Eclectic Investor

The Hidden Costs of Mutual Funds

2009-06-14T16:30:00.010+05:30

A lot of people invest in mutual funds because they believe that these mutual funds deliver a better return than they could hope to achieve in their lifetimes. Couple this with the glitzy advertising that mutual funds employ that it is difficult to avoid parting with at least some money to the friendly neighborhood financial advisor.

Nonetheless, the fact remains that past performance is not a measure for future performance. Mutual funds are linked to the markets and markets can move up, down and sideways for years.

The biggest problem of investing in mutual funds is not so much average or poor performance but the fact that most funds perform poorly is because the fund manager and the asset management company take large slices of the profit pie even before it reaches your table.

Costs are the biggest problem with mutual funds and responsible for most of the sub-par performance of the funds. What is worse is that the fund industry go out of their way to hide costs by using complex financial structures and using complicated terms. Most investors lack understanding of these and hence do not question.

Fees can be broken down into two categories:

1. Ongoing yearly fees to keep you invested in the fund.

2. Transaction fees paid when you buy or sell shares in a fund (loads).

The Expense Ratio

Cost of hiring fund managers: Usually 0.5 percent to 1 percent of the assets under management. This may appear small but note that this is the value of the assets and not a percentage of profits. Thus this sum gets deducted before the profits are calculated. Sometimes this could work up to 40 percent of the profits made by this fund manager.

Administrative Costs

Costs of postage, accounting, customer service, rents, staff, etc.

Advertising and Promotions

Brokerage commissions paid when purchasing shares and toward advertising and promoting the fund.

On the whole, expense ratios range from as low as 0.2% (usually for index funds) to as high as 2%. The average equity mutual fund charges around 1.3%-1.5%.

Loads or Distribution Costs

There are entry loads and exit loads. Loads are costs paid to ensure the funds are available at every nook and corner. They are also called distribution costs. These are paid to the mutual fund agents. The extra kickback you receive from your mutual fund agent is a portion of the load he receives.

Loads comprise entry and exit loads. Entry loads are when you pay a fee to enter a mutual fund. Usually 2-5 percent of the investment. So if you pay Rs 1,000 for the investment in to the mutual fund, you will get just Rs 950 worth of units.

Exit loads are charged if you exit the fund before a certain time period. For example, some funds will charge an exit load if you disinvest before one year while others will lock you in for 3 or 5 years. As the number of years increase the exit load is expected to reduce and in the last year of the lock-in, it becomes zero.

The key to good mutual fund investing is to purchase units of those funds which do not charge any kind of loads.

Garbagemen Beat FMs in Predicting Economy

2009-05-26T08:51:00.005+05:30

In December of 1994, the economists sent a questionnaire to four chairmen of multinational companies, former ﬁnance ministers from four countries, four Oxford University students, and four garbagemen. They were asked to predict average economic prospects including world economic growth, inﬂation, the price of oil, and the pound’s exchange rate against the dollar in the ten years following 1994. The economists said the garbagemen and company bosses tied for ﬁrst with the predictions. The ﬁnance ministers came in last.

Extracted from the book The Options Course by George Fontanills.

Real Estate Prices Slump Toward 2003 Levels

2009-03-14T10:16:00.009+05:30

Remember the time when an upmarket property in Malabar Hill Mumbai cost Rs 12,000-17,000 per sq ft. The same situation is likely to come back within a few months according to real estate agents in Mumbai. Prices here had touched between Rs 25,000 to Rs 45,000 per square feet.

New Delhi too is seeing a clear reversal in times. Builders who purchased properties in early 2008 are now wriggling out of deals. In early 2008, a builder had negotiated a Rs 18-crore deal for a 2,925 sq ft house in New Delhi’s upscale Defence Colony area. His objective was to demolish the house sitting on the land and develop apartments, hoping for a return of about 30 percent. However, today he has opted out of the deal losing even the Rs 50 lakh paid he had paid as token money. The same property is now being valued at Rs 9-10 crore.

Developers are dropping prices but the buyers are simply not coming. It is likely that once the panic button is hit, prices could touch rock bottom within months. There are no financiers in the market, and in Delhi, volumes are down 95 percent from peak. New projects launched are 40 percent cheaper than before. NCR regions are also hit. A 11,250 sq ft home in Golf Links, which was purchased for Rs 70 crore, is now available for Rs 50 crore, but there are few takers.

Mumbai's troubled times continue. Sometime ago a deal was made in Usha Kiran Apartments, on Altamount Road, by an executive of a financial broker. Within days of almost finalizing the deal, the executive backed out. Ten months ago, actor Vinod Khanna offered to pay Rs 1.25 lakh per sq ft for a 2,500 sq ft apartment for the ultra-luxury apartments, El Palazzo, located in the Hanging Gardens area of Malabar Hill. Subsequently Khanna backed out, but it was a wise decision.

Current prices in Il Palazzo are around Rs 70,000 to Rs 75,000 per sq ft. Near here, in Pedder Road, rates are around Rs 45,000 per sq ft. A few kilometers away, in Mumbai's CBD, Nariman Point, a London-based Indian national acquired a 3,475 sq ft property at NCPA Apartments, at Rs 97,842 per sq ft, nearly six months ago, but rates there are almost half that now.

In the central Mumbai’s Worli and Lower Parel areas, rates are down to Rs 12,000-18,000 per sq ft, while in Bandra they have fallen by more than a fifth to Rs 15,000-25,000.

Where price drops have been of the order of 50 percent, buyers appear to be showing interest. Orbit Corporation is now asking Rs 16,000 per sq ft for its new project in Lower Parel down from Rs 35,000 per sq ft.

In India’s technology capital Bangalore, prices have fallen by up to 25 percent in some area, says a Morgan Stanley report, and DLF, India’s biggest real estate company, cut rates by about 30 percent at its upcoming project.

Brigade Group's The Gateway project, one of the oldest localities in town, is quoting at Rs 5,090 per sq ft against Rs 5,790 per sq ft last year. Second sales are going at Rs 4,700-Rs 4,800 per square ft.

Kolkata too is cooling down on the real estate front. Prices are off their mid-2008 peaks. In areas such as Ballygunge Circular Road, Sunny Park and Queens Park rates, which were Rs 8,500-10,000 per sq ft in January 2008 jumped to Rs 13,000-14,000 in June-July before dropping to Rs 9,000-11,000. Residential properties sold at Rs 12,000-15,000 per sq ft last year, are averaging Rs 9,000-10,000 per sq ft now.

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The Simple Explanation to What Happened at Satyam

2009-01-08T18:27:00.004+05:30

Everyone is asking the question: What happened to Satyam's Rs 5,400 crore cash that was on the books. Amid all the hype, here's the simple story.

Ramlinga Raju found a way to give Rs 5,400 crore to his son's real estate companies Maytas Infrastructure and Maytas Properties. This money had already been siphoned out before the declaration that Satyam was buying out the two Maytas companies.

However, the shareholder revolt that followed forced Ramlinga Raju to cancel the buyouts. But the money had already been transferred out.

The other simple story: Satyam had been fudging figures for years. There was no substantial cash in any case. The only way to show this cash as spent, was to acquire Maytas and show is as an asset purchased for the cash.

This way cash from reserves would be shown as investments or cash paid for aquisition.

Either way, Ramlinga Raju screwed up.

Blame the Government for Real Estate Mania

2008-12-15T11:54:00.022+05:30

The best way to dampen real estate spiral is to make capital gains on real estate compulsory and not provide any kind of exit routes. After all why should reinvestment back in to property save you capital gains tax.

When you purchase shares of Tata Steel, and sell it for a profit, you pay capital gains tax on that transaction, whether or not you reinvest the money in to Infosys or not. So, why should a person selling his apartment in Mumbai be allowed to save tax, but only if he reinvests the proceeds in to an apartment in Bangalore?

The Indian government is guilty of keeping an excessive real estate spiral in place. It has kept the real estate boom going, by providing an exit route for real estate investors, via reinvestment in property.

In order to save capital gains tax on property the government says that you can reinvest the money within one year in to real estate and avoid payment of capital gains tax. Alternatively, you lock this money in to a capital gains bonds, which pays you 5 percent each year, for the next five years. At the end of the tenure the capital and the interest becomes tax-free. The capital gains on real estate is taxed at 20 percent for long-term capital gains and 30 percent for short-term capital gains.

Who picks property at Rs 2 per square feet and sells it at Rs 2000 per square feet. It is none but politicians, especially those who are in power. The Indian government has perpetuated a constant stream of investment in real estate by introducing this exit on capital gains.

As Sam Zell said, there is no shortage of land in India, but there is shortage of zoned land, which means land freed for real estate development. This land is controlled by the government. Zoned land is never made available to individual home buyers.

Why is it, that people who can pay Rs 30,000 per square feet for an apartment are not allowed to pay Rs 17,000 per square feet for land, on which they can build their own homes.

The government's job is to focus on creating new cities, by providing infrastructure (excuse this buzzword) - in simple term, water, electricity and roads. Instead, politicians focus on acquiring cheap land, doubling FSI, and selling them at profits that even the stock market cannot provide. This is why real estate is such a darling of the chosen few in India.

Thus, it makes sense, that when one votes, it is always in the best interest of the people to ensure that one single party never remains in power for more than one term. If it is a choice between theivves, the best thing a voter can do is to divide the spoils and exercise at least one wee bit of control over the overall process.

Always vote out the incumbent government, and bring in a new one. This is the sanest thing to do. Irrespective of what the party stands for, just make sure they do not rule for more than one year.

Do not Bail Out Real Estate Companies - Avinash MKB

2008-12-08T15:34:00.008+05:30

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

Hiranandani Exploited Middle Class for Super Rich

2008-12-05T08:41:00.004+05:30

Mumbai builder, Niranjan Hiranandani, exploited a middle class housing scheme in Powai to construct luxury apartments catering to the superrich. This comes across from a High Court order passed Thursday preventing the builder from selling more than two flats to one person.

In 1986, builder Niranjan Hiranandani was allowed to construct over 230 acres of land under the Powai Area Development Scheme, (PADS), in which 50 percent of the flats constructed had to be less than 40 square meters (430 square feet) and no flat could exceed 80 sq meters (861 sq ft). The objective was to allow the burgeoning middle class to benefit from the scheme.

However, in 1989, Hiranandani was provided an exemption allowing it to merge flats but the amalgamated flats could not exceed 15 percent of the total development.

However, the greedy developer built flats of area 1870 sq ft and 4925 sq ft which are currently priced at Rs 4 crore and Rs 8 crore respectively. In March 2008, a report submitted by the MMRDA confirmed the violations. However, the state government allowed the company to get away with just Rs 3 crore as a penalty.

Today's judgment came as a victory for petitioners, Kamlakar Satve and Rajendra Thacker. The judges said that the developer could carry out further construction at its own risk. The next hearing is December 18 when all parties have to file their replies.

Read the story here

Dubai Debt to GDP a Whopping 148 Percent

2008-11-30T19:50:00.003+05:30

The days of sipping black tea over puffs on shi-sha are over. There will be no more easy on Friday mornings, when expatriates would laze in the security that Dubai was India's cleanest city - considering the number of Indians here.

Many at times would argue that a European lifestyle, without citizenship and rights, was as good in the desert than one that was offered in the snowy mountains of Canada or coast of Australia or the islands of New Zealand. One could have it all here in Dubai, without the attendant niggling irritant called income tax.

Well until October, nobody cared what the GDP or inflation of Dubai was. They did not care to inform the world community anyway, as long as property prices in Dubai skyrocketed and speculators minted money with every 10 percent put down to book an off-plan apartment.

This was supposed to be Wonderland, but Alice has to wake up some day, and this day is now. When she does wake up indeed, Wonderland remains just a fantasy. And so it will be in 2009.

Millions of expatriates would find 2009 the most painful year in their history. God would indeed send the angel of death to knock them out. So many had got accustomed to easy speculation in real estate - a lot did in fact make money, only to invest in bigger and larger projects with more leverage - building their proverbial castles in the sands.

As I had said earlier, the devil has now come home to roost. Dubai has declared its debt through formal speeches of its member of the Executive Council, Mohammed Al Abbar, who said the level of debt owed by the Dubai government is $10 billion, with a further $ 70 billion owed by state-owned companies.

Dubai’s GDP is $54 billion, according to a source that releases such data, which puts Dubai’s debt to GDP ratio at 148 percent.

MHCI Chief Seeks Greater Fools in Gulf NRIs

2008-11-29T18:19:00.010+05:30

Trust desperate real estate developers to act even more foolishly. Zubin Mehta, CEO of the Maharashtra Chamber of Housing Industry (MCHI), is seeking greater fools for his real estate industry a little too late in the day, when even the fools have lost their money.

Mehta said MCHI is targeting UAE NRIs to purchase real estate projects in India, his argument being NRIs could stand to gain up to 20 percent if they purchase now, since the Indian rupee has fallen by this value against the US dollar.

Why UAE NRIs? He said that these folks work to buy a home in India, unlike those in UK and US, who are given residential status and further citizenship in those countries. Good deals are now available, said Mehta, pointing to a depreciating rupee, discounts from builders, facilities like free parking and a stamp duty write-off.

However, Mehta would have a tough task convincing Gulf NRIs, who have already burned their money investing in the Dubai real estate market. Real estate in the Burj Tower area of Dubai is reported to have fallen 50 percent in last three weeks.

Mehta also added that he expects the Indian real estate market to perk up January. Now this is really desperation.

Times Benchmark Reflects Residential Property Slump

2008-11-29T17:56:00.006+05:30

Times Property, the property supplement of the Times of India, Mumbai, has changed its Benchmark column to reflect the slump in residential property rates in Mumbai. Benchmark features on the front page of the Times Property Supplement of the newspaper that appears every Saturday. Data for this section is supplied by Mumbai broker Narain's Corp,

Benchmark is widely read and referred to by home buyers in Mumbai.

Despite the massive price correction, Times Property has reacted slightly slower, mainly because the data supplier Narain's Corp was reluctant to do so.

While Benchmark shows corrections in the suburbs, its South Mumbai rates are shown has untouched. However, it may take a little more time before the data supplier accepts the new reality.

The reductions in Times Property's Benchmark will bring cheer to new home buyers.

Rottenization

2008-11-28T08:46:00.015+05:30

It has been at least four years since I read articles talking about good values and the right reasons for business success. During the last quartet of years it appears as if the belief in doing good seemed to have been lost, having got replaced by gung-hoism. Thankfully, with this global downturn, the good things should be back and good things lead to great things.

Take the example of Bangalore. I lived in Bangalore in the late 80's and early 90's. The city was a brilliant mix of values and great weather, heritage, history and nostalgia. Then they discovered it to be the Silicon Valley of India. All of a sudden, there was a wave of thinking about how similar Bangalore was to the Bay Area.

Indians from the US suddenly descended in to the city and set up home here, promoting the idea that one could earn salaries in the US but live offshore, in inexpensive Bangalore. The number of NRIs suddenly 'finding' Bangalore was surprisingly higher than during the tech boom of 1998-2001.

In no time, real estate became the most favored investment and locals who owned ancestral property - and those who purchased it as farmland - began to sell it at a premium to greedy but gullible NRIs. The very people who moaned about Bangalore losing its old world charm were now selling land like fresh cakes at the local Iyengar Bakery. No thought was given to infrastructure and preservation of culture or heritage, or nature.

The city, which was renowned for its flora - huge gigantic trees over hundreds of years old - was fast being replaced by the visions of the financiers, and ideas of those living in deserts and arid lands. All of this laid out in neat slices, compressed and packaged as progress. So, what has all this progress done to Bangalore?

Clogged roads, 3-hour drives to the airport and vague debates on the timings for local pubs, sponsored by the local corporate brewer. The beer capital of India did not give a thought on what laws should be put in place against those drinking, driving and running someone over in one night. This is called a mad culture of "investing in real estate", which never allows for thought on how the city should develop.

Internet, and information technology, and consequently digitalization were supposed to make life cleaner and better, for rich and poor, but what has it done. Bangalore, instead, has become another Mumbai - with its hyper real estate prices, fast deteriorating infrastructure, congested roads, pollution and crime. Good folks with good money were replaced by home loan-loaded ecstatic rodeos, riding some new wave of software jobs, airline jobs or financial services jobs, and what have you, thinking that they were writing the story for the next decade. Suddenly debt was cool, and "this is how it is in the US" was a statement for every financial misstep possible.

Flipping homes became as easy as flipping burgers. Just put down 10 percent, book a property, sell it for 20 percent profit next quarter. Another variation was: Buy an inflated property on mortgage, calculate the monthly EMI, and expect the rent to pay off the EMI. Real estate trading became the new casino, in which all could participate, without understanding it. Ever heard of options in commodities and stock? What we were seeing between 2005-2007 was real-estate option trading, without any kind regulation - a perfect resume for disaster if you do not know what options can do.

