Thursday, September 06, 2007

India's subprime crisis

Business Standard reports on the drop in the disbursement of housing/consumer loans

interesting snippet here. The banks have lent just 15% of last year's bookings with a loan/deposit ratio of 8%. If this continues the banks will go in the red soon and start posting losses. How else can they afford to pay out 8% deposit rates on 92% of deposits, when they are only loaning out 8% of loans at 12.5%. A simple shopkeeper will tell you this scheme doesn't work.

This shows that the Indian loan consumer is either
1. price sensitive to high interest rates
2. priced out of the housing market due to sentiment of overinflated prices
3. priced out due to lack of ability to pay EMI
4. All the above.

The only way the consumer will come back to the loan and housing market is the drop in prices, given that loans rates will not go back to previous levels. There is no other way.

With interest rates jumping frm 7.5% to 12.5%, its not a 5% rise in EMI, it is a 66% rise in EMI. so a 20k monthly payment for 20year, 20Lakh loan suddenly becomes 32k. Thanks to the magic of compounding, consumer pays 76.8L for a 20L loan instead of 48L, leading to a loss of 28L. This is the magic of adjustable rate mortages (ARM) also called floating rate loans in India. I think many buyers of expensive properties over 40L(now 1.5crore payment) will not be able to make these payments. This is India's subprime.

Since April, banks have lent only Rs 9,132 crore (Rs 91.32 billion) compared with Rs 66,950 crore (Rs 669.50 billion) over the same period last year. On the other hand, banks had raised Rs 1,34,828 crore (Rs 1,348.28 billion) of deposits till August 17, 2007.

SBI may lower home, retail loan rates

BS Reporter in Mumbai | September 05, 2007 07:41 IST

State Bank of India [Get Quote] (SBI), the country's largest lender, is likely to reduce interest rates on home loans and other retail loans by next week, to coincide with the start of the festive season. The bank's Maharashtra and Goa circle is already offering home and auto loans at 50 basis points lower than the effective rates for new borrowers.

"We would look at reviewing lending rates when the festive season begins. A decision would be made in the next one week," said a senior SBI official.

SBI offers floating rate home loans at an interest rate of 10.75-11.25 per cent. For a fixed rate home loan for up to 10 years, the bank charges an interest rate of 12.75 per cent. The floating rate for auto loans is at 12-12.5 per cent. As part of the promotional offer in Maharashtra, the bank has waived half of the processing charge and is also offering a higher loan to value ratio for new borrowers, which means borrowers could get loans higher than the normal 80-85 per cent of the property cost.

Last week, Bank of Baroda [Get Quote], lowered home loan rates for new borrowers in the hope that it would generate some demand. BoB reduced interest rates on home loans by up to 50 basis points to 10-11.50 per cent.

A BoB official had said "The bank has to survive in a market which is highly competitive as the home loan demand is elastic. After a series of hikes in 2006-07, the home loan demand has shown moderation. The rate cut may help to get better response."

A slump in demand for loans, much sharper for retail loans, has made bankers worried as the impact of subdued interest income on year-end profits is staring at them. Banks had raised their prime lending rates (PLRs) by 250-300 basis points during the last one year. The PLRs of the five largest banks have increased to 12.75-15.75 per cent from 10.25-12.75 per cent a year earlier.

"Banks will have to look at reducing lending rates (for new borrowers) if credit does not pick up till the end of August. We are already five months into the year and advances are more or less flat, while banks have mobilised huge deposits," said another SBI official.

ICICI Bank [Get Quote] has already factored in a sharply lower growth in retail loans. Managing Director & CEO K V Kamath recently said the bank would now be talking of a low double-digit growth of 10-15 per cent in retail loans in 2007-08, down from earlier estimates of 25-30 per cent. The bank had seen over 40 per cent growth in retail loans in the past few years.

A senior official from Punjab National Bank [Get Quote] said, "Our rates are already competitive but nothing (lowering of lending rates) can be ruled out. We expect the demand to pick up towards the end of September and early October."

