Friday, February 01, 2008

Another hypester on CNBC

It seems like this gentleman has a vested interest in some Mumbai real estate companies. If you look around Mumbai there are hundreds of towers under construction with most of them not being sold. These hired guns are responsible for hyping the market without any fundamentals. As for Chennai and other cities prices are still around 3-5k per sq/ft. In Mumbai we are taking of 8k+ on average. If other cities dont have purchasing power, how come Mumbai is different. Apart from the business community Mumbai is full of lower income neighborhoods. All you need to do is take the train and look at the mass number of people 10-15% of whom can afford the high prices. For the rest its life as usual in lower quality homes and shanties. Its high time these hype creating analysts are bought down to earth

Speaking to CNBC-TV18, Nalin Kumar of JM Financial said that markets like Mumbai will continue to see an upward bias in pricing. He added that tier III cities and Chennai will see price correction.

Excerpts from the exclusive interview with Nalin Kumar:

Q: We been speaking to the industry majors at large over the last couple of days and the overall sense is that with interest rates peaking off, prices could actually remain stable to slightly see a negative buys? Is that something that you concur with?

A: I largely concur with that it is more a function of the markets; some markets will see a negative in price and there are some markets, which will actually stay stable and certain markets like Bombay actually may continue to witness upward buyers.

Q: The more important in shadow on the Bombay realistic market could come from the Bombay Stock Exchange markets, the fact that they have sagged a bit and at least about 15-20% of their highs and it is not improbable that they could go down again. In such a scenario do you think that there could repercussions even in hot markets like Bombay?

A: I think Bombay is largely driven by the fact that there isn’t adequate supply at each level in the market. So Bombay will still do well. Having said that, if the stock market continues to remain weak or stagnating, people may use profits from one market to offset losses from another markets and that could have an impact on the real estate prices. But it really requires a sustained two-three month downtrend for this to happen. It won’t happen if markets are down and are weak and then come right backup.

Q: Could you give us some of the cities that you see a price correction in and consequently even a price appreciation in metros or in B or C cities?

A: In my opinion, Tier III cities will see the fastest decline in prices once real estate starts correcting. In terms of other cities, which have run-up fairly and rapidly, we have Chennai which is run-up fairly, quickly and that could see a correction. In north, NCR region has a lot of supply coming on and that could see a correction, of course the Tier II, Tier III cities like Chandigarh etc. have equal levels of pressure coming on them.

Q: What are the reasons that you expect corrections? Is it an oversupply issue? Why do you think the real estate market is headed for a correction in certain quarters?

A: There are multiple factors again which would bring the real estate markets to the correct levels. First of all and the most important in my mind is what the pricing is for the end user and many of these properties are now getting out of reach of the end user that it was designed for. So if we leave out the extremely premium end of properties, I think many of them which may have earlier being priced at a Rs 50 lakh price range are now worth a crore and so the end user kind of moves away and he can’t buy.

The second thing is there is too much investment into land, there is a lot of construction that is proposed to come up and once the supply eventually hits the market, you will see a significant stabilization in prices.

Q: One last word on this spate of IPOs that are starting to reemerge in the real estate segments specifically with regard to Emaar that they have to revise its price band to a little lower. Do you think some of these companies may be coming out of aggressive valuations at this point of time given the kind of momentum that the stocks have actually seen?

A: My sense is that eventually the market will find the right price point for capital raising exercises. Now the fact that a lot of real estate companies are looking to raise capital is reflective of the fact that they need to have cash on their balancesheets because hard times maybe ahead. They may have looked at aggressive valuations and the market has not been happy with those valuations and therefore they are coming back with valuations, which are slightly lower than what they had ideally been hoping for achieving.

Q: Do you think real estate prices in Bombay will stabilize or inch up?

A: I think the supply in Bombay is low and visible supply for the next 12-months continues to remain low and I feel that prices will stay static to rise upwards. I think it’s difficult for Bombay to drop dramatically.


Anonymous said...