Having seen first-hand the Tech boom and bust - I know enthusiasm is great for start-ups but it does not pay in the long run. Most people confuse enthusiasm with happiness. In the Tech boom of 2000, the Internet was supposed to be the great leveler, so anyone with an Internet account and a url was a company. Venture capitalists became the new kids in town, peddling the deadly shot in to the veins of start-ups - cheap capital. Meetings were held where puffed-up child-CEOs (not very different mentally from the child soldiers of Africa) were asked business plans with specific targets for burning money. There were meetings where one was given a dressing down for not spending enough. If it was burning money in 1998 then, it was taking on debt in 2004 that was the new mantra.

Frankly, the impending rout of real estate - it has not even started, mind you - will provide a great pause for all, unless of course we are overloaded with debt, having purchased property with the idea of flipping them over in 3 months and worse still, hoping to rent it for more than the EMI. Clearly, worldwide, this party is now over!

Many ask me why I am delighted with this rout of real estate stocks. I think it comes from deep within. I despise this rottenization of livable spaces, invading, decimating and converting organic material in to concrete. It's a contradiction, that we first burn down forests, fill the space up with processed rubble and then put out ads that say: "Come live in the lush greenery". Ask those who purchased apartments in Powai (Mumbai) in 1995. How lush is their environment today?

What makes real estate dangerous is that you have the most enthusiastic and emotional fools with the least ability buying in to this. The mass participation in speculation thus causes an almost uncontrolled spiraling of prices.

The repercussions of a never-ending boom in land would have been disastrous. Where would this have led us? The commercialization of water? We almost thought of this. How about air?

Fortunately, booms and busts are self-correcting bootstrapping mechanisms. Thankfully, Nature finds its own corrective path, and as this real estate mania grinds to a halt over the next 2 to 5 years, it will allow us to find our real selves and values. By the time the next bull run starts, we would have spent years "at the grinding mill" and done our time.

However, future generations would perhaps not learn from this financial turmoil, as we have not from the earlier ones, because, as is the nature of emotional beings, we will always get mired in our own ecstasies.

Dubai Developers Invoke 'Seize Property' Clause

2008-11-26T21:11:00.007+05:30

A new trend is emerging in Dubai, which has many developers invoking a default clause in the sale agreements, which state that if a purchaser defaults on payment of installments, the developer can keep the earlier payments as well as the property.

This is causing speculators a lot of grief, since many had paid the first deposit as a means of booking the property and had hoped to exit before the next installment.

However, Dubai lawyer Kavita Panicker, says she receives "two or three calls each day" from US-based investors regarding property purchased in Dubai. Most cannot pay the installments and are facing problems paying installments. She said these investors are happy to exit at a loss.

However, developers are reluctant to take the properties back and are invoking the seize property clause in the sale agreements.

Dubai's Estimated Debt 100 Percent of GDP

2008-11-26T16:04:00.005+05:30

A look at Dubai's economy:

Tourism, retail and real estate, which all show signs of being strongly affected by the present world downturn, together contribute around 30% percent of GDP.
Financial services, hit heavily by the global crisis, contribute around 10 percent of GDP.
The energy sector contributes only around 6 percent of GDP.
Wholesale, transport and storage, which are also likely to be negatively affected, also contribute heavily to the economy.

The emirate's debt is estimated at roughly 100 percent of GDP.

The Mullahs Have Landed - in Dubai

2008-11-25T20:12:00.008+05:30

Dubai is soon headed for a crisis of such huge proportions that its expatriate population has never seen ever.

A double whammy of weak crude prices - down from $150 to $50 a barrel - and a weaker US currency - petrodollars - will make its ruling Executive council scour high and low for ideas on how to fund the highly leveraged property market balloon it has created and what to make of asset depreciation. In many ways, the government has got caught in a whirlpool of its own making.

For expatriates, especially those who made laughable investments believing that Las Vegas could be created around the fringes of Islamic fundamentalism, this could be the wake-up call for a long dreary nuclear winter.

With the pain starting to ride down the nerve to common people, Dubai's success and any impending failure would get straightaway tied to the non-Islamic indulgences of the place. Financial pain gives rise to conservatism and religious extremism. With Dubai sandwiched between Shia Iran and Sunni Saudi Arabia, it could get caught in any crossfire.

The role of Dubai has never been understood; why is Dubai so powerful within the Emirates - even though it has no oil, no manufacturing base, nor has it been able to achieve Singapore's status as a port of repute. Yet, it has been able to hold up to Abu Dhabi, which owns 90 percent of the UAE's oil, and whose rulers, although more powerful, are far more low profile.

One reason that comes to mind is that Dubai is a refiner for Iran's oil, and a lot of refining margins are tied to the price of oil, which means the last four years were a bonanza for Dubai. This perhaps explains its clout. With clout, comes ambition, and with ambition a penchant for breaking rules, and Dubai has had all of it. In fact its direction toward becoming a tourism hub for Middle East revelers has always been watched closely by the Islamic right.

Dubai has no choice, because tourism in desert cannot takeoff without prostitution, alcohol or gambling. There is always talk about how activities in Dubai are frowned upon by the conservative Islamic countries. Some time in 2005 there was a rumor of some threats by Islamic extremists to bomb City Center, a shopping mall in Dubai, all of which was well-handled and overcome without alarm. Clearly, it had become evident even then that Dubai's success was getting increasingly uncomfortable for some, and sooner or later there was bound to be trouble.

However, before Islamic conservatism could get it, the credit crisis from the West got its goat. As much as charging interest is haram (sin) in Islam, this did not stop the mortgage on construction from becoming the fuel for Dubai's real estate bubble, as it goaded the desire of millions of expats of owning castles in the sand.

With bright ideas and some really grandiose schemes indeed being delivered, it was western money, and speculation drove up the market in Dubai. There was a time in 2007, when financial executives from New York, speculated on villas in Jumeirah, booking a villa one week, and selling it out the next for a profit. It was this false sense of a bullish market that encouraged lesser mortals among the expatriates to participate in the orgy. Until of course, it all blew up last week in their faces.

Finally, as the sand settles, people will begin to see Dubai what it it really is - a city of imagination but very little lastability: without natural resources, like water and fertile soul, and no oil, it looks like this time the devil has come to stay.

Without the sins of the West - alcohol, prostitution, gambling - Dubai would have certainly found it a challenge to sustain its tourism story. Now, as the hype of the glamor and glitz, gets replaced by caution and conservatism, the Mullahs are now going to have all the time to take a hard look at what Dubai represents, and see how it fits in to the general laws of Shariah. With Dubai now having to increasingly depend on Abu Dhabi and Saudi money, the Mullahs have surely landed.

Dubailand Property Available for Half Price

2008-11-25T17:13:00.007+05:30

Dubai-based Elysian Real Estate sent a text message to up to 40,000 mobile phones advertising distressed property sales. The text offered a luxury six-bedroom, six-bathroom villa in Dubailand, a multibillion-dollar luxury theme park on the outskirts of the city-state, at an advertised cost of about £3.86 million – about half its original price.

Dubai's Burj Tower Prices Crash 50 Percent in 3 Weeks

2008-11-23T13:31:00.009+05:30

Speculators in Dubai's Burj Tower - the tallest tower in the world - are in for a rude shock. They have woken up to find that their property values have plummeted up to 50 percent, that too in just 3 weeks. According to brokers, most properties in the Burj Tower district have slumped by at least 22 percent. These were same apartments and commercial establishments that had risen 88-200 percent in the year until September 2008.

Zero premium and even discount sales have become rampant as investors rush out of sand castles and in to cash. Prices outside the tower fell from an average of AED 3,500 ($952) per square foot to AED 2,700, and on 8 Boulevard Walk, for instance, dropped from AED 3,300 per sq ft to AED 2,500 per sq ft in three weeks – a 24 percent decrease. Old Town quarter of the development had fallen 30 per cent in the past month, along with nearly 20 per cent at the South Ridges and Residences areas.

Price fluctuations in the Burj Dubai tower had been far more volatile because of the high percentage of speculators owning these properties, according to brokers. Some had since been sold at significant losses to generate cash. However, they said, the most expensive floors, such as those branded by Armani, sold at about AED 14,000 per sq ft and were holding much of their value.

Abu Dhabi’s high-end developments have also been affected. Many of the buyers appeared to have no intention of holding on to the property long enough to make the first required payments to keep possession of it. Like Al Reem Island, which had 95 percent speculators with no intention to make any payment after the deposit. Residential properties in some cases [are now put into the market] at minus 15 per cent premium.

A floor of offices that was offered in Al Shams Abu Dhabi at AED 2,500 per sq ft three weeks ago is now being offered at Dh2,100. Reem Island's properties purchased at up to AED 2,700 per sq ft are now available at AED 1,800.

Read the story here

The Denial of Reality - Arvind Singhal

2008-11-20T17:52:00.003+05:30

There is no sign of let-up in the economic turbulence all around us. While there is, finally, some realization within the prime minister's office and the key economic ministries that India is not insulated from the global economy and that serious measures have to be undertaken to prevent the Indian economy from melting down too, it is surprising to observe the response of corporate India to this situation.

As if on cue from the USA, where there is an increasing clamour for more government bailouts, many in the Indian private sector have started to make similar noises. Of all those who have been the most vocal in seeking government support, subsidy and protectionism, the case being put up by the realty sector is the most disturbing. When the recent economic boom started in 2003, land prices in posh Delhi localities ranged from Rs 40,000 to Rs 60,000 per square yard. Builders’ flats in Gurgaon for middle-income customers were being offered for booking at Rs 2,200-2,500 per square foot, while premium residential developments in South Mumbai came to market at Rs 4,000 per square foot. Office rentals in Gurgaon were at Rs 30-35 per square foot per month while in Mumbai, they hovered around Rs 100 or so. In April 2008, the same prices respectively had shot up to Rs 400,000 per square yard, Rs 6,000 and Rs 28,000 per square foot, and Rs 120 and Rs 400 per square foot per month.

While this increase, ranging from 300 per cent to 1,000 per cent, put many Indian developers on the Forbes list of billionaires, it also resulted in the destruction of the primary demand for residential and commercial property from actual users since it became unaffordable and nonviable, and brought only speculators to the market. In this situation, the noise from the real estate sector exhorting the government to facilitate reduction in the home loan rates is nothing but a denial of the reality that unless the property prices are scaled back to 2003 (or even 2005) levels — making them affordable/commercially viable for actual users once again — the realty sector will not see a boom again irrespective of the lending rates.

Contact Abhinav at abhinav@technopak.com

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Bahrain's Property Bubble Has Officially Burst

2008-11-20T16:00:00.003+05:30

A senior professor at City University's Cass Business School, London, has said that Bahrain's property bubble has officially burst.

According to Prof Stephen Lee, the sector was grossly "inflated" sector and would would now fall in line with prices and growth rates in the rest of the world. He said it would take at least 2 years to recover.

He added that the credit crunch has already hit Dubai where if you work for a property developer you will not get a loan to buy a car. Supply will far outstrip demand, according to Lee.

He said that although the Palm Island in Dubai and Bahrain Bay, for example, will be completed, the wealthy will not invest in them, unless confidence comes back.

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Dubai Ambitious Palm Project Falls 40 Percent

2008-11-20T15:47:00.005+05:30

The ultimate reclamation from the sea project, the Dubai Palm Jumeirah project, has seen its value erode over 40 percent since September, according to real estate brokers.

A four-bedroom villa on the man-made island developed by government-owned Nakheel, is now selling for AED 10 million (Rs 13 crore), down from 15 million dirhams.

Rehab Gouda, senior sales agent at Al Jabal Real Estate, said that prices had fallen 40 percent during the same period.

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DLF Cuts Price 21 Percent in Bangalore Project

2008-11-19T22:43:00.006+05:30

The real estate slump is now beginning to grind harder on developers.

India's largest real estate developer, DLF, has slashed prices for apartments in its 80-acre gated community project at BTM Layout in Bangalore. Prices are down 21 percent to Rs 2775 per, from Rs 3500 per sq ft.

This means that a 1,310 sq. ft two-bedroom-hall-kitchen (BHK) flat in the project would now cost Rs 36.35 lakh, or about Rs 9.5 lakh cheaper than its initial price. The project, however, is yet to receive mandatory approval from the Bangalore Development Authority.

The project was launched to a closed set of invitees where the price was discussed. An analyst who did not want to be named said that prices could go even lower.

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Arun Nanda: Another Wishful Thinking CEO

2008-11-17T17:21:00.005+05:30

Have you not witnessed time and again, the CEO of Parsvnath coming on CNBC and saying that there was no slowdown and there was no cash problem? Did you not see Sanjay Puri, CEO of Unitech say that analysts do not know how to value real estate companies?

Since then, all these companies have had their stock prices relentlessly banged to almost a 1oth of their 52-week highs. Now, here is another joker in the pack.

Arun Nanda, executive director of Mahindra and Mahindra said there is no slowdown in its real estate projects, even though there is slump in demand.

“We are not slowing down on any of our projects. Jaipur is rocking, Chennai is doing well, city-based projects such as Faridabad are also doing well,” he was quoted as saying on the sidelines of the India Economic Summit.

Nanda, an executive director of the company, was quoted dishing out more gems:

"Fundamentals of real estate have not changed," he said.

"We have actually got cash in the bank," he said, adding there is a huge demand in 30 to 40 lakh apartments segment. He, however, said the housing loan segment is facing problems, adding there were no funding issues for its projects and the company’s affordable housing projects are not going to disappear, but he did admit that investors are not coming forward.

“Demand has been put on back-burner and interest rates are hurting people,” Nanda said. He also informed those present that Sebi approval for the initial public offering of Mahindra Holidays and Resorts Ltd.

Sure you have heard of the proverbial deer freezing in the headlights. Or is this simple a case of self-denial?

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Stanchart Pays Rs 720 Crore in Bombastic BKC Deal

2008-11-13T17:56:00.004+05:30

In a deal that seems to be one-off, albeit bright spark, in an industry gasping for cash, Standard Chartered paid Rs 720 crore for 2.2 lakh sq ft in an under-construction building called Crescendo. The sellers were Parinee Developers.

The rate works out to Rs 32,000 per sq ft, which is between 30-40 percent lower than the Rs 45,000 shelled out in 2007 by Wadhwa Builders.

The deal is being shouted down a one-off by brokers, many of whom say that Standard Chartered paid more than it should have. A Stanchart spokesperson said they were planning to set up their corporate headquarters at the new premises which will also have the wholesale and retail banking operations.

Commercial lease in suburban Mumbai is also slumping. Grade-A properties are now leasing at Rs 325 per sq ft as opposed to Rs 400-450 a few months ago. Office space has also fallen to Rs 300-350 as compared to a few months ago. However, even at these rates, there are no lessees available, said industry sources.

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Unitech Forced to Sell New Delhi Head Office

2008-11-13T17:50:00.005+05:30

The morass that Indian real estate companies have sunk in to is now becoming glaringly evident. The nation's second-largest property company, Unitech, is now forced to sell its New Delhi office of over 2 lakh sq ft, to raise cash and meet demands from lenders.

Unitech had borrowed an undisclosed sum from HDFC, using the Saket head office as collateral, while HDFC sources claim this number to be Rs 30 crore.

Unitech sources said that HDFC has agreed to purchase this property for Rs 450-500 crore, and that formal agreement is expected to be signed end of this month. Unitech had itself purchased this land for over Rs 127 crore.

HDFC clearly refused to comment on this.

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Realty Cos Likely to Default on Payments

2008-11-11T22:44:00.013+05:30

Citigroup, in a note to clients, has warned that Indian real estate companies face a higher risk of payment default as access to cash becomes restricted.

The same note states that DLF, the nation's biggest property developer, Parsvnath Developers and Omaxe have shown a decline in Q2 income, as a slowing economy and tighter lending norms by banks cut out the oxygen supply.

Citigroup analysts categorically stated that they do not expect a recovery in the near term.

In another development, Goldman Sachs too said, in a separate note, that the earnings of realty companies reflect a slowdown.

New Delhi-based DLF Q2 profit fell 4 percent, while Unitech's Q2 declined 12 percent respectively.

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SBI Chairman Sees 50 Percent Correction

2008-11-11T21:13:00.008+05:30

OP Bhatt, chairman of State Bank of India (SBI), the country’s largest bank, expects 50 a percent correction in the housing sector prices in the country.

“In India we may witness up to 50 percent correction in pricing in the mortgage markets. If that happens, it’s good news for the Indian banking system as NPAs would reduce and new business would fall-in,’’ he said at the concluding session of Ficci-IBA Conference on Global Banking: Paradigm Shift, in Mumbai on Saturday.

Bandra-Kurla Land Fetches Mere Rs 92 Crore

2008-11-11T20:51:00.004+05:30

News that did not make it to the headlines: Land at Mumbai's Bandra-Kurla Complex was sold 50 percent lower than March 2008. Thus comes hardcore evidence of the Mumbai real estate market having slid in to a cold freeze, despite the bravado of developers. On thing is now certain: real estate companies are going to die a slow death over the next year.

The said plot of land was picked for Rs 92 core at Rs 1.55 lakh per square metre—half the price from the previous auction in March. Ahmedabad-based Talim Research Foundation, a venture of Subhash Chandra’s Essel Group of Industries, was the sole bidder, paid just Rs 2 crore over the minimum sale price. This in face of the deal five months ago, when Jet Airways (India) Ltd picked up a plot in the same area at Rs 3.52 lakh per sq metre.