Since April, banks have lent only Rs 9,132 crore (Rs 91.32 billion) compared with Rs 66,950 crore (Rs 669.50 billion) over the same period last year. On the other hand, banks had raised Rs 1,34,828 crore (Rs 1,348.28 billion) of deposits till August 17, 2007.

In the first quarter of 2007-08, SBI added Rs 2,012 crore (Rs 20.12 billion) of advances. The bank's lending portfolio stood at Rs 3,44,087 crore (Rs 3,440.87 billion) at the end of the June. "While, domestic advances fell by around Rs 2,000 crore (Rs 20 billion), the international loan book of SBI grew by close to Rs 4000 crore (Rs 40 billion). The bank's housing advances stood at Rs 39,241 crore (Rs 392.41 billion), constituting 52.22 per cent of its retail advances.

Wednesday, September 05, 2007

The case for Dharavi redevelopment

It will be interesting to see what would be the pricing in this area. I'm guessing 7k-10k a sq/ft seems to be about right. These guys will construct small apartments and consumers will lap it up. Connectivity to Dharavi is extremely good from all sides and its proximity to Bandra Kurla complex will be a big plus.

The Hindu businessline reports

Sobha-Puravankara consortium bids for Dharavi project

Maharashtra Govt receives EoIs from 26 consortia

Anjana Chandramouly

Bangalore, Sept. 5 The Bangalore-based Sobha Developers and Puravankara Projects have, as a consortium, bid for the Rs 9,250-crore Dharavi Redevelopment Project in Mumbai.

Confirming this Mr J.C. Sharma, Managing Director, Sobha Developers, said that the consortium (a special purpose vehicle) “will qualify on financial and net worth parameters for all the five sectors. It’s an opportunity we would like to explore.”

Mr Mukesh Mehta, architect and adviser to the Government of Maharashtra, said the Government has received expressions of interest from 26 consortia — with three partners each. Of the 78 companies that have shown interest, 25 are international ones; only one consortium is completely Indian, he added. The project is expected to take 5-7 years for completion.

According to the Government’s plan, Dharavi will be divided into five sectors, which will be developed by private developers. The Government will award only one sector per developer.

Each sector will have infrastructure for health, income generation, and knowledge, environment and socio-cultural development, Mr Mehta said.

The project will earn the Government a premium of over Rs 3,000 crore-4,000 crore, besides infrastructure such as roads, water supply, hospitals, schools, etc. that will be developed by the private developers.

The Government is likely to share 70 per cent of the premium for the redevelopment, Mr Mehta said. This will be the first eco-housing criteria suburb of India, he said. He added that they were closely working with the USAID for the project.

Currently, the slum is spread across 535 acres. Of this, 20 per cent of land is private, out of which six per cent is encroached space. “We will take over the encroached land only,” Mr Mehta said.

Realty developers now zero in on the masses

Finally somebody is taking sense. We are tired of hearing about apartments costing crores of rupees and the lifestyles of Ambani's and Wadia's who are building palatial buildings for themselves. Now is the time to get to reality. The developers will now build tiny apartments but those too will not find buyers. For any reasonable transaction to take place for the middle-class, prices have to drop 25%.

Economic times reports.

After a two-year surge, home prices in the country have dropped as much as 20% because even the most upwardly mobile tech graduates can no longer afford to buy, forcing developers to consider building for the poorer masses.

“We’re at a point where growth in salaries has not kept pace with property price increases,” said Hari Krishna, of Kotak Realty Funds, a unit of Kotak Mahindra Bank that has been raising $350 million for property joint ventures in India. “Many developers are rationalising prices across the country, and certain sets of people are saying there’s a need to focus more on either the luxury or the mass market.”

Since India eased rules on inward property investment in early ’05, the country has swept into a dusty frenzy of construction, causing land prices to double in major cities. Drawn by a thriving, 1.1 billion-person economy, where a new batch of graduates swarm out of technology parks eager to shop and go home to modern apartments, global property investors such as Citigroup and Morgan Stanley have rushed in.

