Indian Real Estate: Bubblicious as Any Other

So, how many times have you been told that the Indian real estate market is different? How wonderful you felt when price of apartments in Mumbai tripled, or prices for plots jumped 20 times in Chennai. Then, you took a loan from the bank last month and picked up an apartment, hoping the rent would pay off the EMI, and you would be sitting pretty with property for which over 20 years you would have paid 50% extra as bank interest. A good idea, if markets were headed just one way. Ironically, they do not, and if we look anything similar to the UK market, we should be headed down at least 30%.

A study conducted shows Indian real estate has been no different from any other in the world, especially the UK. As an overhang of the Raj, we seem to have replicated the UK real estate with some lag. Look at the chart below. This was the UK real estate market.

From the low in 1995, the average UK house price has risen from £50,930, to the £158,745 by the end of 2005, which is more than tripling in price. From peak to to peak, House prices have risen about the same 50%, as when the peaked in 1990. The trend analysis suggests any decline could take house prices to the previous peak of approx 105k, which would represent a staggering drop of 34% off current prices. For those who follow technicals, India has behaved exactly like this, then it's time for a 34% cut from today's prices.

A respected analyst friend of mine, said that tops in real estate prices, are not the same as they are in stocks. An peak and exhaustion in stock prices is usually represented by a spike, and then a drop, whereas a peak and exhaustion in real estate is represented by a plateau. This plateau has been reached in India, and should be construed as a top. In most cases, technically, real estate prices correct at least 30%, irrespective of what anyone says.

Considering some offers being made in the Indian market by brokers, who are encouraging clients to purchase apartments, at any price, with a suggestion that they need not be registered, since 3 months later they can be sold to some greater fool for a 40% markup. In most cases, such behavior of excess leverage is seen at tops in stock markets, and these suggestions can be equated to top-like behavior in real estate. Now for the 35% correction.

Read the Market Oracle article here

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Realty Gripe Strikes PE Fund Managers

The gripe is now being seen in the stomachs of the fund managers at PE funds. Until December 2007 and a few months in 2008, they were seen sashaying with the developers, wiggling their dollars pulled out of desperate investors in the US, who were facing a massive downturn in their real estate markets. Somehow, these PE funds were able to convince them that India and Asia were insulated from any US downturn, and that instead of earning 4% of returns in US, it was wise to invest for 25% in India.

They are not dancing anymore, instead their ass is grass, if this realty slump in India continues for another 6 months, and most likely it will. We need one nice high in the stock markets, and that seems to be coming, to make retail investors and baby speculators from entering lock stock and barrel in to real estate again. This will be the final high, because, post this, we will see such a severe shock, that it could be that real estate in India will not rise again.

When first mentioned in February, that a top had been reached in real estate, my own colleagues did not agree, but now as they see their homes drop from Rs 60 lakh to Rs 54 lakh, they are beginning to see the dawn of reality.

Now, evidence is showing that nearly 30% of realty deals are stuck as PE fund are asking developers to revalue the deals, else no money would come in. It appears a real close haircut if no a shave is in the offing for realty players. The norms for valuing real estate are no longer butter and jam, but hard crust.

Even Renuka Ramnath of ICICI Ventures, which has raised two funds of $1.5 billion, for India-specific investments, had to be prodded in to saying that these funds would be deployed in to real estate. She was on the BBC, talking more about infrastructure and retail, while the anchor pushed for realty, which she very half-heartedly agreed to. Reading between the lines, basically, real estate is no longer the favorite child of PE funds.

Even Saffron Asset Advisors, a fund that is relatively gung-ho over real estate, is very measured in their words. This fund has raised a lot of money for sector-specific investment, and has a large proportion allocated to real estate. However, Ritesh Vora, director (investments) for Saffron, said evaluations are more rigorous than they were a year ago.

But the situation was not so tough for real estate companies earlier. With the stock market on a downslide, real estate companies deferred their IPO plans and turned to PE funds to raise money. According to ICICI Securities, during the last two years, around 60 funds raised $30 billion in assets to invest in Indian real estate.

According to Cushman & Wakefield’s joint managing director, Anurag Mathur, the focus on delivery timelines, costs, quality and sales targets are now becoming the norm. Om Chaudhry, CEO of FIRE Capital Fund said more realistic valuations of projects are being seen.

Read the Hindu Business Line story here


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Chennai Real Estate Party Over

The hottest city in South India, Chennai, is now reeling under cooling real estate prices. Current rates are at least 20% lower than the same time last year. One of the main culprits in this is greed.

Take the case of owners of a property in Karpakkam, who were getting Rs 50 lakh per ground (2,400 sq ft) in March 2006, and Rs 54 lakh in December 2006. In March 2007, they demanded Rs 65 lakh and got it, but greed got to them and they upped it to Rs 70 lakh, the next week. Finally, the builder backed out and the deal fell through -- it has never been closed again. The owners are now stuck with property, whose price has now fallen to Rs 56 lakh a ground. All through 2006 and the first quarter of 2007, prices along the IT corridor had risen steeply due to anticipation about a bigger boom in the software and knowledge industries.

