interesting to watch the price at which this property sells, or will it be doctored in back-end rebates to some NRI.

Some argue that these banks are only freeing fixed assets and releasing capital -- however, it is unusual for a bank to sell an asset with interminably rising value, if developers, brokers and some newspaper supplements are to be believed.

Recently, American Express Bank also sold some of their residential property, and HSBC has been selling property since 2006. Amex was also the bank that sold a Malabar Hill property to investor Rakesh Jhunjhunwala for Rs 25 crore.

Foreign banks have moved their operations from South Mumbai to business districts in suburban Mumbai, and now prefer to give their employees a fixed cash compensation every month, which the employees could use to pay the house rent or the instalments of a home loan.

So question is, what are these banks planning to do with the cash released by sale of these fixed assets. Real estate investments?

Quotable Quotes on The Housing Correction

"The correction will be of a short-term nature rather than a long-term one, lasting for about 18 months, after which they will stablize." -- Balaji Rao, Country Head, Starwood Capital.

What he means: For the next 18 months, prices will continuously decline, after which they could stop declining, but not necessarily rise.

"The suburban market will see a bit of slowdown, in addition to what was witnessed last year, but this will not be true for the island city." -- Sanjay Dutt, Joint Managing Director, Cushman & Weikfield.

What he means: Although, some others in his company were denying it, there has already been a correction last year in Mumbai suburbs, and some more slowdown can be expected, but not in South Mumbai.

"The next two years will see the market remain on hold, unless the US economy recovers and inflation comes under control." -- Pawan Malhotra, MD & CEO, Mahindra Lifespace.

What he means: Forget about any further price rises in the real estate industry. The US economy will not recover for 2 years.

"Any crisis leads to innovation and differentiation, hence we may see builders constructing, one BHKs or compact 2 BHKs in a bid to push volumes." -- Pawan Malhotra, MD & CEO, Mahindra Lifespace.

What he means: Builders have in so far deliberately not been not building 2-BHK houses, and we have been focusing on luxury apartments, but now we may want to cater to the middle class.

"During this interim period builders should adapt to the situation and continue to sell rather than going underground. The market wants to see resilient builders; hence builders should take a dip in their margins and continue selling, in order to emerge as long-term players in the market." -- Balaji Rao, Country Head, Starwood Capital.

What he means: I am wishful thinking.

Source: Times Property, Mumbai, April 12, 2008




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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