Mumbai Metropolitan Region Development Authority, or MMRDA, had no choice but to award the 5,900 sq. m to the lone bidder in Talim. The plot would be used for an educational facility by the nine-year old foundation which does social science research with a focus on health, communication, micro-economics, social audit and poll studies.
In March, only three out of five plots were sold in a land auction by MMRDA when Jet Airways picked up a plot and Starlite Systems bought two residential plots at the same price. Land sales have been down since this year’s beginning compared to 2007, when city-based Wadhwa Group had bought a commercial plot in the complex at a staggering Rs 5.04 lakh per sq metre for a 16,500 sq metre plot.

Even Starlite and Jet Airways that bid for the plots in March have requested MMRDA to give them an extension of six months to pay the premium. “Developers are not willing to pay astronomical prices for a piece of land and are waiting and watching for some correction to happen,” he said. “Many developers are also under a liquidity crunch which is why they are staying away from land purchase.”

Developers are not interested in purchasing land according to Hemant Shah, chairman of city-based builder Akruti City. The general view is that those who have purchased land last year are unable to launch projects, due to the slowdown, but land owners are not willing to lower the rates, leading to a crunch.

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Parvsnath's Retail Plans Shelved

2008-11-09T09:57:00.006+05:30

Parsvnath Developers has put its retail foray in to cold storage, citing adverse market conditions as the reason.

Parsvnath had plans for 5-10 front-end stores by this fiscal, backed by an international retail partner for logistics. The plan had included hypermarkets, food joints, and very large retail stores of about 2.5-3 lakh sq ft. Initially, the plans were to roll out stores in Delhi and Mumbai, followed by other cities. Parsvnath even formed a subsidiary, Parsvnath Retail Ltd., for its retail business and had acquired 5.5 million sq ft. of space across the country.

However, now due to the adverse market conditions caused by the global financial crisis and the resultant economic slowdown, these plans have been postponed indefinitely, and could be resurrected when market conditions improve.

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Noose Tightens Around Necks of Mumbai Developers

2008-11-03T21:58:00.001+05:30

The massive cranes around Mumbai are fast disappearing as the real estate industry goes down in to the dumps. Where one slab per month would be raised, it is now down to one in three months. Banks have become very choosy about lending to the real estate developers as investors disappear and home buyers wait for prices to drop.

It appears to be a game of who will blink first, with builders hoping for the prices to recover, and residentual apartments still costing between Rs 15,000 per square feet and Rs 21,000 per square feet in Juhu area of Mumbai, and Malad and Goregaon still commanding between Rs 9,000-15,000 per square feet.

In Mumbai, the same apartments that were on the market for the last 6 months continue to be circulated. For example, a builder demanding Rs 80 crore for a 8,000 sq ft super-built-up apartment has not been able to sell even one unit.

A few builders who have real estate purchased prior to 2004, are making optimistic noises, however most of them, for whom the interest rate is ticking, are squirming as the noose is tightening around their necks.

Some of the news in the market is of a the brother of a prominent developer from the eastern suburbs, who has branched out on his own now, is stuck after a US-based bank allegedly stopped funding his projects in Hyderbad and Chennai. Another developer with residential projects in Goregaon, Virar and Thane finds himself pushed into a corner after taking a Rs 100 crore loan from a Kutchi industrialist at hefty interest rate of over 40 percent.

One builder, who shook the property market last year after he paid a phenomenally-high price for a plot in BKC, is also believed to be now on the edge. His investors are breathing down his neck and even the nationalized bank which funded him, now wants its money back. His desperation is now evident because he has started offering brokers a 4 percent brokerage for getting clients, said sources.

In the commercial segment, the lease rental prices in BKC has come down from an average of Rs 450 a sq ft to Rs 325-Rs 350 a sq ft over the past three months, it is learnt. Developers setting up IT parks are also getting worried as they are not getting the price they were expecting, said a broker.

According to housing experts, about $4 billion has been pumped into the Indian real estate market by FIIs and venture capital funds. Another $12 to $14 billion was to flow in within the next 18 months. This will not come anymore.

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Nagarjuna Construction Puts Future Real Estate Projects on Hold

2008-11-03T21:31:00.009+05:30

Nagarjuna Construction Company has clamped down on future real estate projects due to current slowdown in the sector and has tempered its capital expenditure plan for 2008/09.

According to Subba Raju, vice president-finance, NCC is not planning any investment in real estate projects. "All our real estate projects are fully capitalized," Raju said. "We have put all other projects on hold. We are not launching them because of adverse market conditions."

The company will spin off its real estate operations by March 2009 in to its subsidiary NCC Urban Infrastructure, which currently is involved in building a national games housing project in Jharkhand, a unspecified project in Hyderabad and 3-4 small projects in Bangalore.

"We are not planning any investment in real estate projects. All our real estate projects are fully capitalized," Raju said. "We have put all other projects on hold. We are not launching them because of adverse market conditions."

Earlier this month, rivals Hindustan Construction Co and IRB Infrastructure also said they slow down their real estate forays, given the weak market situation.

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Emaar-MGF's Gupta Shellshocked by Real Estate Downturn

2008-11-02T21:12:00.004+05:30

Emaar-MGF's MD Shravan Gupta appears dumbed down by the sudden downturn in the real estate business in India, and hence needs to read a book about Jack Welch, where he would learn that one of the premises for success is to "Look at things as they are, and not as they were or as you wish them to be".

The executive vice chairman and managing director of Emaar-MGF Land, appears to be making surreal statements about the importance of real estate in India, despite the fact that his company's IPO bombed early in the year, even before its launch, and was instrumental in providing one of the early clues that the real estate market in India would go in to a tailspin too.

“The present turbulence will make the real estate grow strong and it will emerge stronger after this phase,” said Shravan Gupta, executive vice-chairman & MD of Emaar MGF Land Private.

In the stock markets, you are told not to live on hope or you will die in despair.

Gupta feels the importance to the real estate sector a trifle underrated and it should be given more importance. Sure, how about the regulators coming up with a housing index which can be traded on the NSE?

Gupta's words border on being delusionary when he says that in the present scenario, sentiments were overpowering people’s thoughts rather than actual ground conditions. The effect of the global financial condition is certainly felt in India but according to him it’s not as bad as it is portrayed.

“Demand for homes does exist today," he says. Well, they do in the US too, where people still need to buy homes to live. According to Gupta, it is just that the buyer is in a state of uncertainty looking into the world around him. In his view, it is not bad loans but the high lending interest rates that are driving away the buyers and the sector is in a stage of hibernation but no real slowdown is seen.

According to Gupta, prices in some cities may have gone up on the basis of lack of supply but still in India real estate is under-priced when compared to the rest of world.

What he suggests is that a collective force of the real estate developers should be presented before the government to implement certain uniform policies and regulations, which can benefit both the buyer and the developer.

A few months ago, the MD of Unitech had come on television to say that analysts do not know how to value real estate companies. Since then Unitech has plummetted from Rs 220 to Rs 30. The MD of Parsvnath had cockily said that there was no slowdown. The shares of his company have plumetted from Rs 200 to Rs 50.

Shravan Gupta should thank himself his company is not listed as yet.

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Dubai: A Cataclysmic Disaster Waiting to Happen

2008-10-28T12:41:00.001+05:30

Dubai's hyperinflated real estate market is about to implode or blow up in the faces of speculators. Sales are collapsing and the global downturn in the UAE, whose currency is linked to the US dollar, is going to be a reluctant victim of a cataclysmic disaster.

Desperate sellers are now selling off their pre-booking investments at zero premium. Commissions of agents are down up to 70 percent, and six months may be just about the time that investors may have to bail out of risky real estate investments.

Real estate companies like Emaar have seen their value erode 62 percent since the beginning of the year, and the Dubai Financial markets, which is the barometer of the financial health of the country has slumped 48 percent. Colliers International earlier revealed growth of property prices in Dubai slowed to 16 percent in the second quarter of 2008 from 42 percent in the first quarter. Morgan Stanley warned in August that property hotspot Dubai could see a 10 percent fall in prices by 2010. Perhaps this was an understatement.

What makes Dubai vulnerable is that it has zilch oil, and it had charted itself a course of becoming a property and construction hub for the entire Middle East. Dubai was expecting foreigners to come in and buy up apartments and commercial space, but for a country that depends 30% on construction economy is now on a verge of a cataclysmic disaster.

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Real Estate Developers Ready to Start Price War

2008-10-28T01:31:00.004+05:30

The daggers could be out soon, as massive loans taken from market players may start to burn holes in real estate developers balance sheets if the properties are not sold soon.

The cartel for real estate players who have been holding up rates for the last six months may soon get in to desperate mode. Real estate developers are bracing themselves for a 50% cut in their property rates. This despite the fact that real estate prices in India have fallen 20-25% over the last seven months. Industry experts at a recent TiE-Indian Angel Network summit held in New Delhi agree that further price cuts are in the offing.

Kashi Nath Group's CEO Sanjay Khanna clearly admits that those who do not reduce prices now will be forced to do this some time or the other. Ask Ashish Mathur, head of business development and marketing for Mahindra World City, who gave a resounding "yes" when asked if a 30% cut can be expected in realty prices.

Santhosh Kumar, deputy CEO of Jones Lang LaSalle Meghraj, says that a 30-50% discounts are available even now, if one is willing to pay cash down.

In the case of residential property, the rate of interest on home loans has gone up from around 7.75 percent in 2004 to around 12.75 percent now. Almost 90 percent of home buyers take the home loan route. For a person taking a home loan, the rate of interest has increased 5 percent in the last four years. If a person borrowed a lakh for 20 years at 7.75 percent in 2004, he would have to pay around Rs 96 thousand as interest eventually. At the present rates, the interest rate burden has now increased to more than Rs 2 lakh on the same amount.

The liquidity crunch has been fueled by expensive home loans, a slowing Indian economy and the global financial crises. Banks too have become reluctant to lend to the realty segment. The ing economy has had a direct impact on commercial property market. During the quarter ended September 30, commercial space demand has slowed down in all major metros, with low leasing demand in the first two quarters of the year.

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Navi Mumbai's Palm Beach Road prices slump 50%

2008-10-26T14:42:00.001+05:30

It would be overkill to write about the fall of the real estate market which we have been tracking here since we gave a call that in February 2008, the realty market in India had made a top. It still took some time for an official confirmation of the crash in real estate prices, but today the Times of India (Mumbai) confirmed that the famous Palm Beach Road in Vashi has seen an almost 50% crash in real estate apartment prices.

For starters, this is just the beginning. Builders are willing to sell swiftly without any fuss. While a few months ago, home buyers were willing to invest by putting down payments even before the plinth was raised, today no one is ready to even consider a ready apartment.

Previously touted as the Marine Drive of Vashi, the 9 km Palm Beach Road, was becoming a upscale real estate stretch between Vashi and Belapur. Today, plauged by zero-sales and a crashing stock market, in which real estate stocks have fallen more than 90% of their high values, On paper, residential sales are still sitting pretty at Rs 7,500 to Rs 9,000 per square foot, but with near-zero sales and a volatile market, panicky developers and regretful investors are selling for as low as Rs 4,500.

Navin Makhija is a director with the Wadhwa Group, which is stuck with the biggest project—six towers of 25 floors each on Palm Beach Road. He tangentially acknowledges the slump in rates. "In these days when the global market is bad, sales are down and so is sentiment. It's natural that some will offer lower rates to sell houses," he says.

Makhija adds that for their Palm Beach Residency project, prices have been "internally lowered to Rs 7,000 to 8,000 psf. We are not going to make any sales for the next one-and-a-half months, but hopefully things will pick up", he says.

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Builders Abandon Leasing Dreams, Push for Outright Sales

2008-10-09T16:51:00.006+05:30

Futuristic dreams harbored by real estate developers, of building castles with cheap credit of 2007 in the market, and leasing them to desperate home and office owners, are now beginning to face reality that in the end, there is indeed no free - or cheap - lunch.

This is borne out by the fact that is that real estate developers in Mumbai and even the rest of the country are now pushing outright sales of their commercial properties - offices, retail stores, hotels - instead of leasing them out. These were the same companies who were hoarding apartments in the hope of selling them at astronomical prices.

In some areas of say Mumbai city, residential and commercial spaces skyrocketed 300% as investors became intoxicated in the highs of investing in real estate. Overnight, even menials were dishing advice to their owners, having seen their slums jump up to crores in value, as companies aquired their lands to build towers and further sell them to occupants and investors.
Those dreams however appear to have fizzled out, the impact of which will become glaring by 2009.

Developers today are ready to sell properties at a rate which is seen attractive by buyers today. Their focus is now on purchase, build and sell off for immediate gains, instead of holding back on structural space and leasing them instead.

For example, Raheja Corporation has started selling off its office spaces in PUne, Hyderabad and Navi Mumbai. Even subsidiary Raheja companies are following the same strategy in Mumbai.

Another real estate company, Indiabulls Real Estate, which saw a meteoric rise in 2007, has recently started selling their office spaces located on Tulsi Pipe Road, Jupiter Mills and Elphinstone Mills.

Its pride construction, the One Indiabulls Center, which was built to have expensive leases on office space, is now being sold off piece by piece, according to reports in the market. Even Ashok Piramal group's Peninsula Land Ltd (PLL), which is developing commercial buildings in Ashok Gardens - a premium residential project comprising 2-, 3-, 4- and 5-bhk (bedroom, hall, kitchen) apartments located at upper Parel in Mumbai - is selling off the commercial building instead of leasing the property.

Peninsula Land, which had sold off 5 lakh sq ft of Dawn Mills, is now in the process of selling complete 19 lakh sq ft. Realty major, DLF too is in the process of selling a part of its big commercial establishments instead of leasing. Competitor, Hiranandani Constructions is understood to have not entered into a single land deal since the past few months.

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Distress Sales Await Real Estate Investors

2008-08-26T11:09:00.003+05:30

Real estate companies have so far been booking paper losses, but after Diwali, these losses will be real, according to Nayan Bavishi, a UK investor of the Baron Group, who invests in Indian and Dubai real estate. This should lead to some sudden wave of distress sales, which would bring apartment prices to realistic levels. "Right now, it is only depletion of paper profits; wait till after Diwali and their [real estate companies]'s pockets will get eroded further."

The Indian real estate market has been hurt by a slide in the stock market, rapidly rising interest rates and aggressive demands from private equity investors. After five years of boom, real estate firms in India are grappling with lukewarm sales and cash crunches as inflated property prices and interest rates at near-decade highs scare away buyers.

"The aggression for acquiring land has disappeared. Deal volumes are down 35-40 percent," said Anuj Puri, who heads property consultant Jones Lang LaSalle Meghraj. Till last year, property firms, flush with funds from public offers or advance bookings, rushed to bid for land parcels, even at distant locations in metros, and in second-tier towns.

Even mid-size developers in India say they hold land reserves of 60-100 million sq ft, sufficient for projects planned in the next 3-4 years. But slumping demand could drive down land prices soon, leading to some distress sales, officials say. "We have not acquired an inch of land in nine months. I think by December-January, land prices should soften," Vyomesh Shah, Managing Director of Akruti City told Reuters late last month.

Akruti City, a leading developer, has not acquired any land in the last 9 months. A shortage of cash has caused delay in projects and it is likely that some announced projects may not even take off the ground. Builders are now unable to fund through advance bookings by buyers. "Developers normally did construction through booking advances for planned projects. Sales are down, so obviously there are delays," said an analyst at a Mumbai-based brokerage that has revised downward target price on sector stocks by 15-25 percent.

Most real estate firms are still getting by with advance bookings done 18-24 months ago, a sustained lack of demand in the coming quarters may worsen the situation.

Read the Reuters story here

South Mumbai Slumps; Jolly Maker Flat has no Takers

2008-07-29T20:03:00.011+05:30

An apartment in Jolly Maker Apartment I and II, has no takers despite a 27 percent price cut.

Located in the prime residential area of Cuffe Parade, in the southern part of Mumbai, this flat - measuring 1,700 sq ft carpet area - was priced at Rs 18 crore in January 2008. Today, even at a discounted Rs 13 crore, the apartment remains unsold. [pic: World Trade Center and IDBI Tower, located near the JMA I and II]

Investors who rode the wave of the great Indian real estate juggernaut of 2004-2008 are now wringing their hands. Not just individuals, but even corporate speculators, unrelated to the realty business, who were lured in to real estate speculation, are now stuck.

Consider another case of an apartment that Siemens India put up for an auction sale in June 2008. With a base price of Rs 4 crore, the auction received 3 interests, two of whom bid Rs 3.75 crore each - in what appears to be a coordinated bid - lower than the base price. In better times, Siemens would have had a choc-o-bloc room with bidders vying to outdo each other. Forget a significant premium, Siemens had to contend with a lower price.

Cut to individual investors, who picked up properties at severely high premiums in areas like Noida, Gurgaon and Greater Noida, as well as in Mumbai and Bangalore. Almost all of them, loaded with floating rate interest loans, are now facing higher interest charges, as the value of their properties are slipping. They all face the prospect of a negative equity, where the monthly EMI is higher than the monthly return that such an investment would face in a riskfree bank deposit.

