Wednesday, May 21, 2008

Thane Real Estate Prices Start Tumbling

Runwal is offering free parking and a write-off on your stamp duty and registration costs, while Dosti is providing an upfront 10-15% concession. These Mumbai builders are offering sops to those willing to invest in their projects. Clearly, Thane's realty boom is slowly turning sour.

Encroachment of Forest lands by developers, a case that is now in the ambit of the Supreme Court, has made Thane a shaky destination for real estate home buyers. If the Supreme court case turns against them, they stand to lose their entire investment. Banks too are unwilling to fund such properties. Further compounding these problems are sky-high real estate rates.

Owners of apartments on forest land are even offering their homes for Rs 1,500 cheaper per sq ft, yet are unable to attract buyers. May is the peak month for real estate and a time when brokers and builders have a field's day, demanding prices according to whims and fancies. This has not been the case this year. In private brokers admit that they foresee a slowdown once monsoons arrive and the slack sets in.

According to Edelweiss analysts tracking the realty sector, demand for homes in Thane has fallen 20-30% percent in the last quarter. In Mulund it is 40-50 percent say broker sources. Despite this, builders are not toeing this line, but say that rates have in fact been increased 5-10% percent. This however is a gimmick, since all of this becomes negotiable once the money is placed on the table.

Affordability and forest land issue have become a bone of contention in Thane. No one wants to shell out Rs 4,200 to Rs 6,500 per sq ft for apartments in this city. Brokers are advising that unless there is a pressing need for a home, 4-5 months, homes are certain to fall further.

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Tuesday, May 20, 2008

Soros's Gloomy View has Lessons for India

Wake up Mr. RBI Governor and Mr. Finance Minister. It is you who hold the reins to prevent mishaps in the Indian economic story, before elections come about. If you sit aside and watch cheap PE funds sloshing around in to hideous real estate schemes, then I am certain you will not mind opening your ears a bit and listening to man who will not hesitate a bit from playing vulture to the carcasses of the stock markets.

The news web sites are full of George Soros and his gloomiest forecast of the US, UK and other world economies. But what catches my eye is his advice to the UK governor, which resonates like a message for our own YV Reddy.

Here are some of the Soros gems:

  • Central bankers are partly to blame for the credit crunch because of their past behavior in bailing out the financial sector whenever it got in to trouble for over-lending - the so-called moral hazard problem.
  • Central banks should explicitly target asset bubbles such as housing booms and try to stop them getting out of control, which is something they have resisted doing so far.
  • Tougher but smarter regulation would be needed in the future, in order to reduce the excess supply of credit in the economy. These could include measures to force banks to put aside more reserves in good times, to help cushion them in bad times.
YV Reddy if he is listening is certain to announce a larger than expected CRR hike soon, and ICICI's Kamath will not be able to keep home loan rates low any more.

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Delhi Prime Land Sold at 17 Percent Discount

In what is seen as a significant indicator of a cooling Indian realty market, a prime land deal in Delhi, was concluded at 17 percent discount to its price one year ago. The 1.18-acre land, sold for Rs 200 core, and bagged by Parsvnath Developers, was jointly owned by Mahajan Industries and the Videocon group in Connaught Place. The deal, at Rs 169 crore an acre, has come at a discount of almost 17 percent.

“We have come to the end of one property cycle. Speculators have exited the market and we are seeing a softening in the housing market. This will now spread to the commercial market and then finally impact land prices. So with borrowing cost going up, and prices softening, the euphoria towards land acquisition has certainly died down,” says Cushman & Wakefield Asia executive managing director Sanjay Verma.

Land prices in the national capital region (NCR), Mumbai suburbs, Bangalore and Hyderabad have corrected by up to 25% as property developers slow down their land purchases. Poor sales and lower availability of credit at higher cost have prompted property developers to end the mad rush to acquire land. Some of the developers have even backed out of land deals which were agreed upon as the slowdown hit the sector.

Prices have come down by up to 25% in Mumbai’s distant suburbs, including Thane and Belapur, and pockets of Hyderabad and Bangalore, according to property consultancy firm Knight Frank India. Prices in the NCR, with an exception of Faridabad and Delhi, too have witnessed a correction of up to 25%, says a senior Unitech executive, adding that transaction volume has dried up. Land prices in Faridabad have risen 10-30% in the past 3-4 months.

However, Faridabad is just catching up with its neighbouring locations. The prices in Faridabad are still lower than in Gurgaon or Noida and the current price rise is more towards building a parity with them. Land prices in Delhi are said to be stable.

Read the ET story here

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Monday, May 19, 2008

H&S in British Housing Market

When Eclectic Investor spoke in February 2008 of the paanwala top in the Indian housing market, many scoffed. However April 8, 2008, the the Economist has said that the party is over in the British housing market. There are views being propounded that the real-estate bust is slowly moving eastward from US, to UK, and now to Middle East, India and China.

However, have a look at the picture. Technical traders would recognized a very familiar pattern.