Developers such as DLF and Parsvnath Developers have listed on the stock exchange to raise funds for expansion drives. Annual property investment is projected to double to $90 billion by ’10.

But a drop of around 20% in residential transactions since January — as rising interest rates and soaring prices put India’s new rich off buying — has persuaded many developers to take a second look at their business models. Prices have fallen 15-20 % in New Delhi and Punjab, and have paused in Mumbai after sharp rises.

Most developers have been targeting the roughly one million families bringing in $25,000-50 ,000 a year — for example , middle level accountants or software programmers. Another million families are expected to join their ranks over the next three years, according to an economic think-tank , while the number of ‘super-rich’ families with an annual income of more than $250,000 is set to nearly triple to 141,000.

But with fierce competition to build high-margin apartments for the rich, some investors are starting to target the 53 million families earning $2,500-5 ,000 a year — where the much-vaunted figure of a 20 million home shortfall originates. An estimated 22 million families should be lifted out of poverty and into this segment of society by ’10.
Gross margins for the mass market are around 20%, rather than the 30% for high-end housing.

But developers can forge healthy businesses by building huge townships on non-prime land that is more easily acquired. “Our view is that building residential units for the lower middle class in that part of the world is pretty recessionproof ,” said Alastair King, chief executive of Eredene Capital, which is listed on London’s Alternative Investment Market (AIM). “These are people taking out mortgages for the first time,” he said, citing bank clerks, junior civil servants and hotel chambermaids as examples.

Massive housing in Bangalore

Hindu reports on the mass housing plan by HDK

Bangalore: A month before it is scheduled to hand over power to its coalition partner, the H.D. Kumaraswamy-led coalition government is launching a massive housing project through five mega housing residential layouts spread over 15,000 acres of land around Bangalore.

A meeting of the Bangalore Development Authority board held here on Monday approved the formation of five new layouts, which will envelop about 1.76 lakh house sites of various dimensions.

Chief Minister H.D. Kumaraswamy said that the five layouts would be developed simultaneously and the sites would be ready for allotment in about six months.

“The Government estimates the requirement of house sites in Bangalore at around 2.1 lakh and I am confident that the demand of the people will be met substantially,” Mr. Kumaraswamy told The Hindu.

Mr. Kumaraswamy said: “In line with the assurances held out by me over the past 19 months to provide housing for people in the lower strata of society, the BDA will set apart around 100 acres of land in each of these new layouts for vertical housing. About 75,000 flats, largely comprising one-bedroom apartments, will be constructed for allotment.” The price of the flats would be decided later, he said.

With elections to the municipal bodies notified earlier on Tuesday, the Government has decided to make a low-key pronouncement on the mega housing programme. The opening up of the green-belt area around Bangalore following the approval of the new Comprehensive Development Plan (CDP) has paved the way for the BDA to obtain the requisite land for the housing scheme.

BDA Chairman Shankaralinge Gowda told The Hindu that the developed layouts would be owned by the BDA and land owners in the ratio of 60:40. For every acre of land acquired, the owners would be provided four sites each of 2,400 squar e feet. The cost of land would be Rs. 500 a square foot.

A BDA press release said that Nadaprabhu Kempe Gowda Layout, between Magadi Road and Mysore Road (4,814 acres and 60,879 sites) will be developed at a cost of Rs. 2,639 crore; Shivaram Karanth Layout between Doddaballapur Road and Hesaraghatta Road (3,546 acres and 18,975 sites) at a cost of Rs. 1,847 crore; D. Devaraj Urs Layout between Airport Road and Varthur village (1,976 acres and 24,904 sites) at a cost of Rs. 1,108 crore; S. Nijalingappa layout between Varthur village and Sarjapur Road (35,451 sites in 2,806 acres) at a cost of Rs. 1,550 crore; and Kyasambahalli Changalaraya Reddy Layout between Hosur Road and Sarjapur Road (2,134 acres and 26,734 sites) at a cost of Rs. 1,170 crore.