Declines of up to 30% are already being seen in many areas of the cities. Even areas which are usually considered hot and insulated from price cuts - like South Mumbai - have seen a 15% decline. The major victims of these declines are investors - those who purchased homes with an intention of selling them to genuine users for hefty prices. In Delhi and its suburbs, nearly two of three residential transactions are resales.

The main attraction for investors was the fact that property returned 200-300% for those who invested in late 2003 to early 2004. Investors would take loans, book the apartments, and sell them off before the year was through. This does not appear to be the option any more, and with less interest from new investors, demand has tapered off, leaving investors stranded with high loans and declining value.

The lack of interest is affecting residential developers too. Residential projects are usually self-financing in nature, meaning developers use the money they get from customer advances to fund the development. This money is used by builders to build projects, making their investments virtually riskfree. With investors shying away from new realty projects, developers are finding it tough to get finance for their projects.

The high cost of raw materials is also impacting developers, who are now focusing on completing projects rather than signing on new ones. Investors continue to hold on to their properties, latching on to the ubiquitous hope, that prices would rise.

Discounts abound the realty space. Apartments at Parsvnath City in Dharuhera near Delhi, have a list price of Rs 1,800 per sq ft, but even with a discount of 4% buyers are hard to come by. In Bangalore, a 2-bedroom apartment located in Indiranagar, purchased for Rs 29 lakh, three years ago is now available for Rs 34 lakh, 20 percent less than what it cost six months ago.

However, there does not appear a respite in sight. Another 15 percent correction is expected by property market consultants, and with exhibitions of distress sales of apartments planned by real-estate service providers, it may soon be a bonanza time for bargain hunters.

Read the Livemint story here

Bandra Aparment Rates Sink to Rs 16,000 Per Sq Ft

2008-07-14T20:59:00.009+05:30

The hottest real estate area in Mumbai is now facing a cooling real estate prices. After having commanded over Rs 25,000 per sq ft in 2007, apartments in Bandra are being quietly sold for Rs 16,000 and Rs 14,000 per sq ft.

While premium areas, like Pali Hill and Carter Road, which have celebrities living in them, are less affected since they have celebrity value attached to them, the less glamorous areas of Bandra, are facing the onslaught of sinking real estate rates.

In fact, some broker sources are expecting apartment prices to sink to between Rs 13,000 and Rs 14,000 per square feet. Apartments in TDR (transfer of development) buildings have even been sold for Rs 12,500 per sq ft.

A small developer in Juhu, scrounging for cash, has even put on offer apartments at a discount of 35% to current market rates.

Even Mahim, located next to Bandra, used to command between Rs 14,000-Rs 16,000 per sq ft during the height of the real estate mania, which ended early this year. Today apartments are being sold at Rs 12,500 per sq ft on the higher side.

A knowledgeable builder has asked his friends to hold on to any purchases of property until the next year. He said that property prices in Mumbai are slated for another 20% drop once the monsoons are over.

A lot of builders are hoping that the fortunes of the stock markets would turn, and that new buyers would come again in to the property market after the rains, and during the festive seasons of Diwali and Christmas. However, even they are now beginning to see the reality and are exiting in a low-key manner.

A few months ago a developer had purchased an old industrial estate in Lower Parel area. Tenants are still waiting for the builder to come to them with a proposal to vacate the premises. It has been months, but in so far, noone has come forward.

Read the DNA story here

Cash Crunch Hits Mumbai's Builders, Redevelopment Plans Tossed Out

2008-07-12T11:01:00.006+05:30

Redevelopment deals are softer than potatoes in hot water. A cash crunch has started eating in to the plans of Mumbai's builder lobby. Considered the shining story of the real estate bull run from 2004-08, redevelopment of old housing complexes has slowed down completely.

The first signs were visible when a story, of Rs 402 crore deal between Sterling properties and Vivek Society, in Vakola, Santacruz, featured as front-page headlines in local Mumbai tabloids. Each 550-sq ft owner was supposed to be offered Rs 2 crore per flat, but this this became a wet mop, when Sterling backed out, citing difficult market conditions.

The plan for redevelopment works like this: The older housing complex sells its land to the builder, who demolishes the structure, and with the enhanced FSI, builds a taller building on the same land. He adequately compensates the current owners with either larger apartments, cash or both, and then sells off the additional apartments as his profit. However, with speculators in the fray, prices had spiralled up to a point of unaffordibility, and builders are no longer willing to take the risk, since loans have become scarce, interest rates have been hiked, banks are no longer interested in funding under-construction apartments, and home loans have become expensive.

Further, with the demand for apartments slumping, builders simply are unable to take the risk. Exorbitant pricing is slowly moving out of the system.

Among the cancelled plans of redevelopment include Wadhwa Builders's Vishal Nagar in Borivili; and Pune-based Kumar Builders's Khira Nagar, Santacruz. All deals signed up last year are being renegotiated downward to the extent of 25%. Some others that have gone back to the table are societies, Flying Carpet and Tirupati, near Khar Gymkhana. Developers are even not willing to extend more than 25% additional space in the new constructions, to owners of flats in old apartment complexes. A specific case in Khar's 11th Road, society members accepted a barely 20% increase. Last year the developer was willing to shell out any amount, but the story changed six months ago.

Another stumbling block is the high stamp duty that the Maharashtra government has levied on builders wanting to transfer the plots on to their own names of societies registered in the 1980's.

Read the DNA story here

Citibank Puts Indian HQ on Sale, Stanchart to Follow

2008-07-11T23:03:00.012+05:30

The tarpaulin has collapsed over their heads in the US, that they are now trying to sell their offices in Mumbai and send money back home.

Foreign banks have put their offices on the Mumbai real estate market as a serious downturn awaits the home mortgage business in the US. The option-ARMs (home loans that start with very low or zero EMIs and then reset to very high rates after a few years) are set to revert in December 2008, thus accelerating the number of foreclosures, as home buyers, who were virtually lured in to ludicrous home purchases, find they are sitting on negative equity. This means the value of their property falls below their purchase price.

On sale is Citigroup Center, located in the Bandra-Kurla Complex in Mumbai. This 2 lakh sq ft tower is expected to fetch Rs 500-800 crore, if market sources are to be believed. This means the price per sq ft is Rs 25,000 to Rs 40,000 at the highest end. However, it is unlikely that even this price may be achieved. Citibank is loud-mouthed when it palms off homes at exorbitant prices to NRIs, like it made sure it splashed the news in all the papers, when it sold a flat in Nariman Point, Mumbai, for Rs 97,000 per sq ft, but when it sells its own property, it is rather tight-lipped, which is to be expected.

The 8-storey structure will however be leased back by Citibank. The bank has been on a selling spree for the last few months, in an attempt to shore up capital for its beleagured US headoffice. Citi's CEO Vikram Pandit has pledged to sell off over $400 billion in assets over the next few years. Citi has also sold property in Tokyo Japan for $445 million to rival JP Morgan, and has leased it back. Over 45 branches have been closed in the US.

Another bank that has put its Fort office on sale is Standard Chartered Bank which has a 40,000 sq ft office space in the Fort area of Mumbai.

It is amazing that at a time when a lot of foreign financial companies are taking billions of writedowns, Barclays Bank chose to pay a rent of Rs 1 crore per month for 15,000 sq ft of office space located in CeeJay House, in Worli, Mumbai.

Read the TOI story here

Why I Feel It's Not Time to Sell - Sainik

2008-07-05T12:40:00.005+05:30

Analysts and fund managers are all asking us to be cautious and the bravest of the brave are asking us to nibble, by putting in around 10-20 percent of capital to work. Technical analysts are going berserk, saying they expect 2600. I read that if Nifty breaks 3800, we go straight to 2600.

But, hey, wait a minute, what is this I am hearing? Were we not being told that the Nifty at 6000 was cheap and one could buy with a 3-year timeframe in mind. All over we would be hearing the most pessimistic downward target of 5000 at worst, or best, depending on whether you were long or short. Today those targets have been halved.

The markets are driven on two pivots: fundamental and technical, i.e money flow. Surely, money was flowing inward at 6000 Nifty and it has reversed at 3900. However, at 12,750 Sensex, the PE for the Sensex would be around 12, with an expected EPS of 1050 for March 2009. Very rarely has the Sensex traded below 12 PE in the past. If we touch 9000, the Sensex would trading at 8 PE, which would be a lifetime first.

It is said that those who forget history are condemned to repeat it. At Sensex 12 PE, you are being asked to sell, and when the PE was more than 25, they were asking you to buy. Think and decide whether you want to believe the analysts or should you be using common sense instead. As they say, common sense is not commonly found.

Unitech's Santacruz Project Scaled Down

2008-06-18T16:57:00.011+05:30

If there is ample money and good valuation in the private sector, as opposed to the public markets, why has Unitech's Santacruz Koliwada project scaled down half to 1 million sq ft?

Sanjay Chandra, Unitech's managing director said in a CNBC interview, that there was better valuations for real estate in the private equity segment than public markets. This comes at a time when after much dithering, Lehman has agreed to invest Rs 750 crore in to Unitech's Santacruz Koliwada project in Mumbai.

What has gone unnoticed is that Unitech has cut back the size of the project by 50 percent. The original deal between Unitech, Lehman and then Deutsche Bank, was valued at Rs 2,000 crore for 2 million sq ft, for which Unitech had already invested Rs 500 crore. This works out to be Rs 10,000 per sq ft for land and construction. Lehman and Deutsche Bank were expected to get a minority stakes each in the project for bringing in together Rs 1500 crore.

Due to the conditions in the marketplace, as well as Lehman's own problems in the US, the project appears to have been scaled down to 1 million sq ft. In this Lehman has infused Rs 750 crore, the same amount of money it had committed for the original plan, but has taken in a 50% stake in the SPV. Deutsche Bank had earlier backed out of the deal.

So, why is Unitech not getting another private equity fund to finance the balance 1 million sq ft. Several stories are being fed in to the media that Lehman may invest $700 million in other projects by Unitech. This seems a bit contradictory.

Read the CNBC interview here

Video here

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Mumbai's Real Estate Cookie Finally Crumbles

2008-06-15T18:02:00.013+05:30

Mumbai's real estate cookie finally crumbles. Despite the bravado displayed by builders, brokers and advisors of the real estate industry, Mumbai builders face dire straits. In fact, this trend is a pan-India phenomenon. There is almost Rs 20,000 crore that has been lent to builders by Indian banks, and chances are that with defaults on interest payments, banks could consider foreclosure of these properties.

Mumbai's builders are now displaying interest-rate defaults, and have also started borrowing loan-shark money on high interest rates. Construction which had become snail-paced is now resulting in delayed delivery. Like it or now, Mumbai's developers are facing what is just the beginning of the toughest times ahead.

With speculators having exited the market, and retail investors facing a prospect of another interest rate hike, waning enthusiasm abounds India's real estate industry. Retail investors are no longer interested in the real estate market, and with the stockmarkets having taken a serious downturn, profits are no longer available for parking in to real estate. Even Indian politicians, who park their slush funds in real estate are now demanding their money back, and builders are in a quagmire.

This is a transition from being stressed to being distressed, one industry observer said. In fact, even big names including DLF, Emaar-MGF, Sobha Developers, Unitech, Omaxe, Parsvnath Developers, Hiranandani Group, Ansal API, BPTP Developers and TDI Group, are all finding it difficult to complete their projects.

A Mumbai-based family-owned developer has backed out of purchasing the Hindustan Composites land at Vikhroli, which it had agreed to purchase for Rs 700 crore, just a month ago. It has also walked out of the 3.5 sq ft land at Pramanik Landmark land at Goregaon. [Read the story here].

A developer, who has built popular landmarks in South Mumbai, and in far-off western suburbs, has overstretched itself beyond Rs 1200 crore. Another Mumbai builder, who had recently purchased a BKC plot may also burn his fingers. [Read who purchased the land here]. To recoup the cost of land and construction, each office would have to be sold at Rs 54,000 per sq ft, when the prevailing rate is Rs 32,000 per sq ft, and falling further.

A Delhi-based developer, which was to develop the BEST depot has started defaulting on its interest to bond holders. [Read BEST depot story here]

A Delhi-based developer giant has said it no longer interested in the 100-acre plot at Kanjurmarg, which it was in discussions to purchase. Further, Emaar-MGF has taken a bridge loan at 30% interest per annum, to complete one of its projects.

Read the TOI story here and the ET story here

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The Untold Stories of Long-term Investment in Property

2008-06-13T16:47:00.002+05:30

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

2008-06-13T13:27:00.008+05:30

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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Builders Face Cash Crunch as Real Estate Sales Slow Down

2008-06-11T19:12:00.004+05:30

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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Praful Patel's CeeJay House Bills Barclays Rs 725 per sq ft

2008-06-01T00:08:00.009+05:30

Recently, this blog had reported a story about Barclays Bank paying Rs 725 per sq feet for office space in a building called CeeJay House, located in Mumbai's Worli area. [Read the story here] At the time, one could not find the story online, but today this blog was able to locate it online on the Economic Times website.

The ET story had some additional information, which was not available in the TOI version. This is what reporter Nauzer Bharucha has written in the ET:

The landlord of CeeJay House, located next to Poonam Chambers, is none other than civil aviation minister Praful Patel, who incidentally occupies a residential duplex spread over 35,000 sq ft with a swimming pool in this building. On Wednesday, when TOI contacted Patel to confirm the deal, he said he would find out and get back to us. After that, he could not be reached despite repeated attempts to contact him.

So, now you know the shenanigans of the players in the real estate business.

Read the ET story here

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

2008-05-31T12:34:00.000+05:30

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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Unitech Project Hinges on Lehman's Rs 1500 Crore

2008-05-30T19:18:00.003+05:30

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

2008-05-30T11:08:00.011+05:30

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

Saffron Group Talks Long-Term in Real Estate Now

2008-05-25T22:30:00.012+05:30

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

2008-05-25T14:54:00.017+05:30

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.

The Maya of Mumbai Real Estate Deals

2008-05-25T13:15:00.008+05:30

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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Thane Real Estate Prices Start Tumbling

2008-05-21T13:00:00.000+05:30

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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Soros's Gloomy View has Lessons for India

2008-05-20T22:31:00.012+05:30

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

2008-05-20T13:00:00.000+05:30

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

H&S in British Housing Market

2008-05-19T17:19:00.006+05:30

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.

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

2008-05-19T13:49:00.012+05:30

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: 99acres.com)
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: 99acres.com)
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.

John Paulson: King Bear of US Subprime

2008-05-18T16:06:00.010+05:30

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

2008-05-18T11:59:00.014+05:30

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 nseindia.com, 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
HDFC Bank - HDB
ICICI Bank - IBN
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.

This article first appeared on Mukul Pareek's Blog

Indian Real Estate: Bubblicious as Any Other

2008-05-16T18:12:00.015+05:30

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

2008-05-16T01:27:00.007+05:30

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

2008-05-13T20:24:00.009+05:30

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

2008-05-12T18:36:00.014+05:30

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

2008-05-11T20:44:00.008+05:30

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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Mumbai Property Prices Slump Some More

2008-05-09T16:56:00.009+05:30

The Tsunami has started. Prices have fallen 15-20% from Lower Parel to Santa Cruz. In suburbs like Jogeshwari, Kandivili and Borivili, rates are down 15-20%. In far-flung areas, it is 30%.

Punit Aggarwal, chairman of Orbit Corp, says quite clearly: "I can state quite firmly that not only are we seeing a slowdown in sales but also a reduction in flat prices."

Although some new TV channels, like News X, desperate for advertising money, shows juvenile reporters saying that Mumbai's real estate boom is going to last longer than expected, it looks that along with the cooling of the stock market, the real estate hype has gone in to refraction.

Brokers in areas like Goregaon and Andheri say that Oberoi Constructions and Nitesh Estates have lowered their prices. In Andheri, Oberoi has dropped rates Rs 750, to Rs 8,500 per square feet, and Nitesh has lowered it Rs 1,500. Rates here had topped out at Rs 8,500-9,500 per square feet.

"The market is not buoyant any more," says chief of Jones Lang La Salle Meghraj, Anuj Puri. Builders had hope to hold on to their properties but have realized that prices are not going up any much more, and hence have started releasing them in to the market. The cracks have been seen higher in small developers, who are happy to cut by even 25%.

Anshuman Magazine, chairman and managing director (South Asia), of CB Richard Ellis, said the next 4 months, prices are expected to drop even more.

So, the advise to speculators in the middle-class segment: Leave this game to the big guys. Interest rates have just one way to go and that is "Up". So, if you are looking to buy up for investment, try other avenues. There is a lot more blood to be spilt in this market before it can look up again.

Mumbai Builders Plan to Squeeze Salaried Class

2008-05-05T16:17:00.006+05:30

The government is chasing the wrong cartels and creating an eyewash for the residents of Mumbai. Instead of chasing steel, cement, wheat and rice cartels, it is very safely ignoring the real-estate cartels who are historically more ruthless as a junta than any other.

Armed with slush money and cheap PE funds, Mumbai realtors have now acquired muscle power to hold on and squeeze residents a wee bit more. The cartel has been reported to have decided to hold on to exorbitant prices of Mumbai apartments until Diwali 2008. They are also enthused by the rise of the stock markets and the noises that the US recession may actually not happen at all.