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India's Exploding Real Estate Market: Shades of the Florida Condo Bubble

By Anshu Sharma

I just returned after spending a few weeks in New Delhi. The incredible pace of growth in India inspired me to see if I can participate in the growth by investing. India does not allow direct investment in equity markets for non-resident Indian citizens (and definitely not foreigners). I do invest in US-listed ADR like Infosys and exchange traded funds or closed-end funds like the India Fund. But I wanted to invest directly. One option available is real-estate.

The numbers when it comes to real-estate just don't add up though. Real-estate in India is incredibly expensive and not just by Indian standards (with per capita GDP of US$ 700 per annum). Here are some numbers:

  • Condos in New Delhi, India: 2-bedroom, 1000 sq ft apartment for $200,000 [$200 per sq ft] (Source:
  • Condos in Chicago, USA: 2-bedroom, 1000 sq ft apartment for $400,000 [$400 per sq ft] (Source: Google Housing)

Now, remember that the median income in Chicago is 50 times more than that of New Delhi. Why Chicago? Because New Delhi can grow in all 4 directions much like Vegas can (and ChicagoManhattan and San Francisco that are geographically restricted. can in 2 directions) as compared to

Next, look at agricultural land prices.

  • Agricultural land in Faridabad, Haryana (adjacent to New Delhi much like New Jersey is to New York): $250,000 per acre (source:
  • Agricultural land in New Jersey: $12,000 per acre (source: USDA, and for comparison its $6,000 per acre in California and $8,000 per acre in Florida)

One may argue that Haryana is too close to Delhi. Land in Dehradun is available at only $100,000 per acre while its much cheaper at only $20,000 per acre in villages in Himachal Pradesh. All at prices way higher than Florida or California. Commercial land is even more expensive.

The issue of population density pops up every time I discuss this. Let me be clear, the population density of India is much higher than USA. But, when you compare New Jersey and India - New Jersey is actually slightly more densely populated. And New Jersey is much more densely populated than Haryana, India.

The next issue that comes up is one of regulation and availability. Yes, real-estate is regulated in India with laws that prevent easy buying and selling and land records that are poorly maintained. This simply means that the prices can be artificially inflated in the near term (that could last several years) but in the long-term must return to rational values.

Will someone please explain this to me? How can farmers that make less than $1000 per annum continue to own land that is valued (notionally) at several $100K? Are the low rental yields (2-5%) indicative of the bubble?

" 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," Mr. Paulson says.

"Mortgage experts were too caught up" in the housing boom.

In several interviews, Paulson made his first comments on how he made his historic coup. Merely holding a different opinion from the blundering herd wasn't enough to produce huge profits. He also had to think up a technical way to bet against the housing and mortgage markets, given that, as he notes, "you can't short houses."

I heard the same arguments repeatedly in India - house prices never go down etc. We shall see!

Anshu Sharma lives and works in the Silicon Valley. His current focus is on Software as a Service and the emerging SaaS Ecosystem.

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Sunday, May 18, 2008

John Paulson: King Bear of US Subprime

John Paulson has emerged as Wall Street's biggest beneficiary of the subprime crisis, gaining so much from foreclosures that George Soros invited him to lunch, to understand how he had laid his bets with instruments that did not exist a few years ago.

Funds Paulson runs were up $15 billion in 2007 - his investors relishing the bet he made against the seemingly unbridled US housing market. Paulson himself has taken home an estimated $3.7 billion, which is believed to be the largest one-day gain by any Wall Street professional.

You will not find much on Paulson, since before this bet, he was a rather unknown, although successful, hedge fund manager. His Paulson & Co firm employs 60 people and its success has centred on a venture called Credit Opportunities Fund, which returned 590 percent last year, according to trade magazine Alpha.

Paulson's gains came from defying conventional wisdom, like so many others before him: Warren Buffet for buying companies cheap in the 70's and Wilbur Ross, who consolidated steel, and George Soros, famous of shorting the British pound and making $1 billion in one day, in 1992.

In 2006, many thought that housing industry and mortgage markets were rock solid against any trouble, despite the loose lending standards in the markets. One major highlight during the housing boom were CDOs (collaterized debt obligations), which were products that had mortgage securities as the underlying, and these were sliced in to various products of differing risk levels, and sold to others, including foreign buyers.

Then to make these safer, insurance companies came up with credit-default swaps which protected buyers of CDOs against defaulting mortgage owners. The higher the risk of CDO slice, the higher the cost of the swap. The risk perception during the housing boom was so low, that these swaps were in fact being sold very cheap.

In betting on it to crumble, Paulson said: "I've never been involved in a trade that had such unlimited upside with a very limited downside." One of his strategy was to short the CDO slices. Another was to buy the credit-default swaps that complacent investors seemed to be pricing too low.

Paulson's most legendary statement depicts what happens in any manic rise: "Most 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," Mr. Paulson says. "Mortgage experts were too caught up" in the housing boom. Another one he had heard was, "You can't short houses."

