Friday, June 13, 2008

The Untold Stories of Long-term Investment in Property

The following has been sourced from responses to an opinion on a newspaper web site.

I am a so-called high earning person (Rs 15 lakh p.a) (1 lakh = 100,000), yet I am unable to buy any property in Mumbai. Let us look at the economics of purchasing a home, from the buyer's point of view, which articles in all the so-called "free press" never mention.

A 2-BHK flat currently costs around Rs 70 lakh to Rs 1 crore (1 crore = 10 million), in the areas of Mumbai, spanning Andheri to Malad. Even I chip in Rs 10 lakh upfront and take the base price of Rs 70 lakh, the EMI comes to around Rs 62000, which I would have to pay for 20 years, effectively making the cost of the house around Rs 1.5 crore over 20 years.

Every person in a middle level job like mine knows that he simply cannot last in that job for 5 years, let alone 20 years. So, how do I buy that house? The economics simply do not support the current prices, although speculators and the "free press" are trying their level best to create such an image.

In the US, home prices more than 3 times the annual median salary is considered a bubble zone, but here in India, prices are easily in excess of 5-7 times the annual median earning capacity, yet nobody is talking of a housing bubble. The only solution is for consumers to be united and simply refuse to buy for the next 6-12 months.

Last, but not least, builders are misquoting the cost of construction at Rs 1200-1500 per sq ft. The cost of an average construction is Rs 800 per sq ft and not what columnists are writing. Woodwork is the most expensive part of the construction, and builders in India do not provide this as part of construction. I say this on the basis of my personal experience, having built a house in New Delhi suburb. Surely builders, with their experience and scale, can perform far better in lowering this cost. I leave it to people to decide what should be a fair price for both builders and consumers but it certainly is not 6000-12000 per sq ft, existing in Mumbai.

Builders who have amassed fortunes over last 2-3 years and now are stuck trying to sell homes at atrocious prices. What is long term, may I ask. Logically if you buy property now, it has to be long-term, as you are buying at the peak of a cycle, rather call it all-your-life's term, since you would be servicing the EMIs as you grapple with a negative home equity in the years to come. Ask anyone in the metros or Tier-II cities who has bought property over last one year, and they will tell you how difficult it is to sell and make money. With high inflation and economy showing signs of slowing down, it is best to wait for another year and not get bogged down by greedy builders wanting to get rid of their properties at higher prices. Just wait, and like every other market, property will crack too. We will see more realistic levels (30-40% correction) if we dont get carried away by talks that are aimed at propping up the market.

Unknown writers, Ravi and Raj, responding to an article. You can read the original ET story here

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Kotak Realty Pulls Out of Rs 600 cr Deal for Hafeez Contractor House

The much-touted purchase of Hafeez Contractor House has fallen through, with Kotak Realty Fund withdrawing its Rs 600 crore offer.

The 2.5-lakh sq ft commercial property, being developed by Orbit Corp, has been on the pre-sale block for some time now, but slackening conditions are making investors back out. The result is that rates have fallen Rs 5000, from Rs 28,000 per sq ft.

The Kotak deal has been called off," said Orbit's chief financial officer Ramashriya Yadav confirming the development to a newspaper. Located in Lower Parel, Mumbai, the property was first offered to JSW Steel and JSW Power Trading for Rs 360 crore. However, Orbit wanted more and hence the deal was called off. Later, in September 2007, JSW Steel, JSW Power Trading and JSW Investments bought Orbit's commercial office space in Kalina, in suburban Mumbai, for Rs 807 crore.

Earlier, Kotak Realty Fund was in talks with Orbit to buy the property for Rs 600 crore but talks have fallen through.

The Hafeez Contractor House, with the capacity to house 500 offices, is now under construction and will be completed in two years.

According to a Lehman Brothers report, Lower Parel is expected to get as much as 5 million sq ft of office space in the next two years. This could cause prices to soften in this region. Till January, Lower Parel was commanding Rs 28,000 to Rs 31,000 per sq ft for prime office space. However, after the slowdown, the rate has fallen by about Rs 5,000 per sq ft, said an analyst from a brokerage firm.

Orbit was keen on pre-selling the Hafeez Contractor House to ensure smooth cash flows for its current projects, and it had expected that in two years several other projects would be competing with it.

Read the DNA story here

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Wednesday, June 11, 2008

Builders Face Cash Crunch as Real Estate Sales Slow Down

A liquidity crunch is slowly hitting developers and builders as property sales slow down, PE firms tighten purse strings, and input costs rise. All eyes are now on the Rs 1500 crore that Lehman Brothers is expected to invest in Unitech's Santacruz, Mumbai, venture [Read story here], and market speculation is that given Lehman's problems and its decisions to move out of mortgage and realty worldwide.

Builders are delaying projects and delivery since there appears to be a cash crunch in the system. Two things are compounding things further: one, rising inflation is going to force the RBI to increase interest rates, and banks will be forced to pass this on to consumers. The thing with real estate is, that once the slowdown sets in, the cycle lasts at least 3-5 years.

Investors, who had purchased apartments with the clear intent of capital gains, are now quickly palming off these properties at 15% discount to the builder quotes. Take Bandra for example. Rates varied from Rs 23,000 to 18,000, are now available at Rs 21,000 to Rs 15,000. The point to note is that this is just the beginning. Once, the rains come in, and the buyers become more objective in their purchases, these rates are likely to slide more.

While six months ago, sellers outnumbered buyers, these days, buyers have become scarce. Compounding this is that PE firms are no longer interested in investing in companies directly, and are prefering special purpose vehicles (SPVs) which are project-oriented.

Real estate companies use the percentage completion method to register sales and profits. Hence, if there is no offtake, and if input costs rise, their margins get squeezed. This means, expect writedowns in their balance sheets. With borrowing rates at 24%, those unable to complete their projects could run into massive trouble.

Read the DNA story here

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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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