Their main aim: Frustrate salaried people who have no choice but to own a home in the city, and close deals before the slump actually rears its ugly (or beautiful) face, depending on which side of the fence you are.

Over the weekend, I met with a friend -- a really middle-class chap -- who had booked at 1000-sq-ft apartment in Bandra, for Rs 80 lakh in 2004. This he had managed by selling his 1-room home in a colony, and a loan from a bank. Today, someone offered him Rs 4 crore for this apartment. He is an average hard-working business man himself, and said he was boggled by this. He said that 20 years of running a very popular food outlet had not made him this much money. Neither does he expect to make as much in the next 20.

He also gave me an example of his neighbor who now rents his apartment for Rs 65,000 a month, which pays off the EMI of his flat, and makes him enough money. The person has now taken more bank loans and purchased another property at current rates, in the hope of renting it further. Perfect, because this is how the cycle of real estate works, until a time comes when the rents do not pay for the cost of the mortgaged flat, thus creating a negative asset, and consequently distress sales, driving the spiral downward.

For now, of course, rates in Mumbai, seem to be held on to by the builders. Although there are the usual denials of cartelization, it is indeed a fact that despite sales having dropped 40%, and a dud April, where hardly any home sales have happened in Mumbai, and with the CRR hike, applicable from May 24th, and more importantly, the prospect of serious 8% inflation -- at the retail level -- the strategy to hold on to prices till Diwali could be the last gasp of an industry waiting to fall under its own weight.

Meanwhile, if the salaried class has nowhere to go, they will just fall in to the searing spikes of Mumbai's realty developers.

Read the TOI story here

Jai Maharashtra! Lets Rebuild Mantralaya

2008-04-30T19:21:00.018+05:30

Is this the beginning of the end or the end of the beginning? Now even Maharashtra's politicians do not want to be left out of the realty grab, and have come up with a scheme to extract their pound of flesh.

The public works department (PWD) has devised a plan to redevelop the State's assembly house, Mantralaya, located at Nariman Point, in Mumbai. This is the same area where the NCPA Building is located, in which Citibank sold an apartment last year for Rs 34 crore, which worked out to Rs 97,842 per sq ft last year.

So, while farmers commit suicide, rice and wheat cost twice as much, steel and cement double up in price, infrastructure trudges along, garbage lies everywhere, and people defecate along the tracks, the public works department will spend Rs 1000 crore of taxpayers money, to unnecessarily redevelop Mantralaya.

This is how it will work: The PWD will offer a triangular plot near Mantralaya to a developer, which would demolish the ministerial bungalows located here, and in its place develop 6 new towers of 31 stories each. In return for this, the builder will redevelop Mantralaya.

PWD is careful to emphasize that no change would be made to the basic structure of Mantralaya, which is a landmark, like the Sydney Opera House. An extra 100,000 sq ft created, which includes an extra floor for the CM and the deputy CM.

So, now, who will be the lucky builder for this dream project? And will the Maharashtra government be passing off the profits from this venture to the taxpayers of Mumbai?

The one other similar incident I had heard about was when Nero played the fiddle while Rome burned.

Read the TOI story here

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What is a Housing Bubble?

2008-04-29T22:07:00.001+05:30

Subprime Fallout: Slums in the United States

2008-04-27T14:12:00.005+05:30

Denial is the first reaction to any crisis. When someone tells you that a dear relative has died, what is your first reaction? When you are told the stock market has collapsed, what is your first reaction? Watch this video - because if you are told that the subprime market has created slums in the US, your first reaction would be denial. In 2006, was this even visualized? In 2008 it has become a reality. Why then, are we so reluctant to admit that this can happen in India?

Indian Real Estate: Back in License Raj

2008-04-24T22:23:00.007+05:30

“There is no shortage of land in India”, declared Sam Zell, “there is only a shortage of zoned land”. Read that statement carefully. Read it again. And think of the SEZ policies and the land grab.

Read this article which shows how we are back in the license raj, at least as far as real estate is concerned.

In July 2006 I made a prediction: property prices in India will decline by 25% to 40% over the next 9 months. By July 2007, property prices had increased somewhere in the region of 20% to 30%. So much for my prediction.

So much for sensible analysis. The property markets were in frenzy in 2006 and 2007. Large developers were listing their stocks via IPO’s and they were all lapped up. Well-paid analysts were talking about the embedded Net Asset Value in the stocks of these property developers and the land bank they all owned.

The SEZ policy is the equivalent of the industrial license raj that ruled - and ruined -India’s economy till 1991. Land was acquired at maybe Rs. 10 per square foot. A few approvals later, the land was re-zoned and re-born as a pretty garden villa real estate project selling at Rs. 4,000 per square foot. The magic of the Indian rope trick. The magic of an opaque approval process. Land barons were born. They made it to the mega rich league of the market cap charts.

Investing in India: real estate is overpriced?

Sam Zell, the legendary real estate developer and investor from USA, gave a talk at a conference in Bombay in December 2006. Not more than 5 feet 6 inches in height, he stood above the frenzy of the crowd. Sam Zell had just sold his company, Equity Office, to the private equity firm, Blackstone, for some USD 35 billion in November 2006. Why are you selling Sam? - all the commentators seemed to be asking him - the US economy has a long way to run.

I can picture Mr. Zell smiling in silence as he collected his cash. He sold out at a level that - in hindsight - was the peak of the US property market cycle. “There is no shortage of land in India”, declared Sam Zell, “there is only a shortage of zoned land”. Read that statement carefully. Read it again. And think of the SEZ policies and the land grab.

Sure, India has a demand for some 20 million homes and some 5 million office units and some 200,000 hotel rooms. And schools and colleges to educate the one hundred million young children. And hospitals to take care of the 100 million elderly people in the country as they age in a changing society where the children don’t live with them anymore.

And we need many more cricket stadiums to watch overpaid cricketers sell you some TV sets, washing machines, and mobile phones. A back of the envelope estimate indicates that India needs to build some 3 billion square feet of property in the next 5 years to partially meet some of this demand. How much is that?

Well, visualise Nariman Point. And now imagine that we have to build a string of Nariman Points from Bombay to Bangalore.

There is enough land to construct all of that. The shortage is in the zoned land. This is a man-made shortage. A shortage created by policy. Just as India had to suffer for 20 years with a regime that forced us to buy the Premier Padmini and the Ambassador - and we had to wait 3 years to get the cars delivered. At the end of the wait, we got a useless product for a lot of money. And Premier and Ambassador were profitable companies - whether their profits were declared in cash or cheque.

Just like the sheltered real estate developers. Land is in abundant supply. There is some special mechanism to convert this useless land to useful, zoned land. My colleagues in our real estate arm tell me that there are 62 approvals required to get useless, un-zoned land converted into an end product that we can live on.

Artificial barriers have created an artificial price of the end product. And this leads to a strange end market at today’s prices. The very rich can buy any property anywhere in the world - or any city in India. The rich can afford to buy one nice home in any one city. The middle class cannot really afford to buy in many cities. The poor have no hope of buying anything.

Investing in India: a long term opportunity, short term dangers.

The volume potential in India is huge - tens of millions of square feet can be bought every year by genuine buyers. But not at these inflated prices. Not at prices propped up with an industrial license raj mentality. A policy that favours the few well connected developers. Unlike a car ownership, home ownership is critical. People don’t riot because they cannot buy a car. People will get pretty upset if they cannot afford a home.

The current level of property prices is not sustainable because not many people can afford to buy homes. A simple test: can you afford to buy the home you are currently living in at today’s real estate prices? At what price level can you afford to “re-buy” the home you are living in? And do the same mental test for the people you know. Now where do you think the “real” level of property prices should be?

The real estate developers have land banks though these - in an open environment - are “unbankable” into cash and profits at these current levels of real estate prices. But there is a large demand for real estate out there - at different price points. But which developer - or business person - wants to work hard and build a volume business?

Why build 100 million square feet of homes and sell them for a profit of Rs. 200 per square foot when a “zoning process” allow you to build 10 million square feet and make a profit of Rs. 2,000 per square foot? It is far easier to do what was done in the days of the license raj - limit the supply. Create these islands of favouritism called SEZs or earmark little islands of zoned land from friendly sources. And when you are on an island, it is easier to milk paradise.

And if there is a back lash from the voters, the folks on the island may still get away. But the investors in their listed stocks may not.

Sourced from the column The Honest Truth on ContrarianProfits.com

Ajit Dayal is a contributor to The Honest Truth. Ajit has over 20 years of experience in asset management, financial research and analysis. In addition to founding the Advisor in 1990, he has worked with leading US and UK financial advisory and asset management firms.

Coming Soon: Property Derivatives in India

2008-04-21T18:41:00.009+05:30

In a move that could be a last-ditch attempt to counter the slowdown in the Indian real estate market, a clutch of Delhi and Mumbai developers are pushing for the launch of property derivatives on the NSE, reveal unconfirmed sources.

A closed-door meeting is said to have transpired between officials of Sebi and the Finance Ministry, in New Delhi, the source further said.

This may be the solution for the real-estate industry facing a serious meltdown as well as investors who are facing a double whammy due to a interest rate hike.

The launch of a derivative market in property will allow smart investors to hedge as well as rebalance their property portfolios. The new derivatives will be on real estate, and not the developer companies whose derivatives are already being traded on NSE.

The tool will also be handy for development teams in real estate companies, which are quick to use cash, but find it cumbersome to recover it from the real estate properties, due to the illiquid nature of the asset.

With the launch of these real estate derivatives, developers and builders would be able to sell their properties in the futures markets, immediately, and realize the cash, while the building takes its own time to come up.

However, many in the financial world are however wary of these derivatives. They say it would be used by companies to manipulate the prices of real estate.

Should such derivatives be launched, property prices would shoot up through the stratosphere, and make it impossible for the salaried class to buy homes in an already overheated markets. Nevertheless, it will allow speculators, hedgers and current home owners to realize the worth of their investment in real-time, by buying and selling futures and options, instead of waiting for a buyer.

This may be one reason why builders and developers could be keen on a quick launch of property derivatives. The discussions are at a very preliminary stage and no one is coming on record. However, sources say that it may soon be put up for discussion in the public space.

Price Cut Tsunami to Hit Indian Real Estate

2008-04-21T16:08:00.008+05:30

The DNA describes it well, when it says, “It started out as a light breeze but the winds of change in the city’s spiraling property market are now developing in to a strong gust.”

Builders, big and small, are suddenly turning to their fixers of the real estate industry – brokers. These shunned lot are suddenly being looked upon as favored brides, in an industry that is soon about to witness the Tsunami of Price Correction.

This has never happened before, and brokers are chuckling, since 2-3% extra commission on achieving targets can pack in a healthy balance sheet.

In fact, not only is there a 2-3% extra, but a discount of 10-15% is also thrown in to the price, which the broker can pocket for himself, should he wish.

The story of last 2 years has slowly begun to sour in Mumbai. The sex is over, it is refraction time for Mumbai’s building industry.

Builders are actually addressing the bull by the tail instead of the horns, and this is why there is a veil over the price falls. The actual correction is 20-25% if you take in to account the discounts of 15%, and the waiver of stamp duty, free parking included, etc. And this is just the beginning.

Big names like Hiranandani denies there is a correction. But then, this is a builder whose promoters have denied Rs 160 crore of provident fund to employees, and were recently in the news because of a CBI investigation. You cannot take their words seriously. The sales of flats at their recent project, Hiranandani Meadows, Thane, has been relatively slow.

There are denials from Mukesh Patel of Neelkanth Developers and Sunil Mantri of Mantri Developers. Mantri said he got 2000 inquiries and has sold 50 flats already. However, even he had to come up with a discount scheme:

Just 5 days to save Rs 3,65,700! At Mantri Park Goregaon, 1BHK & 2 BHK apartments. Consider savings in stamp duty as additional sweetener. Rush! This offer is valid only upto [sic] April 13, 2008 or first 51 customers

Let us look at some other advertisements that belie the weakness in the housing industry:

Rs 300 off per sq ft only up to 20 April 2008. Lok Housing, Mumbai
Pay 20 percent now and 80 percent on possession. Nahar Amritshakti, Mumbai
Free modular kitchen, free parking, free interiors, stamp duty relief. New Delhi

Then comes the case of Orange Properties, which is a car-offer specialist: It gave Maruti SX4s to people who purchased an apartment in their Bannergatta project, and earlier the same company gave Audi A4s, each worth Rs 30 lakh, for those who booked villas in their Magnolia Brooksville project.

The collective desperation of an industry is slowly unveiling itself. Just one straw is required to break the camel's back. What will it be? The CRR rate hike -- not this one, but the balance 0.25% which has been held in abeyance for April 29, 2008 -- or the relentless surge in prices of oil, rice, wheat, pulses and metals -- in other words, soaring inflation. Or, will it be the Supreme Court coming down hard and justly on builders for violating the Private Forest Land?

Whichever it may be, the real estate industry is in for a real shock.

Regulatory Authority Needed in Real Estate

2008-04-19T13:14:00.001+05:30

One of the most discussed topics among home buyers these days is whether there should be an authority in the housing industry on the lines of the SEBI, IRDA and FMC, the regulatory organizations of equity, insurance and commodities markets.

Builders and developers seem to have unbridled sway over the housing industry, which in fact is an asset class in itself. While trading in all other asset classes are regulated, it is surprising that the companies in the real estate business have absolutely no overseer.

It is not that regulatory authorities have a lot of bite, but over time they mature and do in fact regulate the market to a great extent. Have we not all seen how the BSE functioned, before Sebi came in to existence? There were always the usual threats, as there were by the brokers in those days, but they later all cooped up and went about doing their business.

Today, the real estate business looks like a concerted effort by all builders to hold prices, while acquiring cheap land from government. For the builders, this is certainly be as good as it gets -- they have become the new East India Companies of India.

Properties in Mumbai are being parceled off by the government to builders who are financed by foreign money. No harm in this, but when the end-result is properties being sold for speculation to those living abroad, who have no desire to occupy these flats, but who in turn rent it out to the hapless local masses, then something in the cycle is detrimental in nature. This trend has started to kill the city, and eventually will kill the market too. However, unless checked before it is too late, the entire city would have paid a hefty price.

These days, a person earning Rs 1 crore a year, cannot think of buying a 1000 sq ft home -- forget mentioning the word "decent" -- in South Mumbai, where properties of these sizes retail for Rs 6-9 crore at the lowest end. In places like Malabar Hill and Napeansea Road, one square feet costs Rs 1 lakh! Today it is cheaper buying a 2000 sq ft ranch in California than owning a hole in Mumbai.

If the city is out of bounds, affordability now means that affluent salaried families have to move out of the suburban limits completely. This means traveling hours to their places of work, but remaining marooned on the fringes of the city. A similar situation was seen in Japan, in the 1980's, the dismal consequences of which are very visible even today.

Truly, in comparison, the Indian home buyer was better off during the days real estate was fragmented with the underworld running the show. In those days, you would pay off black money to the builders, but were able to afford an apartment in a specific quarter of the city.

These days, the goondas are wearing suits, ties and slick shoes, carrying notebooks with Powerpoint presentations, and holding the people of the city at ransom. Ever since the realty industry has got organized and corporatized, it has slaughtered home buyers. Homes have become stratospherically unreachable in every corner of the city. In fact in the same area, homes can cost widelydifferent, without an iota of change in surrounding infrastructure. When a TV star cannot afford to buy a place in Mumbai, one wonders who is it that is buying homes in Mumbai.

We will need to see some quick and dramatic action by the government in setting up a regulatory commission for real estate. Builders are now saying that this will force them to take money in black. Is this not ridiculous that a builder-developer can actually accept this with impunity, that if the government brings in a regulatory commission, it is willing to commit a crime against the nation.

Really speaking, black money is accepted even today. The full check payments exist only for far-flung townships outside of the city. So, nothing really has changed. So, as far as the home buyer is concerned, it is high time we see a housing industry regulatory commission. If SEBI, IRDA, and FMC have done a good job in their respective industries, there is no reason why one cannot make a difference in the housing industry.

BKC Land Sold for Rs 1270 Per Sq Ft?

2008-04-18T11:31:00.011+05:30

Who says land in Mumbai is expensive?

Parsvnath Developers has been able to procure land in Bandra-Kurla Complex, measuring 30,820 sq m, in open tender for Rs 42 crore. The project is for development of a depot for BEST, Mumbai's local transport and electricity provider.

The project involves planning, design, construction and re-modeling a fully-equipped depot, staff housing and commercial offices. This is however not the point.

Let us calculate the cost of per sq land in BKC, which is sold by MMRDA, the Maharashtra government's arm for real estate development.

It works out to Rs 1270 per sq ft. This is the cost of land at which it has been acquired by a private developer, in Bandra-Kurla Complex, considered to be the hottest property in Mumbai. All the while, home buyers are asked to cough up Rs 30,000-50,000 per sq ft for buildings in this area. If this does not reek of some sort of connivance of government then what is?

These same developers want to build housing and commercial blocks on these lands, and sell them for exorbitant prices. Precisely why investment by real-estate fund manager, Saffron has valued the project at Rs 620 crore.

