Saturday, May 31, 2008

Emaar-MGF Stake Sale at 50% Discount; IPO Plans Put Off for 2 Years

Emaar MGF, whose Rs 690-per-share IPO was dramatically called off has sold its equity for Rs 300 a share, less than half the IPO target. This was done during the conversion of the preference shares sold to private investors at Rs 300 a share which were to be offloaded during the IPO to retail investors. Now, the same preference shares have been converted to equity at Rs 300 a piece.

Emaar-MGF is a collaboration between Dubai, UAE-based Emaar Group and New Delhi-based MGF Ltd. The IPO, had it been successful at Rs 690 per share, would have raised Rs 7,000 crore for Emaar-MGF, and would have taken its total valuation to Rs 66,000 crore. EMaar-MGF says it may not return to the IPO market for another 18-24 months .

The Emaar-MGF IPO fiasco should serve as a lesson for bleating goats and braying donkeys, who had been danching in the revelry that surrounded Indian realty companies. Most of these companies are more han 50% down from their highest peaks last year. In fact, there is nothing special or different about real estate as an asset class.

During the orgisastic dance pre-January 2008, investors were willing to pay any premium for real estate shares. Like the warm rush of heroin that rises in the addict's bloodstream, retail investors savored the big bold headlines in the newspapers and colorful supplements, pumping their savings and investible money in to shares of real estate companies. The high of Indian real estate had intoxicated everyone, for it was believed that property prices would rise straight from the waters of the Arabian sea to the peaks of Mount Everest.

However, someone forgot to factor in global warming, or so it seems.

Read the Livemint story here

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Friday, May 30, 2008

Unitech Project Hinges on Lehman's Rs 1500 Crore

Unitech's 97-acre project in Santacruz, Mumbai, from which Deutsche Bank had exited , may have just one investor - Lehman Brothers, itself a beleagured financial entity, if US reports are to be believed. The success of this project now hangs balance on Rs 1,500 crore, which Lehman is expected to confirm by June 15.

Unitech's plans to convert the Santacruz Koliwada area in to a residential-cum-commercial hub may take a beating if Lehman Brothers refuses to put down this cash. Earlier, Deutsche Bank which was a co-investor, became disconcerted about the valuations and refused to be part of this deal Now, however, it is reported that Lehman will put in the Rs 1,500 crore by itself.

Sources in the Mumbai real estate market say that Unitech had purchased this land when the prices were at its peak, and when property prices were expected to scale right up to Mount Everest from the shores of the Arabian Sea. Unitech had paid up Rs 500 crore for bagging the project, but could not muster the balance Rs 1,500 crore. Thus, it had approached the two banks for an SPV arrangement, wherein it offered stake for cash. Deutsche Bank however backed out. [Read the story here]. Lehman may now negotiate a higher stake on revaluation of the project profitability. Besides, it may not fund Unitech's Worli project.

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EMI Holidays: India's Subprime in the Making

An eerie trend is rearing its ugly face as builders get desperate to prop the flagging sales of apartments. In an echo of what caused the subprime crisis in the US, builders are now luring home buyers with loan options that resemble the exotic mortgages of the US.

Trends reported in Delhi point to EMI holidays, where you book an apartment by paying 10-15% down payment of the apartment's cost - determined by the builder - and arrange for your bank loan. Once you have your bank loan in place, the interest component would be paid by the builder until the flat is ready. Once possession is handed over, usually 18-24 months, you begin paying the balance EMIs.

Even in a seemingly straightforward home loan industry in India, loans can take on subtle flavors not easily visible to the borrower. There are all kinds of caveats loaded in to the agreements which emerge only in the event of a dispute. The EMI itself comprises a capital component and an interest component, which is determined by the bank.

Typically, an EMI holiday means no EMI is to be paid by the borrower until the possession of the apartment is given. This basically means the borrower does not have to pay the capital component until the apartment is in his possession. This non-payment of capital will obviously attract an interest which will be calculated and added on to the balance EMIs, which kick in after possession - there is indeed no free lunch. Home loan borrowers are seldom clear about the underlying structure of these loans.

Now, as far as the interest component of the EMI goes, this would be 'happily' shelled out by the builder. At 10% per annum, it is a steal for all builders, who now have ready access to the cash, since under RBI regulations, real estate funding is not automatically available from domestic banks.