Chennai has actually shown greater appreciation than Mumbai, but has not made it to the headlines. There are interesting cases to note: Layouts promoted in 2002 at Rs 2.4 lakh per ground saw 20 times appreciation. Some owners of land had sold their properties for Rs 50 lakh per ground, reinvested the money in outlying and undeveloped areas and got 300 percent appreciation on the reinvested money. However, with the downturn setting in, those who delayed the sale of their land in the hope of reaping higher profits have been stranded. This applies especially to some of the layouts promoted by the Tamil Nadu Housing Board in Sholinganallur.

The plots in the TNHB layout that fetched Rs 45 lakh last year are now down to Rs 30 lakh. Businessmen earlier flipped properties purchased on 14% loans from banks and sold it for 100% profit. This is not happening any more. DLF’s low-cost housing plan is another factor that has affected speculators. One speculator purchased 15 acres on the Old Mahabalipuram Road (OMR). Then DLF came in and announced its Rs 2800-per-sq-ft property near Semmancherry, and this person, and others, are struggling to recoup their investment. By pricing its project Rs 1,000 to Rs 1,200 less per sq ft than other ongoing residential projects in the area, other builders had to scale down prices, and land demand fell.

Apartment prices are good indicators of land prices too. Slumping apartment prices, are causing land prices to sink too. Dreams of the IT corridor in Chennai are now turning sour. Builders are saying the IT Corridor was overrated and hype, because infrastructure was never in place. Further, water in this area is saline and brackish, and hence cannot be used for construction, thus increasing construction costs.

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Mumbai's Housing Shortage is Pure Hogwash

The hype about Mumbai 's short supply of apartments and heavy demand has proven to be nothing but builder hogwash. If you plan on investing in homes, just hold your horses. This June, home prices in prime Mumbai suburbs are expected to fall further.

I just got back from a meeting with a broker, for an apartment in Santacruz (Mumbai). The meeting was like a breath of fresh air. A first-hand experience of the fact that prices for homes in Mumbai are actually tapering off. In fact, they are down 20% for certain. The current rack rate is Rs 14,500 per sq ft in this area. It's a nice flat on the higher floors of this building. This is in the prime suburbs of Bandra and Santacruz, and not Mulund and Bhandup, the eastern suburbs, where one can be sure that they have fallen at least 30%.

What was a bigger relief is that when I asked for the topmost floor, there was the usual story of this being taken up by managers of one of India's largest private banks, and the fact that there was a 50:50 chance that they would be available for purchase. This is a clear indication that home investors booking easy loans are moving out of the market?

The same broker was offering to show me excellent grade-A apartments on Peter Dias Road, for Rs 18,000-20,000 per sq ft in Bandra (Mumbai). This is in the same suburb where an aquaintance, who I met last week, was saying rates had shot up to Rs 40,000 per sq ft. He had picked an apartment for Rs 80 lakh in 2004, and was offered Rs 4 crore about two months ago.

In Bandra, the housing rates in 2002 were about Rs 6,000-7,500. They had almost tripled in 6 years. This actual tripling happened in the last 4 years, while before this rates had been slumping for almost 6 years. It appears that the down cycle has started once again.

In 2002, an apartment in Mahim, which is on the northern edge of South Mumbai, a km south-west from Bandra, rates are hovering at Rs 12,500-14,000, whereas in 2002 they were between 4,000 to Rs 5,500.

We had seen in the month of March and April, a kind of limbo, where sellers were not willing to succumb to lower rates and buyers were hesitating to buy. The stalemate has now been broken, and sellers have blinked first.

This monsoon, real estate in Mumbai is certain to cool further.

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Santa Cruz Man Loses Shirt (and Everything Else) in Realty Bust

Drunk on the real estate mania, splurging on negative amortization loans, and staying invested in denial, has finally left a Santa Cruz (Calif., US) man naked and playing in the sand.

Steven Forgaard, 37, [not the person in the picture] has defaulted on nine homes and expects the banks to close all of them. He now says he considers it a mistake to have invested in the real estate market.

Forgaard – a software project manager – has become an insignia for all Bangalore software professionals who have done exactly the same, and stand to face a similar future in 6-8 months.

"I knew I was sitting on time bombs," Forgaard said. “I knew the market was going to go soft and I knew that property values would decline. But I figured that I had enough equity to survive the storm and sell or take the loss and refinance. I didn't anticipate a downturn of epic proportions such that home values are 40 percent less than they were,” he said.

Forgaard bought his first investment home in the booming housing market of North Las Vegas in 2004, followed in the next two years by eight others in such hot markets as Phoenix and Palm Springs, California, before he realized in 2006 that the situation was worse than he had feared. “I knew that the market was soft but at that point I'm realizing that this could really get ugly,” he said. “At that point I had a bad feeling in my stomach.” Forgaard thought he still had enough equity in the homes to “take a huge hit,” possibly losing most of his investment, but thought for a while that he could still ride out the storm. He is slated to lose his car and primary (home) and will have to exit Santa Cruz, where he was born and raised, and live by the beach.

Experts say speculators like Forgaard, who count on real estate values to keep rising to pay off their debt, play a risky game and doubly so when they use neg-am loans. The Forgaards likely will sell their Santa Cruz home and declare bankruptcy before banks start foreclosing on his properties. With a newborn son, they intend to start over in his wife's Northern California hometown. “Where I went wrong is I invested heavily in an area that wasn't my passion and I had a really demanding full-time job so I couldn't pay attention to nuances, the little indicators telling you the housing market was going soft," he said. "I was in over my head."

Read the Reuters story here

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