No harm in this, except that this is "organized butchering" of the 40% citizens who want to live legally in Mumbai. The balance 60% of Mumbai live in slums, and will be getting small rented apartments as compensation for their lands, which will be taken away and sold to builders at high prices, a la Dharavi.

Read the original BS story here

Mumbai Realty Slump Becomes Very Real

2008-04-17T21:31:00.005+05:30

They may have appeared unfazed, but they now have begun to face reality.

It is good to know that Times Property of April-12, 2008, mouthpiece of Mumbai's housing industry, has acknowledged that there will be a correction, after months of writing that there is no such thing in Mumbai.

The usual suspects quoted in the article also sheepishly accept a correction will happen, albeit they say it will be 15-20% ; at least this is 5% more to their usual cliche of 10-15%. This is a far cry from February 2008, when none of them accepted that a correction is possible.

Now, one can safely assume a expect a 50% correction in the Mumbai real estate markets -- over the next 1-2 years.

Bubbles, housing or any other, are not caused by demand from the consumers, or affordability or the existence of genuine buyers, although these are the oft-attributed reasons for any manic rise. While these factors can be contributors, the single-most reason for bubbles is too much cheap money floating in the markets, with nowhere to go. But money is going to get very expensive in the next 3 months.

The RBI will have to hike the interest rates, because there is no other way to beat the 7% and still growing inflation. The other option is to make the rupee stronger, which the RBI has always been reluctant to do. There is a view that this time both options could be used by the RBI, which can be a double whammy. With interest rates rising, more speculators would exit the markets, and builders would have to pay more on their borrowings, and consumers more on their home loans. Further, a rising rupee would hit US investments in India.

This may also be a reason for a flurry of PE investments in real estate and others in India, rather than being a mad rush for property investments, it may just be a concentration of a closing pipeline of investments, before the RBI raises interest rates and allows the rupee to further increase.

The RBI is in fact facing a piquant situation, where rising import costs are creating havoc for Indian consumers. Already the rising prices of steel and cement are hitting the roof, and those of rice and wheat are hitting the bellies.

Suddenly, the talking heads at real-estate brokers, builders and developers, as well as those who have purchased expensive homes, are now saying the correction is certain, but it will be of a shorter term nature. All of them sound more like a mother comforting her crying baby.

None of us can say how long this correction will last, and none of us know what shorter term means. We have been introxicated with 50% gains in stocks within months, so it is unlikely that our shorter term is going to be more than 3 months.

Essentially this means we are looking in the face of a longer term correction in real estate.

However, irrespective of what the yardstick may be, now not a single builder or broker is denying that we are set for at least a 18-24-month decline in property values. While all are keen on talking about the time, no one is certain about the depth of the decline. At most 20% is being quoted as the outer limit.

The general reasons why builders and brokers are putting on a brave face in Mumbai is that they believe there is a genuine shortage of supply. Fact of matter is, there is no genuine shortage. The shortage has been created by builders hoarding properties. Do a round of any builder in the Andheri-Goregaon belt, and you will see lots of flats which have been "pre-sold" to investors.

Builders also apportioning credit to the High Court order on the private forests issue for creating a shortage of homes. This is completely untrue.

The acute rise in the cost of Mumbai's real estate, as it would be in any other state, is due to a unholy nexus between Maharashtra's politicians, most of whom own swathes and swathes of property, the builders and brokers, and uncontrolled hoarding and cartelization.

80% Decline in Primary Realty Sales

2008-04-17T00:06:00.004+05:30

There is an 80% decline in primary realty sales in India, according to Unitech's vice president (Sales and Marketing), Bhaskar Basu, who has upped the advertising of Unitech Grande, a 347-acre project outside of Delhi. Unitech is trying hard to lure buyers. for this project, which was started 8 months ago.

“Speculators are exiting real estate. Therefore, promotional activities have increased these days to woo buyers, who are the actual users now,” said Omaxe chairman Rohtas Goel, who has just launched a luxury apartment project.

“All developers will have to work harder now. And that’s why the visibility of promotion campaigns has gone up. Everyone is trying to grab a piece of the shrinking market,” said real estate consultancy Knight Frank India chairman Pranay Vakil.

Desperate times call for desperate measures. One builder in Mumbai is trying to make "brokers" out of customers. If you have picked an apartment or a plot in some grand scheme, you can convince your friend to buy too, and coolly pocket 2% as commission from the builder.

The times would be getting harder, is what the writing on the wall says. After years of frenetic sashaying, builders and developers are now scraping their best to close deals.

The focus of builders has now turned to high-earners in the banking sector who get their bonuses around this time. If this fails to enthuse executives, it would mean another step lower for the real estate industry.

Read the original ET story here

PE Investors Turn Wary of Real Estate

2008-04-15T12:13:00.004+05:30

India’s real estate industry would like you to believe that the country’s real estate scenario is perfectly under control and that foreign investor interest is not waning at all.

However, some trends belie the fact that a good amount of wariness has crept in to the investor space too, many of whom are now opting to invest in SPVs – specific investments in projects, which are easy to monitor and exit – instead of a stake in the company.

The common refrain some months ago was “land bank”. Companies acquired land, and then determined the amount of construction possible on this land. They put a future price per sq ft to the amount of space to be constructed, and used it as a measure to determine the current value of the company. Companies were then listed based on these valuations.

How different was this from the manic 1990’s when Internet companies were valued based on future revenues? Millionaires are being created in real-time, based on future, and imagined, earnings of their companies.

However, the nose-grinding devastation of Emaar-MGF’s IPO suggests that Indian retail investors are no longer buying in to skyscraper-like projections of real-estate companies. Neither are the East-Asian investors. DLF and Indiabull’s REITs which were to be listed on the Singapore stock exchange were withdrawn some time ago.

It clearly means that institutions, investors and retail traders cannot, at least for a few years, think of buying in to real estate IPOs and flip it over on listing day. By the time the market is back on its feet, SEBI would have in place a circuit filter on Day 1. At present, there are no circuit filters applicable to a new stock on its first day of listing.

Thus, there is no reason for real estate buyers, to buy into highly priced properties, which are being sold through large glossies in the newspapers. When the BSE Realty index has fallen 46%, real estate will soon follow. And this is just the beginning.

The Commercial Property Bubble of Mumbai

2008-04-14T09:48:00.005+05:30

Mumbai is in the middle of a "commercial property" bubble which is making residential properties unaffordable to even the "affluent salaried class" here. The government is making a Bandra-Kurla Complex (BKC) of the entire city.

It may be worthwhile to investigate if there is anything in the law that prevents commercial towers from coming up on lands meant for residential occupation. If there is, it can be the ultimate pinprick for this commercial property bubble of Mumbai.

The question many are asking, why is it that builders are still hanging on to their rates, when there is no marked demand from home buyers for the past 3 months, and when even brokers and developers admit that the sale of residential apartments have fallen 30-40%. What caused this immense maniacal rise of property prices up to 300% in 3 years. Why is it that in the same location, the cost for an apartment varies 100%, given the cost of land is the same?

The reason that every real estate expert and non-expert is ever so willing to dish out is the simplest: huge consumer demand. A pent-up demand for homes, further compounded by the High Court order on private forests lands. Sanctions on builders that have encroached on forest land, in areas such as Thane, Mulund, Bhandup, etc., they proffer has compounded the shortage in residential apartments, thus peaking rates further.

However, a cursory look will prove this incorrect.

A scan of advertisements, for homes in these areas, makes it clear that investors and home buyers have no interest. Instead of a pent-up demand, there is a simmering trepidation, that a home purchase may result in a confiscation of property. Brokers are actually advertising, "Not on Forest Land, "Clear Title Deed," etc in an effort to lure back buyers. So, the HC order creating a shortage does not hold water.

Given this scenario, what had taken and is keeping prices high in Mumbai?

The answer is simple: Excess money.

This overdose of cash is not the one that PE firms investing in SPVs for specific projects in Mumbai. This is one that builders are paying societies to vacate their old and dilapidated buildings, so that commercial towers can come up in their place.

Not a bad idea at all, except that allowing commercial property to come up on residential lands is actually the virus that has been hiding for too long. It is logical for builders and developers to focus on the most profitable areas of business, but it is up to the government to control and regulate excessive greed and exploitation.

The Maharashtra government is allowing builders and developers to buy out old residential buildings, and construct commercial towers on them. It is a well known fact that commercial property fetches up to 3-4 times the rate for a residential apartment, in peak times, and at least twice in stable times.

Quite obviously, builders are focusing on commercial property, paying up to 3 times the residential rate. The objective is simple: Pull down the old dilapidated structure and build a sky-high commercial property. Purchase cheap TDR from other slum redevelopment projects and add this on to this tower. Since the new structure is usually in the luxury segment, builders command at least twice prevailing commerical rate.

This has caused a unique situation. Slum dwellers, and those living in old one-room tenements, chawls etc., are being paid 3 times the residential rates and asked to vacate their properties. Now, these individuals, armed with excess cash do not mind paying twice the rate for a residential apartments in the same area,-- it's free money, in any case, said one such owner -- keeping 1/3rd of the new-found wealth in the bank.

An istriwala (one who irons clothes) was paid Rs 80 lakh to vacate his 100 sq ft hut in Bandra-Kurla Complex, where a new Tata project is under development. Another, who refused to budge was paid Rs 1 crore a few months later. Such is the mad rush for building commercial property.

This has set in to motion a vicious cycle, starting with every person claiming that his apartment is now worth the new rate paid by the builder, thus jacking up residential rates in the area. Seeing the neighbor with his millions, others are running up to banks, signing up mortgages, coughing up the premium and investing in properties, convinced it would either be picked up for commercial redevelopment, or at least see at 20% appreciation due to it. New builders come in, pay 3 times the new residential rate, thus taking rates up even further.

This vicious cycle has been responsible for the housing bubble in Mumbai. If left unchecked, we are not so far away from what happened in Tokyo in 1990's when the housing bubble of the 1980's was punctured, and Tokyo has never recovered till today.

It is a different story if new commercial areas are being developed, like Nariman Point and Bandra-Kurla Complex were built in the 1970's and 1990's respectively. But it makes no sense making a BKC out of an entire city.

It is time the Maharashtra government to step in , or risk being booted out.

Foreign Banks Exit Own Mumbai Apartments

2008-04-13T23:01:00.012+05:30

Desutsche Bank and Citibank, which are being quoted in newspapers as pouring heaps of private equity money in to projects of real estate developers, are themselves abandoning their residential properties in Mumbai.

Deutsche Bank is the same bank which has been reported as co-investing $500 million along with Lehman Brothers in a Unitech SPV.

Of course, no one expects them to give us the real reasons for selling these properties, but a change in the compensation structure is being quoted, along with the fact that these flats are located in "distant" South Mumbai, far away from the bank's current locations, and hence no senior directors want to stay in these houses.

However, until 3 months ago, Citibank itself had sold a property in NCPA Building in Nariman Point for Rs 34 crore, and has now put another residential property on Altamount Road for sale. CB Richard Ellis (CBRE), the broker handling this transaction, has fixed a floor price of Rs 32,000 per sq ft.

It would be interesting to watch the price at which this property sells, or will it be doctored in back-end rebates to some NRI.

Some argue that these banks are only freeing fixed assets and releasing capital -- however, it is unusual for a bank to sell an asset with interminably rising value, if developers, brokers and some newspaper supplements are to be believed.

Recently, American Express Bank also sold some of their residential property, and HSBC has been selling property since 2006. Amex was also the bank that sold a Malabar Hill property to investor Rakesh Jhunjhunwala for Rs 25 crore.

Foreign banks have moved their operations from South Mumbai to business districts in suburban Mumbai, and now prefer to give their employees a fixed cash compensation every month, which the employees could use to pay the house rent or the instalments of a home loan.

So question is, what are these banks planning to do with the cash released by sale of these fixed assets. Real estate investments?

Quotable Quotes on The Housing Correction

2008-04-13T14:27:00.007+05:30

"The correction will be of a short-term nature rather than a long-term one, lasting for about 18 months, after which they will stablize." -- Balaji Rao, Country Head, Starwood Capital.

What he means: For the next 18 months, prices will continuously decline, after which they could stop declining, but not necessarily rise.

"The suburban market will see a bit of slowdown, in addition to what was witnessed last year, but this will not be true for the island city." -- Sanjay Dutt, Joint Managing Director, Cushman & Weikfield.

What he means: Although, some others in his company were denying it, there has already been a correction last year in Mumbai suburbs, and some more slowdown can be expected, but not in South Mumbai.

"The next two years will see the market remain on hold, unless the US economy recovers and inflation comes under control." -- Pawan Malhotra, MD & CEO, Mahindra Lifespace.

What he means: Forget about any further price rises in the real estate industry. The US economy will not recover for 2 years.

"Any crisis leads to innovation and differentiation, hence we may see builders constructing, one BHKs or compact 2 BHKs in a bid to push volumes." -- Pawan Malhotra, MD & CEO, Mahindra Lifespace.

What he means: Builders have in so far deliberately not been not building 2-BHK houses, and we have been focusing on luxury apartments, but now we may want to cater to the middle class.

"During this interim period builders should adapt to the situation and continue to sell rather than going underground. The market wants to see resilient builders; hence builders should take a dip in their margins and continue selling, in order to emerge as long-term players in the market." -- Balaji Rao, Country Head, Starwood Capital.

What he means: I am wishful thinking.

Source: Times Property, Mumbai, April 12, 2008

Has Deutsche Bank Exited Unitech SPV?

2008-04-12T17:53:00.000+05:30

An awkward story, featured by CNBC on April 8, 2008, about Lehman Brothers confirming the $500 million investment in Unitech’s SPV, has got me thinking.

This announcement had nothing new to convey. It merely said Lehman was confirming its investment in Unitech's SPV. There were no sources quoted either at Unitech or Lehman. Curiously, the other SPV investor Deutsche Bank was not mentioned at all.

So the question that comes to mind: Has Deutsche Bank reversed its decision to invest in the Unitech SPV? So, is Unitech or CNBC trying to prevent the facts by playing up another angle so as to continue the hype in the real estate scenario in India.? The CNBC story only said, matter-of-fact, that "an official announcement would be made next week".

On the face of it, it appears innocuous. However, when you consider the fact that this story in itself was about 3 weeks old, first published by the Economic Times, which talked of two SPV investors, Lehman and Deutsche, a story subsequently picked up by the global media, including CNN Money and others.

So, what was it that CNBC was trying to achieve?

I do not think that CNBC is run by fools, as most traders say. It is a well-oiled engine that works in cahoots with corporations, albeit seemingly an unwitting partner, to manipulate stock prices, with conjecture, innuendos, and mostly with things not said, rather than said.

I smell a rat in this Lehman-Unitech story, but then as one steel-trading friend said to me, I always smell rats, and that the smell is so embedded in my nostrils, that I smell rats even if there are none. May be he is right, but here is my personal take on what CNBC is trying to achieve:

Protect someone's stake in Unitech, because Lehman and Desutsche are both planning to exit these projects.
Attempting to jack up Unitech’s price to allow some large investor to exit his stake.
Protect and prevent a slump in the real estate market by playing positive -- even if speculative -- stories.

Unfortunately, CNBC has become a poor cousin of its US counterpart which is equally infamous for its jingoism, but has refrained from sinking to abysmal levels. Further, Sebi too has fallen short of investigating investments made by holding companies of media organizations either directly or through persons and companies acting in concert. Even a cursory study can reveal some startling facts.

Unitech had picked up slum rehabilitation land in Santacruz and Worli in 2007, the peak of the Indian real estate mania, while Lehman and Desutche had committed their investments around March 2008, when despite the subprime complications, things were not really as gory.

Sometime later, things have taken a very ugly turn. Bear-Stearns went down and Lehman was rumored to be next. So there is every reason for Lehman to conserve all the cash it has, and pull out of any investments, so as to protect itself in the US. For those who do not agree, remember how Bear-Stearns sold each and every holding in India, and remember the Orchid debacle. There were rumors about Lehman doing the same but somehow things did not pan out like this. This time, it could well be.

Since the deal making news in March 2008, real estate prices in Mumbai have dropped rather heavily, even though builders may not be be ready to cut prices and may continue to hold the their properties. Fact is, in the suburbs, new purchases have sunk 40%.

The land where Unitech is planning development is in Santacruz, near the Bandra-Kurla Complex (BKC), and at Worli,; at both places, rentals have fallen at least 30% from their heights during the real estate mania.

If indeed these two investors are going ahead with this deal, this means Lehman and Deutsche, each battered rather badly by their poor investments in US subprime, definitely have great wisdom about the Indian real estate market, and consider it cheap.

If we look at what has happened to these companies on their own bourses – Lehman was rumored to be almost filing for bankruptcy – they would really have some answering to do to their shareholders in the US about investing in the Indian real estate bubble.

Now, for one minute, if I look at this entire news story with jaundiced eyes, I can come to only one conclusion.

The entire story played out by CNBC is a desperate attempt by Unitech to leak such information and put pressure on Lehman to remain with this deal.