EMI holidays have apparently impressed local Citigroup analysts, Ashish Jagnani and Aditya Narain, who have written glowing reports that such ideas would boost transaction activity. Perhaps they should consult their global chief, Vikram Pandit, who is sulking and brooding about how to make good the $400 writedowns Citibank had to endure, arising from similar kind of loans, which the bank had encouraged in the US.

In my view, EMI holidays are an indirect way of providing builders with funds, and an means to keep housing prices at current ridiculously high levels. Since the RBI has tightened its noose around banks lending for the real estate sector, they have come up with such schemes which contravene the law without transgression. Reports say that such trends are mostly a Delhi phenomenon, but this is not entirely true. HDFC Bank in fact offers a similar scheme for Nahar's Amrit Shakti Project in Powai, Mumbai. [Read the story here]

Experts and industry watchers have clearly sent out the message that EMI holiday schemes are simply a ruse by builders to sell their current inventory of apartments at exorbitant prices. Once you take a loan, home buyers would simply find themselves locked on to a rate, and with the prospect of a decelerating market, it is clear that anyone who buys property at current rates is looking at years of sliding property values.

Read the HT story here

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Sunday, May 25, 2008

Saffron Group Talks Long-Term in Real Estate Now

The biggest real estate private equity fund invested in India, the Saffron Group, is now talking long-term about Indian real estate.

How many times has this happened in your life? You bought shares of a company in the hope of gaining 30% in a couple of months, and you waxed eloquently its virtues at a South Mumbai champagne party. You woke up groggy-eyed next morning, and winced as you found out that the stock you hold has crumbled 20%.

You are not worried, you tell yourself, because you have purchased these shares for the long term. Now, you are quoting Warren Buffet and how he made his billions holding on to good stocks. In the long term - never mind Keynes says we are all dead - you convince yourself, your share is sure to return 5 times.

If you are sheepishly reading this and saying: Touche, how true; you are not to be ashamed. You are now in blue-blooded company; for some of the astute investors in Indian real estate, Saffron Group, said that it will remain put for a minimum of five years in upcoming properties and will buy out assets with assured rental income.

"Our strategy is to be a leading player in the field. We don't have any short-term view. The industry is growing and it will yield better results for another 10-15 years," Kapoor said.

This means just one thing: upcoming projects are not expected to return in less than 5 years, and Saffron is waiting in the wings to pick up distress sales of properties.

The Group, a brain-child of Ajoy Veer Kapoor and his peers from the banking fraternity, is the promoter of Euronext-listed Yatra Capital, an India-focused real estate fund. Yatra Capital has already raised $260 million in the Indian real estate market. A $350-450 million unlisted real estate fund, launched in February 2008, had an anchor investment of $75 million from Standard Life UK. It is expected to close by the end of 2008.

If you just purchased real estate in India, hold on to your property for the next 10-15 years, for gone are the super returns of 2004-07. No more 30% each year. For that matter, considering an 8 percent inflation tick-in, your interest rate on the home loan is certain to rise further.

Read the Business Standard story here

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Barclays Bank Pays Ludicrous Rent for Worli Office

Barclays Bank, a major global financial services provider, and Britain’s third-largest bank, has done a ludicrous rental deal for office space in Mumbai, where it has ended up agreeing to pay Rs 1.08 crore per month for a 15,000 sq ft office space.

In the same quarter, the financial institution saw its Q1 profits fall, suffering a 1.0 billion-pound (1.25 billion-euro, 1.95 billion-dollar) hit from the global credit crunch. Earlier, the UK bank had announced £1.7 billion ($3.3 billion) in new write-downs amid speculation that it was preparing for a rights issue, to strengthen its capital position.

Yet, the same bank has gone ahead and closed a ludicrous lease deal in Worli, Mumbai, where it is said to have paid Rs 725 per sq ft for 15,000 sq ft office space in an apartment block called Ceejay House (pictured left). This, at a time, when Citibank, in a bid to resurrect itself from the subprime crisis, is selling off global properties, including ones in Mumbai's poshest areas.

This deal is particularly intriguing, considering it is unimaginable that a bank like Barclays would pay such a high rate, which even seasonsed real estate professionals in Mumbai are calling a "freak deal".

