Monday, December 08, 2008

Do not Bail Out Real Estate Companies - Avinash MKB

After yesterday's stimulus package announcement for the Real Esate companies , I read an articke in the Economic Times about real estate companies claiming that the stimulus package was not enough and that they need more.

CEO # 1 says : "They could have done more …. should have cut the steel prices mores …..."

CEO # 2 says: "Package should be annouced for loans of upto 30 lakhs and not 20 lakhs , this is not enough."

This is really juvenile behavior on the part of real estate companies. They are crying hoarse about the inadequate sops from the government, while they have done little to stimulate the uptake in real estate via a price reduction.

I am unable to understand the reason why developers are not willing to cut prices (at least by 15-20 percent). While car companies and every other company is offering discounts to sell their stocks, real estate companies are sitting pretty on their profit margins.

As per my own experience of building a house in Bangalore and also as per the contractor (who also builds many apartments on contract basis) the average cost of constructing a quality apartment is around Rs 1000 to Rs 1200 per sq ft. If you include the cost of land then it would come up to Rs 1500-1700 per sq ft.

But what's the retail price of an apartment in Bangalore? It ranges between Rs 2300 (at the lower end ) to Rs 3200 (medium) to Rs 4000 (higher end). These real estate guys are making dream margins on each project (even IT companies don't make so much).

However, on the balance sheets of real estate companies the profit margins are shown lower simply because all profits made during the bull run were invested in creating more and more land banks.

Given all these I don't see a reason why one should give bailout packages, in terms of cheaper loans to the real estate companies. I believe that the real estate companies should now pay the price for their reckless expansion.

My humble request to the PM and FM is not to give any more sops to real estate companies until they cut prices by 20-30 percent.

Write to Avinash at avinashmkb@smellthecheeseblog.com

Posted by Eclectic Investor at 3:34 PM 5 comments  

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IN PASSING

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


“When 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.”

“Last 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.

"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, "Mortgage experts were too caught up." - John Paulson, trader, who bet against subprime market and made $15 billion.

The 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

Prachi 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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