As the newsreader said, “An announcement is expected to be made next week,” it could well be CNBC’s way of propping the share price to allow some large investor to exit from Unitech.

This story is in fact over 3 weeks old, and was prominently presented by the Economic Times, and then picked up by the global media. Most of the quotes in the newspaper and online stories were attributed to unnamed people close to the deal – basically no one.

If Lehman agrees with Unitech’s plan, why has it not come out and said so. What about Deustsche Bank? CNBC has not said if it also agrees with this plan.

Further details of this plan are as follows: Unitech currently holds 50% stake in these two SPVs. While Mumbai's Rohan Group, with interests in industrial and residential construction has a 20-25% interest in them, the rest is held by undisclosed partners.

Sources that CNBC claims have informed it, that Unitech, Rohan Group, as well as the other investors, would reduce their stake proportionately to accommodate 35% of Lehman. No comment has been made about Deutsche Bank.

Finally, while Unitech has 8 million sq ft for development under this scheme, Deutsche and Lehman are investing in just 1 million sq ft. Which brings me to the eternal question: Is there real estate bubble finally bursting. If builders are asking your to pay Rs 25,000 - and Rs 50,000 per sq ft why is it that Lehman is investing in just 1 million sq ft? Why not go the whole hog if the deal is so sweet.

Read the ET story here

Read the March-23 Bloomberg story quoting ET here

Read the March-23 Reuters story quoting ET here

Read the March-24 CNN Money story quoting ET here

Read the March-24 Marketwatch story quoting ET here

Read the April-8 Moneycontrol (CNBC web site) here

Lessons from Japan’s Housing Bubble – V

2008-04-12T17:52:00.007+05:30

All the king’s horses and all the king’s men, could not put the Housing Rubble up again.

The accompanying image depicts house prices post the Housing Bubble. By 2004, the Japanese housing bubble had become completely obliterated. More than $20 trillion (1999 dollars) were wiped off with the combined collapse of the real estate market and the Tokyo stock market.

A class-A property in Tokyo’s financial districts were less than 1/100th of their peak, and Tokyo’s residential homes were 1/10th of their peak, and even at this time they were considered to be listed as the most expensive real estate in the world.

One of the main reasons for the failure in containing the housing bubble was the late intervention of the Japanese central bank, the Bank of Japan, which stepped in late-1989, when it was too late and rates were stratospheric.

As with any desperate moves, the action it took was far too heavy and too fast, raising benchmark interest rates from 2.5% to 6% over 15 months. This was too much for Japan's over-inflated land and stock markets to handle, and economists say that this pulled the rug out from under both markets at the same time.

The Japanese housing bubble was a result of the availability of cheap money, at low interest rates, while the US sub-prime crisis was a result of inflation driving up the interest rates, which forced the Fed to cut benchmark interest rates from 5.5% to 2.5%.

Primarily, it is the availability of excessive funds sloshing around in the economy that causes bubbles. In Japan, business corporations themselves indulged in real estate speculation, so when markets collapsed, it wiped out company balance sheets, crippled the nation’s banks, and gave the overall economy a blow to the chin. This appears to be very similar to what is currently happening in India.

Read the first story in this series: Why is India's Housing Bubble Similar to Japan's

This article has been developed from the October 2005 issues of the New York Times. You can read it here

Lessons From Japan's Housing Bubble - IV

2008-04-12T17:37:00.012+05:30

Bubble Survivors: Marooned in Distant Suburbs

A fallout of the housing bubble was the creation of the financially marooned.

In the 1980’s, land prices in Japan rose to such astronomical levels, that the only places people could afford were far away from central Tokyo. Many individuals were forced in to deep debt by buying poor quality homes in areas that were hours away from their offices. These were the only places they could afford.

Subsequently, when a fall in Tokyo's real estate led to severe declines in property values in the outlying areas., people who purchased these properties were stuck, and could not sell them since they now fetched less than the balance on their mortgages, taken over a decade or more ago. Many till today are trying to make the best of life in homes that are far away from work and for which they had grossly overpaid.

Read the next story in this series: All the King's Horses and All the King's Men

This article has been developed from the October 2005 issues of the New York Times. You can read it here

Lessons from Japan's Housing Bubble - III

2008-04-12T16:39:00.010+05:30

Bubble Indicator: Mad Rush for Home Loans and Huge Debt

The rush to use housing loans to fund home purchases and retail borrowers becoming very comfortable with taking on huge debt is an indicator that a bubble may be in place.

During Japan’s housing bubble, banks came out with exotic loans that required very little money upfront and promised extremely low EMIs for the first few years.

Surprisingly, despite having seen this taking a toll on the Japanese, US financial corporations did not hesitate to devise similar debt options, to fuel the housing boom in the US, and consequently these loans were responsible for what is now famous as the Subprime crisis.

Japan’s exotic loans included the so-called three-generation loan, a 90- or even 100-year mortgage that permitted buyers to spread payments out over their lifetimes and those of their children and grandchildren.

Perhaps the one redeeming factor in India is that home loans are conservative products of 15- and 20-year tenures, given only after a 5-10% down payment is made. Loans in India conform to stringent qualifying mechanisms, which may be one reason why many believe that there may not be a bubble in place.

It can be argued that a lack of exotic loans has in fact prevented a blow-up, but this does not mean it will be enough to prevent it. To take things in perspective, salaried individuals in India have been a conservative lot, who until 1991 were expected to buy a house with their savings.

This continues to be the general line of thinking, but people have become more aggressive and speculative. It is not unknown to find 25-year-old ITES employees to splurge of large homes using home loans. This has also caused the average age for home purchase to fall to 32, while in 1991, when the Indian economy opened, the average age of a home purchaser was around 38.

Nonetheless, the prime driver for real estate in India continues to remain the stock markets. One must not forget that in 1995 the per-sq-ft rates for homes were the same as in 2006. New highs were made only in 2007, driven by the large sums of monies made available to real estate companies, either through listing, or through private equity funding.

The boom of 1995 was without cheap credit and private equity, which counters the argument that the lack of exotic loans in India has prevented a housing. It is worthwhile to note that floating-rate interest loans in India are a form of exotic loans, where the EMI could increase if the RBI increases the repo rates – the rate at which the RBI lends to banks.

But when property prices dropped in Japan, homeowners found themselves saddled with loans far larger than the value of their real estate. Many fell into bankruptcy, especially those who lost their jobs or took pay cuts as declining property prices helped to incite a broader recession.

Read next story in this series: Marooned in Distant Suburbs

This article has been developed from the October 2005 issues of the New York Times. You can read it here

Lessons from Japan's Housing Bubble - II

2008-04-10T12:29:00.006+05:30

Myth: Prices will keep rising forever.

Too many homebuyers, lured by sleek advertising and media-generated hoopla, buy properties that they can rationally ill-afford, given their financial background and potential. However, their eyes are usually centered in to a future where they expect to sell their newly-acquired properties at huge profits, while allowing rentals to pay for their EMIs. However, when prices drop, buyers get financially battered and in worse cases even completely wiped out.

Human beings have a congenitally designed to not learn from the past. During a bubble, people don't believe that prices will fall, even though it has been proven wrong so many times before.

Another indicator of a bubble is the unbridled bidding for worthless land.

At the peak, an empty three-square-meter parcel (about 32 square feet) in a corner of the Ginza shopping district in Tokyo sold for $600,000, even though it was too small to build on.

Prices were highest here in 1989, with some fetching over $1.5 million per square meter ($139,000 per square foot), and only slightly less in other areas of Tokyo. Plots only slightly larger gave birth to bizarre structures known as pencil buildings: tall, thin structures that often had just one small room per floor. Such structures later become reminders of a different era, like the aftermath of a boisterous party.

Another indicator of a bubble is the acute scarcity of affordable housing. In Japan too, during the housing bubble, the focus was only on building commercial property and luxury apartments. In India too, currently, especially within the city limits of Mumbai, a standard 2-bed room apartments cost no less than Rs 1 crore.

By 2004, a prime “A” property in Tokyo's financial districts were less than 1/100th of their peak, and Tokyo’'s residential homes were 1/10th of their peak, and even at this time they were considered to be listed as the most expensive real estate in the world. At the end of the Japanese housing bubble, some $20 trillion (1999 dollars) was wiped out with the combined collapse of the real estate market and the Tokyo stock market.

Read next story in this series: Mad Rush for Home Loans and Huge Debt

This article has been developed from the October 2005 issues of the New York Times. You can read it here

Lessons from Japan's Housing Bubble - I

2008-04-09T18:20:00.018+05:30

Why India's Housing Bubble Similar to Japan's?

A housing bubble is in place when property rates start rising at double-digit rates, and people start taking loans to invest in property, with the idea that the loan can be paid back easily and the property sold at a profit.

Once the bubble is burst, the property is worth a fraction of its purchase price and people get left behind with a negative asset, where the EMI is higher than what the asset can earn in a month. In such a situation, the balance outstanding loan cannot be paid off even if the asset is sold.

Japan is an excellent example of a housing bubble that went horribly wrong, and it has a glaring similarity to what is happening in India. Read on and identify the similarities:

The Japanese real estate market boomed from 1985 to its peak sometime in early 1991.
During this time, Japan’s property prices rose much faster and more steeply as speculators used paper profits from a booming stock market to invest in property, insupportably leveraging the prices of both higher and higher.
The biggest speculators in Japan's frenzy were deep-pocketed corporations, and they pumped up the commercial property market at the same time that home prices were inflating.
Japan suffered one of the biggest property market collapses in modern history. At the market’s peak in 1991, all the land in Japan, a country the size of California, was worth about $18 trillion, or almost four times the value of all property in the United States at the time. A commonly-quoted claim was that the land beneath the Imperial Palace in Tokyo was worth more than the entire state of California.

Then came the crashes in both stocks and property, after the Japanese central bank moved too aggressively to raise interest rates. Both markets spiraled downward as investors sold stocks to cover losses in the land market, and vice versa, plunging prices into a 14-year trough. In 2005, the land in Japan was worth less than half its 1991 peak, while property in the United States has more than tripled in value, to about $17 trillion.

Homeowners were among the biggest victims of the Japanese real estate bubble. In Japan’s six largest cities, residential prices dropped 64 percent from 1991 to 2004. By most estimates, millions of homebuyers took substantial losses on the largest purchase of their lives.

Read next story in this series: Myth: Prices Will Keep Rising Forever

This article has been developed from the October 2005 issues of the New York Times. You can read it here

Why a Real Estate Bust is in Offing

2008-04-08T22:27:00.014+05:30

Stock market crashes almost always precede a real estate bust, and there is no reason why it should be different this time.

Several analysts are waxing glory about the Indian real estate market, creating a belief that it can never collapse. However, history has proven that there is a direct correlation between the stock markets and real estate markets, with a time lag of usually 6 months to 1 year.

If the Nifty and Sensex do not make new highs by June 2008, India’s real estate market will start accelerating downward. By this yardstick, we have another 3 months before the property dream becomes really sour.

However, this doesn’t mean that all will be hunky-dory for those who have invested in property. Until then, prices will not rise; at best they will stagnate or remain in a state of limbo – both sellers and buyers won’t budge.

Whenever the stock markets have passed through boom times, demand for – and consequently prices – of property have gone high. Likewise, in depressed stock markets, property prices tend to soften.

The reason for this relation between the two markets is that, in rising markets, investors find real estate as the ideal place to park the huge gains made in the stock markets, leading to escalation in prices; conversely, in a falling market disposal of property is the quickest way to cover losses, leading to a fall in property prices.

History is replete with examples to confirm this nexus. The most glaring is Japan. It has never recovered since its real estate boom and subsequent bust of 1985–90. India incidentally is exhibiting the same pattern as the Japanese cycle.

Japan’s real estate market crashed in 1990 following the stock market crash. It is almost 18 years since, but the real estate market is still stagnant in Japan.
In 1991, post the Harshad Mehta-led market crash in India, the real estate markets also crashed and prices remained stagnant for next 6-7 years. They bottomed out in 2002.
In 2001, the tech-led Nasdaq crash caused the real estate market to fall around 20-30 percent.
The 2007-08 downturn in US real estate markets is staring at us right in the face.

The reasons for the crashes may be different, but the pattern is almost always the same. People who have lost heavily in stock markets are keen to dispose off their investments in the real estate market. Distress selling always depresses prices. Small builders facing financial shortage have to sell some of their property to meet financial requirements.

Many other individual investors, who have purchased multiple properties with their own funds or loans for speculative purposes now have to sell some of their property before prices go down further.

The question many ask is why did the fall of May 2006 not trigger a real estate crash, in fact real estate reached even higher heights since then. The answer is again in the stock markets. After May 2006, the stock market recovered within 6-8 weeks and even touched a new high, thus buoying real estate prices with it.

However, when the massive sudden fall in the Indian stock markets was seen, there were reports from Mumbai, Delhi, Bangalore, Ahmedabad and Coimbatore that clearly indicated that property prices (specifically residential property) dropped 10 to 15 percent off their highs. Fresh buying had come to a screeching halt in all major cities.

The current scenario in 2008 paints a picture of almost every retail investor waiting for the market to rally up to new highs and this is a huge gamble to take. If the stock markets do not make new highs, and in all probability they will not, it will be no surprise for real estate prices to drop by up to 30 -40 percent in the near future.

However, it is not just the stock market that is responsible for downturn in the property market. Other factors that escalate a crash are:

Rising interest rates on housing loans; these have increased from 8 to 10.5 percent in last two years, thus increasing the number of EMIs.
RBI tightening liquidity. RBI has tightened lending norms by raising risk weightage for real estate loans to 150 percent. A lot of speculation in real estate was because of excess liquidity in the market.
Rise in petrol prices and other commodities puts pressure on monthly budgets of the middle class, forcing it to postpone the purchase of homes.
Lack of government regulation in the market.

The above are reasons why we are primed for a real hard knock in real estate. If you do a check of the above factors, you will see that the current situation complies with each and every point. Yet, almost every person is in denial that an imminent correction awaits the Indian real estate market.

A stock market crash is just a trigger. Usually, property prices reach unsustainable levels on account of huge speculative demand, and the real estate market collapses under its own weight.

The current article has been developed upon an idea from another website. You can read the original 2006 article here

Carpet Area Bill will Bomb Old Flat Owners

2008-04-08T15:53:00.004+05:30

The new bill by the Maharashtra government has thrown up a positive, albeit unintended advantage: it may sound a death knell for the sales of apartments in older constructions.

Prior to this bill, and bouyed by the higher prices of newer and exquisite apartments in their vicinities, owners in old buildings were charging exorbitant rates for their apartments.

In many cases, they would add 40% to their carpet areas, and quote super built-up areas. For example, an owner of a 450 sq ft apartment in a building more than 40 years old, claims an area of 610 sq ft while advertising for his property, and then demands the current rates for his apartment.

While the new rates were applicable to new skyscrapers in the vicinity, these owners had the advantage to demand higher rates. They also claimed low maintenance charges and thus were able to bulldoze their way in a overheated real estate market.

However, the new carpet area bill will change all this. It will make sales of all apartments on par, while builders of new constructions to charge for additional facilities and spaces. Owners of apartments in old constructions will not have this luxury to claim super built-up areas and charge a premium.

Many experts apparently are missing out on the argument that once a society is formed, additional areas and facilities -- like passages, lift areas, terrace, balconies, parapets, ledges etc. -- are owned by the co-operative housing society and not the owner of the apartment. Thus, owners of old apartments claiming super built-up rates is not justifiable.

While no one expects the new bill to bring prices down, it will certainly make things more transparent for the buyer, but the best effect would be visible in the sale of used homes.

Sterling Backs Out of Kalina Deal

2008-04-08T12:20:00.002+05:30

The Rs 46,500 rate (almost 10 times the residential rate for the area) that Sterling Biotech was reported to have been paying for a seedy building in Kalina, a flood-prone area of Mumbai suburbs, seems to have fallen through, if the Mumbai Mirror is to be believed. (read Sterling's Realty Excess)

This development follows the 30% drop in Bandra-Kurla Complex area. Obviously, Sterling could have realized that it was paying a ridiculous sum for land, simply because it was adjoining BKC. However, sources indicate that this may also be a ruse by the members of Vivek Apartments, the building in question, to deflect attention from the deal.

According to the Mumbai Mirror, Sterling has written to the society citing due diligence and advice of the legal team, as reason to call off the deal. It has asked a return of Rs 25 lakh earnest money, paid when this Rs 403 crore was agreed to. However, sources say that earnest monies are like call options and are not expected to be returned in the event of a deal falling through due to the buyer.

The cancellation of the deal may have stunned residents - some of whom have been quoted as saying, "If its too good to be true, it is." Many had paid Rs 8000 a sq ft to book new apartments in a new construction nearby, paying almost twice the prevailing rate. Now they may have to do a distress sale.

None of this appears to be putting sense in to residents who are in a state of shock. Many have said that other builders were willing to negotiate - however, this may be more wishful thinking than reality.

In a scenario, where stock markets have burned down 50-70% of investors money, it is highly unlikely that excess profits would flow in to the real estate market. Bangalore has already exhibited at 40% decline, and is slowly turning in to a buyer's market. Mumbai could be next.