The devil of course would appear in the details of the deal, not much of which has been reported. For one, Barclays already occupies 60,000 sq ft, in the same building, which it leased or purchased (we are not sure) in 2006. Interestingly, we do not know what rate Barclays has paid for the earlier deal, and whether the current deal includes the renewal of the older property. Property deals can include many things that do not get recorded in the lease document.

One of my imaginative scenarios are as follows:

  • Pay Rs 725 per sq ft for 15,000 sq ft but get the 60,000 sq ft. space for free.
  • Pay Rs 725 per sq ft for 5 years and get another 5 years free.
These are shenanigans of the real estate lobby to create an illusion that real estate is a great investment. As an aside, Ceejay House is adjacent to Poonam Chambers, occupied by NCP minister and aviation minister, Praful Patel, whose duplex and swimming pool spans over 35,000 square feet.

This story appeared in the Mumbai edition of The Times of India, dated March 24, 2008. Surprisingly it was not found online on the web site, at the time of writing this post.

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The Maya of Mumbai Real Estate Deals

It's a season of contradictions, and manipulations. While those with excess money are splurging on apartments, others despite their money, have nothing to own. The skewed Mumbai apartment markets has become a haven for either the super-rich or the denizens of the slums.

The real estate market, perched on a precarious ledge, is about to topple, but this does not mean there is respite for middle-class home buyers. And this means, that unlike 1995, the real estate industry is using all the ammunition in its arsenal, to make sure that the illusion of real estate industry growth persists for some more time.

Citibank, in a bid, to shore up money for its beleagured US operations, is selling all its expensive properties in Mumbai, and at the same time film actors and finance company executives are moving their excess cash in to apartments and property.

Vinod Khanna, yesteryears's film actor and Osho devotee, has paid Rs 1.2 lakh a square feet for an 2,400 sq ft apartment in Mumbai's Malabar Hill building, built in 1972, called Il Palazzo. The apartment, whose total cost is Rs 30 crore, was sold by the usual suspect Citibank. The sale was done at an auction held at its office in Bandra-Kurla Complex, and particpants included former Citi India chief, Jerry Rao, and others. As the reporter quipped, each tile of this apartment is more expensive than a Nano car. Il Palazzo has another famous resident, i.e. Rakesh Jhunjhunwala, who purchased an apartment for Rs 25 crore in 2006.

Citi has been on a selling spree of Mumbai apartments since 2007. It had also sold an apartment in the NCPA Building, Nariman Point, for Rs 97,900 a sq ft to a London-based NRI. Unrealted to Citibank, an apartment at Rs 90,000 a sq ft, in Usha Kiran, another 1970's building on Carmichael Road, which is in the same area as the new Mukesh Ambani tower, Antilla. The sale was supposedly made to an executive of Indiabulls, as mentioned by the owner Nirmal Zaveri, of Tribhivandas Bhimji Zaveri, for Rs 27 crore, but there have been no confirmations on the identity of the buyer. Zaveri himself plans to move to a neighboring and cheaper Villa Orb tower, where rates are at Rs 55,000 and Rs 65,000 per sq ft.

Aamir Khan, has agreed to pay Rs 33 crore, to pick up an entire housing society building in Santacruz, Mumbai. His objective: build an entire studio on the plot. The society was built around 32 years ago for SBI employees. There are 22 apartments in this complex, and each would get Rs 1.5 crore for their 730 sq ft home.

In another development, Barclays Bank, negotiated a lease deal of Rs 1 crore a month, for occupying 15,000 sq ft, in CeeJay House, Worli, the rent working out to Rs 745 per sq ft. Barclays already occupies 60,000 sq ft, in the same building, but there is no comment on whether this previously occupied space is owned or leased. Further, the current lease details have not been specified, hence any add-ons, freebies, or back-end rebates in cash, cannot be detected.

The magicians of the real estate business, providing back-end rebates, cheap funding with interest rate write-offs, and other tactics, are creating the ultimate illusion for the local-train traveler, that housing is the best business to put their money in to. Unfortunately, one just needs to check the sources of funds, to realize how the net cost of the apartment sold and rented is actually far less than what is made public through newspapers.

P.S: There appears to be a huge demand for buildings around 30 years old. This appears to be a common thread through the entire Mumbai belt, and considering that apartments are being picked up by politicians, finance company heads, and film actors, it appears that some Maharashtra government ruling is expected for redevelopment of buildings over 30 years old.

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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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