Unitech's Santacruz Project Scaled Down

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

Your email address:


Powered by FeedBlitz

Mumbai's Real Estate Cookie Finally Crumbles

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

Your email address:


Powered by FeedBlitz

The Untold Stories of Long-term Investment in Property

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

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

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

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

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

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

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

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

Your email address:


Powered by FeedBlitz

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

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

Your email address:


Powered by FeedBlitz

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

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

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

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

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

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

Read the Livemint story here

Your email address:


Powered by FeedBlitz

Unitech Project Hinges on Lehman's Rs 1500 Crore

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

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

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

Your email address:


Powered by FeedBlitz

Barclays Bank Pays Ludicrous Rent for Worli Office

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

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

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

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

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

One of my imaginative scenarios are as follows:

• Pay Rs 725 per sq ft for 15,000 sq ft but get the 60,000 sq ft. space for free.
• Pay Rs 725 per sq ft for 5 years and get another 5 years free.
  

These are shenanigans of the real estate lobby to create an illusion that real estate is a great investment. As an aside, Ceejay House is adjacent to Poonam Chambers, occupied by NCP minister and aviation minister, Praful Patel, whose duplex and swimming pool spans over 35,000 square feet.

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

Your email address:

Powered by FeedBlitz

The Maya of Mumbai Real Estate Deals

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

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

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

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

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

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

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

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

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

Your email address:


Powered by FeedBlitz

Thane Real Estate Prices Start Tumbling

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

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

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

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

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

Your email address:


Powered by FeedBlitz

Delhi Prime Land Sold at 17 Percent Discount

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

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

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

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

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

Read the ET story here

Your email address:


Powered by FeedBlitz

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

By Anshu Sharma

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

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

• Condos in New Delhi, India: 2-bedroom, 1000 sq ft apartment for $200,000 [$200 per sq ft] (Source: 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.

Powered by FeedBlitz

Seeking Alpha in Indian Real Estate

By Mukul Pareek

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

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

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

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

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

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

Here are some tickers (on 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.

Your email address:


Powered by FeedBlitz

This article first appeared on Mukul Pareek's Blog

Indian Real Estate: Bubblicious as Any Other

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

Your email address:


Powered by FeedBlitz

Realty Gripe Strikes PE Fund Managers

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


Your email address:

Powered by FeedBlitz

Chennai Real Estate Party Over

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.

Your email address:


Powered by FeedBlitz

Mumbai's Housing Shortage is Pure Hogwash

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.

Your email address:


Powered by FeedBlitz

Mumbai Property Prices Slump Some More

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.

Refer to the DNA story here

Your email address:


Powered by FeedBlitz

Coming Soon: Property Derivatives in India

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.