Citi, AIG Pull out Rs 1500 cr from Akruti

2008-04-08T11:18:00.005+05:30

Citi and AIG which were to invest Rs 1500 crore for a 16% stake in Akruti City (previously called Akruti Nirman) have now dumped the developer and pulled out. The main argument was the high valuations that Akruti was demanding, which -- given the current scenario -- they two PE firms were reluctant to agree with.

In January, Citi and AIG had proposed to pick up equity in Akruti through a preferential allotment, where Akruti would place up to 10.7 million shares. But the BSE Realty index has crashed 46% from its peak of 13,647 recorded on January 14.

After the deal was announced on January 23, shares of the company had touched a record high of Rs 1,399 during intra-day. Since then, there has been a sharp decline, which touched a low of Rs 682 on March 24, or down 50% in two months.

Read the ET story here

Smart Man Sells his Apartment 30% Cheaper

2008-04-07T15:55:00.004+05:30

Praveen Malhotra is a smart man. And this is the kind of person we are looking for to trigger a collapse in the overheated Mumbai real estate market.

Malhotra lives in an eastern suburb of Bhandup in Mumbai, and had invested in a 2-BHK apartment overlooking the lush forests of Sanjay Gandhi National Park, where greedy builders had usurped forest land and built multi-storied structures flouting the Maharastra Private Forests Act.

Malhotra sold his apartment for Rs 27 lakh, almost 30% cheaper than what he purchased it for investment purposes. Malhotra has sensed that most buildings that have come up during the last real estate mania were based on the premise of unmitigated cash from foreign investors and a unbridled rise in real estate prices.

We are used to stock market manias and busts -- do not forget that tulip bulbs in 1600's Netherlands were sold for equivalent of today's $30,000 -- but the Indian real estate bust, which has started in 2008, is going to hurt people more than the 1929 stock market collapse hurt US investors. We are talking EMI defaults at the individual level and not at corporation levels.

Back to Malhotra, he feels that it is best to get out of the market before the rates go for a toss. He has even found a nice way to protect the interest of the buyer. He has signed a power of attorney agreement wherein the new buyer is a "custodian" of the flat until the Supreme Court gives the final verdict. The buyer of course is taking a huge risk, because obviously he is sinking Rs 27 lakh of his own money, since banks have stopped funding these properties.

Of course, when any bubble bursts, the first emotion is denial. And we are hearing exactly the same things. Builders in these forest lands are buying back flats at a discount of 15%, obviously trying to cash in on the panic. But remember that fools come in all shapes and sizes.

All registrations on forest lands are banned by the High Court, and hence those who are buying these apartments may in fact be catching what is known in stockmarket parlance as a "falling knife". The end result is only bleeding losses. Wait for some more time and these apartments could be selling for even less than 20% of current prices.

About so far 10 cases of Malhotra have been cited, but this is just the beginning. Give it a few weeks, and a 100 more will come to light.

Do not expect any resurgence in the stock markets to support this. A CRR hike is in the offing, no matter how much the RBI tries to stave this off. George Soros, legendary trader, as well as Warren Buffet, legendary investor, says the US dollar is going to sink. Where do you think new money is going to come in from?

Read the TOI story here

Ranbaxy Making Hostile Takeover in Orchid

2008-04-07T15:45:00.001+05:30

Although there is no confirmation from Malvinder Singh, MD of Ranbaxy, the huge rise in Orchid from Rs 106 to Rs 220 points to an definite attempt of a hostile takeover in Orchid., which news sources say is Ranbaxy.

Orchid Chemicals crashed 40% in one day, one reason being that promoter K Raghavendra Rao bought up 7% stake using margin money from brokers Indiabulls and Religare.

When Bear Stearns - which owned a substantial chunk of Orchid - pressed a distress sale, the brokers made a margin call which Rao could not honor, and hence they pressed sales to recover their money. The net result was Orchid crashed 40% and more. It has since bounced back, but now with FCCB holders not inclined to exercise their options at significant premium, Orchid is bound to remain with a lot of debt on its books.

Rao, who is also managing director, and other promoters now own 17% of the company and their rather foolhardy method of investment, belies all financial sense. Their objective was to stave off any hostile takeover - and it was easy for a outside investor, since 17% is hardly any reason to give 100% control to Rao and C0. over management. While Mr Rao has cleared his dues to these two firms, he still owes nearly Rs 65 crore to FIs and his current stake is pledged to them.

However, Rao is in a bigger soup. If the financial investors who own 37% of the company support Ranbaxy, then Rao may no longer be a dominant force in the company.

Read a related ET story here

Editorial: I Hope the Shit Has Hit the Ceiling

2008-04-06T21:13:00.002+05:30

No newspaper has yet captured the trepidation that has enveloped the thousands of home buyers who were picking up second and third homes in the hope of renting them and making fast and easy money.

The game plan was simple: take a 15-year loan at 10-12% and have the rent fund the EMI. It was so simple that even housewives had become ace investors in real estate. Accidental millionaires now waxed eloquently about how astute they were in investing in real estate, when all they had done was simply put their money in to a home, because banks had started offering a measly 5-6% interest on fixed deposits.

Further, builders and newspapers issued colorful supplements on how great it was living in polluted cities like Mumbai as long as your place had some patch of shrub and a lot of glass and plastic and as long as they had names like Eden, Amrit, Luxuria, Palazzo; as long as there were buyers who believed that by purchasing these places, they were actually moving to the Himalayas, South of France or Italy. This, when all over the world, and especially the US, homes were dropping 15% each month. The general view going around in India, and loudly cheered on by the likes of ICICI's KV Kamat and HDFC's Keki Mistry was that we do not have a subprime issue in India. It appears that now we do.

Noone had anticipated that powerful builder lobbies would begin to lose their battle to environmentalists and the High Court. After all, they have been champions of bribing the BMC, government officials, ministers and bulldozing their ways through all opposition.

What will it be like a year from now in Kandivili where people have purchased flats at Rs 6,400 a square ft and now can neither register, complete their loans, nor sell it to anyone else. A grim mound of decay seems to be the final destination for Bhoomi Valley and Sun City, two of the projects that now face a bleak future.

Two hundred flats in Bhoomi Valley but only 7 have been occupied. Two hundred and fifty in Sun City and none occupied. The High Court orders of March 24, declaring all these projects on forest lands as illegal has put investors in a state of limbo.

Civic authorities have suspended any further issuance of No Objective Certificates post the court order, and harried buyers are banging on the doors of builders for their possession certificates. Further, banks have suspended all loans to buyers who have purchased on these lands.

The fear in the eyes of builders for once is very real. There are the usual denials: that the government does not know what it is saying, that the court will not rule against hapless home buyers, that there is an election in the offing and no government can afford to upset the voters.

What they have not bargained for is that in a city if 17 million, there are good 16.5 million who cannot buy a home because rates have spiralled to beyond ludicrous levels. That a few 500,000 can afford to sacrifice their lakhs of hard earned income for the larger good of the rest. After all, is this not what good democracy is all about: the majority simply wins irrespective of what is right or wrong.

I believe the courts must simply abide by the Constitution, and encroachment of forest and natural resources is a serious offence. I hope for the good of all of us that as far as this real estate mania is concerned, the shit has finally hit the ceiling.

IBM Bangalore has Started Retrenching

2008-04-06T18:53:00.002+05:30

Insider news confirmed today: IBM has started retrenching in Bangalore. The software bust has started.

Buy Mumbai Flats on Carpet Area Only

2008-04-06T16:25:00.007+05:30

Goodbye super built-up area. Long live transparency, if it can survive the first gasps of breath. Once again, despite some typical obfuscation, the Maharashtra government appears to be taking some steps to make home sales more transparent for the buyer.

On Monday, the Maharashtra Legislative Council will pass a bill, which will make it mandatory for builders to sell homes on a carpet area basis, rather than the ubiquitous measures called "built-up", "super built-up" and in some cases "super super built-up" areas. Things are so ludicrous that one contact in the building industry said that builders could soon be charging for floating particulate matter in the air around Mumbai.

For those who don't know, super built-up area is basically the area that is occupied by the lift, passages, balconies, ledges, parapets, terrace space etc, which builders claim as part of the apartment.

The tragedy of super built-up for the home buyer was that while these spaces are either part of design extensions or areas of common use, you pay the same rate for these non-utility or common use spaces, as for the living space within the home. There is no justification for charging a price of say Rs 5,000 per square feet, for the apartment, as well as for the passage outside.

The new bill will make things more transparent for the buyer, who usually cannot understand or argue against the super built-up component.

Although the new bill does make allowances for promoters to charge for common areas and special facilities in proportion to the carpet area, this in itself may not be a bad idea. Gymnasium, badminton court, tennis lawn, party room, etc., will henceforth not be charged as part of the apartment, but as charges for additional facilities.

No one expects prices to come down because of this new bill, but every home buyer can now expect a modicum of clarity.

10 Most Dangerous Things People Say...

2008-04-04T21:37:00.009+05:30

Peter Lynch discusses the 10 Most Dangerous Things People Say About Stock Prices:

1.) "If it's gone down this much already, how much lower can it go?" (answer: Zero)

2.) "If it's gone this high already, how can it possibly go higher?" (some of the best companies grow for decades)

3.) "Eventually they always come back." (no they don't - there are lots of counterexamples)

4.) "It's only $3 a share, what can I lose?" ($3 for every share you buy)

5.) "It's always darkest before the dawn." (Its also always darkest before it goes absolutely pitch black. Don't buy a business just because price dropped and it is cheaper now)

6.) "When it rebounds to my cost, I'll sell." (The stock does not know you own it! Don't take it so personally Note: this comment is explained by the well documented psychological tendencies called loss aversion and anchoring bias which are talked about in Behavioral Finance. If you liked it at ten, you should love it at 6 so either buy more or sell)

7.) "What me worry? Conservative stocks don't fluctuate much." (There is no such thing as a conservative stock - the average stock fluctuates between 50% to 70% from its high to its low price every year. There is a graveyard where all the "conservative" stocks get buried. Companies and businesses change!)

8.) "Look at all the money I lost - I didn't buy it!" (Don't beat yourself up about the missed opportunities because it is not productive - when he managed the Magellan Fund, he almost never owned one of the 10 best performing stocks in a given year, but he did fine anyway).

9.) "I missed that one. I'll catch the next one." (Doesn't work that way)

10.) "The stock has gone up - so I must be right" or "The stock has done down - so I must be wrong." (Technical analysis is not worth much. So many people like something at 20 and hate it at 12 - never made much sense to him).

Peter Lynch has written (with co-author John Rothchild) three texts on investing, including One Up on Wall Street, Beating the Street, and Learn to Earn. The latter book was written for teenagers.

Read Peter Lynch's bio at Wharton here

Builders Capitulate, Admit Slowdown

2008-04-02T16:18:00.005+05:30

Hang on to your real estate investment and you could get the same apartment at less than 50% within six months.

After months of living in denial, now even large builders and developers , financiers and brokers have come on record to say that there is a huge slowdown in real estate. However, they are not cutting rates because once a rate cut is advertised, the downward spiral will start accelerating.

“We have not seen any major movement in prices of office buildings over the last three months. In fact, prices in the central business district of Delhi have remained hard. Rentals in the suburbs have stagnated,” said Pradeep Jain, chairman, Parsvnath Developers.

“The days of super-high growth are over. Now developers are only going for those properties which are reasonable,” said Abhishek Kiran Gupta of Jones Lang Lasalle Meghraj.

“Companies book and lease space keeping three- to five-year horizon. But given the slowdown in economy, they tend to scale down their demand projection of space. Reduction in demand means more supply hitting the market,” said Jai Mavani, executive director, KPMG.

“Apartment sales have gone down by 20 to 30 percent in Mumbai. Developers are doling out goodies like stamp duty relief, free parking and interiors to boost sales,” said Rajiv Sabharwal, head, retail assets, ICICI Bank.

“New residential projects have slowed down. Only big developers are launching new projects. Buyers are also waiting whether prices will come down,” adds ICICI’s Sabharwal.

Speculators have exited many areas like Greater Noida, Kundli and even some parts of Gurgaon. JLLM Chairman Anuj Puri believes that investors, who comprise nearly 20 per cent of property buyers, are staying out after the stock market crash. “The absence of speculator interest has led to a 15 to 20 percent correction in areas like Gurgaon and Noida,” he said.

“No upward movement of prices has been evident in Bangalore’s commercial business district for the last four to five months. Residential realty prices have stagnated due to an increase in supply, much more than the demand,” said Samira Chandra Gupta, regional director, Colliers International.

Others concur with this view. “Prices have been generally flat. In many localities prices have fallen sharply. The reduction is greater in peripheral areas and to some extent in premium or super-luxury residential properties,” said Shivaram Malakala, executive director, Habitat Ventures. Like elsewhere, prices are expected to remain bearish, with Malakala saying they could fall further by up to 10 to 15 per cent.

"They are holding on to the prices to maintain the momentum,” said Rajesh Mehta, a leading property consultant in Mumbai, adding: “April and May are the key months as far as property deals go. If transactions do not pick up, prices of apartments will fall at least 10 to 15 percent”.

You can read the full Business Standard article here

Knight-Frank Puts up Property for Sale

2008-04-02T14:10:00.002+05:30

I was wondering why there was a flurry of writing in the TOI for luxury homes, and then I chanced upon the edition of Tuesday, April 1, 2008. (Hope this was not an April Fool joke).

The waxing glory of luxury homes and the rise in their value was superceded with this advertisement by broker Knight-Frank.

The area is 2790 sq m. It is close to the Kaya Business Center off Veera Desai Road, Andheri (West).

If there is a mad demand for commercial property and crazy growths in Mumbai's real estate, why is a broker advertising on the front page of the TOI. Until January, the same newspaper was talking of silent big-ticket sales of apartments running in to RS 36 crore etc., and just three months later, a plot cannot be sold without advertising? Wonder which London-based NRI got conned again.

You can call Mitesh Thakkar on (M) 022-9819335359 or Vasant Sarda on 022-9820055411. If you wish to know more you can email here.

Tell me what they are saying.

India's Realty Brokers in Luxury Panic

2008-04-02T09:39:00.007+05:30

A classic case of "Marie Antoinetteism" is taking over brokers, builders, ministers and the TOI. A few days ago, I read an amusing article, obviously twisted by someone on the desk, to focus on the availability of cake, when people have no money to buy bread.

The three musketeers of price euphoria in real estate: Cushman & Weikfield, Chesterton-Meghraj and Knight-Frank, seem to be jamming stories to keep the silly real estate mania in momentum. They achieve this by pumping information that is divorced from the simmering reality. Hard facts are either being ignored or just cannot be seen.

What's the point of saying that posh properties have risen 500% in the last 5 years. Tell me if they can achieve 50% growth in this year. And are these people referring to financial years or calendar years?

It has become a cliche and a boring joke when all corrections described by brokers are almost always not more than 10-15%. We need to talk 50% correction over next 2 years. The Hindu, speaking with HR consultants, has confirmed a 50-60% drop in IT recruitment . Why should there not be a 50% drop in real estate?

Who will be buying up the swathes of homes built in the last 4 years of euphoria, where an orgasm was equated to buying a home, and people were having so many orgasms that you would think the market for Viagra was faltering. Nothing of the sort though.

Fact is home loans are getting expensive. The High Court has put the biggest builders in Mumbai under a shadow of suspicion, for building (encroaching, in the HC words), over forest lands. This means a lot of money is going to move out of real estate and in to -- no not equity -- but bank deposits and fixed maturity plans and insurance.

In the face of this, who will be driving the great realty juggernaut?

Read the TOI story here (the print version had a misleading headline)

Read the Hindu Business Line story here

Bangalore Set on Ghost Town Path

2008-04-01T17:33:00.011+05:30

"Bangalore realty developers have lost their heads," a senior contact in one of the Big audit firms told me. "They are providing their foreign investors with dreams of 100%, returns, by claiming ownership of lands they do not have in their possession," he added.

This may well send Bangalore, known as the IT capital of India, and before this, as the city of gardens, into becoming India's first city of ghost towns. Large projects in areas like Whitefield may soon be dotted with half-completed projects, leaving investors and home buyers in a state of limbo.

Many developers in Bangalore, who cannot be named, have invested in land by buying what can be called call options. They have paid a premium (or earnest money) of Rs 2 crore for purchase of land worth Rs 100 crore, and have signed up intent to purchase, developing project reports that show them as owners of these properties.

The objective is simple. Once the foreign capital comes in, the money is used to pay the land owner. This may be one of the main reasons that was driving up land prices around Bangalore.

Now, with a serious credit contraction in the US, most of this foreign capital has slowed down, as a result of which, we could soon see many such mega projects stalled.

Bangalore, as I have said earlier, has already cracked about 40% in some areas, specifically Whitefield, and if this credit squeeze continues for another quarter, developers themselves would be seen scurrying for cover.

It is only a matter of time foreign investors get wind of this scheme, which is developed by young managers of audit firm, freelancing for 3% - called carry - and local developers.

Of course, the main objective is to list the company, and exit by palming of expensive stock in to the hands of retail investors, but with the IPO market in doldrums, its a matter of time before Bangalore becomes city of ghost towns instead of gardens.