Paulson's strategy was all about having the right view as much as it was about timing. He did not turn bearish too early, but waited for the correct technical moment. Many other followers of the housing market invested a few years earlier against the market only to have suffered painful losses waiting for a collapse that they finally closed their bearish bets.

As Peter Morici, professor of finance at the University of Maryland, says: "He saw what many of us suspected, but didn't have the courage of our convictions to put our money on."

Paulson's quest always led to asking his team the same question: "Where is the bubble we can short?" And rightly, they found it in housing. At this time, upbeat mortgage specialists kept repeating that home prices never fall on a national basis or that the Fed could save the market by slashing interest rates. The success came from the waiting game. As Paulson said once, quoting Winston Churchill, in an interview: "Never give in, never give in, never give in." Sounds familiar, isn't it?

Read the WSJ story here

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Seeking Alpha in Indian Real Estate

By Mukul Pareek

As US housing prices come down to more sustainable levels after a prolonged boom, one can only wonder if we can expect the same story to be played out in other economies. Maybe there is some alpha waiting to be picked up. One place that stands out from a sustainability perspective is India where real estate, whether residential or commercial, seems to have completely disconnected from local economic fundamentals.

Imagine the dusty suburbs of Bangalore, Delhi and Mumbai. Imagine neighborhoods with high rises that have no reliable power or water supply, battered roads if at all, no public transport and a shadow of crime such that locked houses are not safe even for a day. Now imagine these houses commanding prices that match prices in expensive New Jersey suburbs. Go figure. Perhaps there are positive returns to be had in a bet on these. But as John Paulson was quoted in the WSJ , “you can’t short houses”. But maybe we can short some of the companies that build and sell these houses.

The Indian equity markets have enjoyed a tremendous bull run over the past few years. In 2007 the Indian markets were up 47%. Real estate was up even more on a frenzy that makes New York and London decidedly tame. Seeing the time to cash in, multiple ‘mega-issues’ or IPOs from real estate developers came out in 2007. Exorbitantly priced to begin with, they did not disappoint their investors. These IPO stocks outperformed the index (the one that was up by 47%!) by a handsome margin. We look at how some of the larger public offerings have done since they were listed. Terrific!

Which brings us to the point of this post. How sustainable are half a million dollar apartments in a country with an average wage of about $1000 (a year). Sure there are rich people in poor countries. Maybe enough to keep things going merrily forever. But maybe not.

Most people do believe that this is a bubble that is bound to burst. Perhaps it is only a question of when, and not if. But as said Keynes – the market can stay irrational for longer than you can stay solvent. There is no shortage of alpha seekers (and of academics & economists ridiculed on television) that were hurt calling a false top to the real estate market in the US. The same can happen anywhere, but given the fizz going out of the global markets, the Indian bubble may probably be short lived too.

One bet may be to short some or a diversified portfolio of these real estate companies. The Indian markets have already seen a correction in 2008, and that may or may not continue. These stocks do contain significant beta, so to guard against the risk of the general market going up, perhaps a market neutral short position in some of these companies may be desirable. As is the nature of the game, many of these companies have not been listed for too long, so betas that I calculated in the table below are probably unreliable but perhaps not a bad starting point for making an estimate for the future.

Here are some tickers (on, or add .ns after the ticker for Yahoo Finance) with some data. All information is approximate, US dollar conversions have been done using a single rate of USD 1 = INR 40. Notice the volatility in the stocks, they go up and down fast for sure. Also look at their fantastic profit margins. Who cares about EBITDA when net income to revenue ratios are straight out of wonderland!

There are a number of Indian stocks that are listed either on the NASDAQ or the NYSE as ADRs. Many of them are also included in the broader Indian S&P Nifty-50 market index (referred to above). These include the following:

List of Indian stocks listed in the US that are also a part of the S&P Nifty-50 market index:
Dr Reddy's Labs - RDY
Infosys - INFY
Satyam - SAY
Satyam Technologies - SIFY
Sterlite - SLT
Tata Communications - TCL
Tata Motors - TTM
Wipro Ltd - WIT

The list above covers industry, banking, communications and technology, but does not include any exposure to the real estate sector - except probably with the exception of HDB and IBN that have mortgage lending operations in India.

This opens up an interesting possibility - consider building a synthetic portfolio where one goes short on the entire market using IFN, IIF or INP; and simultaneously going long on a portfolio of individual stocks listed above in a way that the net exposure is only to real estate or related stocks. Unfortunately, real estate stocks currently comprise only about 4% of the Indian stock market capitalization, and as of the date of this post only Unitech is part of the Nifty-50. That makes this strategy a bit tricky to achieve but in the coming days as DLF and other Indian companies get included in the Nifty-50, it would be possible to create a portfolio that is strongly correlated (positively or negatively) to the Indian real estate sector.

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This article first appeared on Mukul Pareek's Blog




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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