Clearly the guy Kumar has no clue of what he is talking about. It is all generalities with which anything could be justified. The analysis seems to have no rigor behind it...all anecdotal stuff. How many people have a crore or two in their pockets to buy all these houses, 10-15% of the ones you see on the train? You kidding? What train do you take, is that in Mumbai or New York? (even for New York 2 crore is half a million bucks that 10-15% of the population in the richest country in the world does not have, leave alone one of the poorest). This is going to end in so many tears...

Venky said...

The net worth of individuals has gone beyond 1cr due to the underlying prices of the apartments they live in, but its the same shaky ground we are taking about. I went to a broker yesterday who said that a builder paid 40k rs a sq/ft for a certain old building in Kalina, which is adjoining to the Bandra Kurla complex. The builder would construct commercial office space once he demolishes that building. Once the news of these transactions spread brokers can hype up the area and residents of older buildings dont want to settle for less. Its a vicious cycle been fed by the incessant flow of black money from builders who are bidding against each other to get construction rights to all these projects. Also the SRA scam is benefiting them immensely as they get enormous amounts of FSI by paying peanuts.

Shailesh said...

Venky: Net Worth may feel increased due to rise in RE prices, but even those feel pinch if they want to upgrade.

I think in last 4 years there have been various structural changes that caused the boom, but psychology led it to bubble.

What is everyone's opinion on Navi Mumbai? Is the growth genuine?

Anonymous said...

So all prices effectively depend upon finding the greater fool who to sell it to, typical of a bubble. There is no economic rationale, and for residential property there is no economic connection left between rents and house values. I have a 2 BR apt in Jaipur that I paid 24 lakhs for 2 years ago, and I have to pay maintenance each month, plus be responsible for all other expenses. The highest offer for rent for that has been Rs 5,000 per month. That is 2.5%. So any economically rational man would rather pay rent and keep the money in the bank earning 8.5% annually on a risk-free fixed deposit. The other explanation is that my apartment will grow in value capital appreciation to offset the loss - which means it must continue to grow by about 12-14% a year or so which is far beyond income growth rates over a sustainable horizon.

Same for commercial property, if you are buying office space, say 1 crore for 500 square feet for a small law practice or something, then you need to generate at least 12% (conservative, as bank deposits pay 8%) a year to meet just the cost of capital which is 1 lakh rupees just for cost of capital - forget making a profit or paying staff. That is not happening yet. I don't know how restaurants survive because if you are located in a prime area, how many idli-vadas you have to sell to generate 2-3 lakh rupees each month for the cost of capital alone. So all these MNCs or whoever is paying these crazy London New York type prices in Mumbai will need to generate the same type of revenue will they do that? For example a junior accountant hired by one of the big accounting firms in New York gets billed out at $150/hr (he himself makes much less but his billing pays the firm's bills) - that is not going to happen in India anytime soon.

So if it unsustainable which is my point, it must come to an end. But I don't believe my own forecasts anymore as I have been proved so wrong when I thought the same in 2005.

Anonymous said...

One more thing about black money. Black money also follows the rules of economics, and it is not free money. It is just money on which taxes have not been paid, and often even black money can be very hard earned money. Black money is not lying on the pavement to pick up for free - but you are right about the vicious cycle. That will just make the market shallow as the only people who can afford will be people who had something else they just sold. New people will not be able to get in as incomes don't justify the prices at least yet. (Yes, some people are making 80 lakh a year and so on but that isn't a generalization but more of an exception that gets highlighted more than its fair share).

But we can talk and talk, reality is what it is, and the markets are smarter than all of us, so there is something my dumb mind can't yet figure out.

Venky said...

The yield on a property has lost all meaning. Until there is some event which curtails money supply this nonsense will continue. There is genuine need for housing unlike the US where people have more housing then needed, but the prices are clearly above and beyond what anyone can pay. There is another bozo Mr Narain who writes moronic articles in the saturday Times Property. He is always taking about some expat or some high net client who wants to rent an apt in South Mumbai. I don't know why TOI gives him so much space for his hyping business.

I think New Mumbai prices around 4-5k are good purchase levels. Now a days we are seeing realty insiders taking about mid-market housing in mass projects. I think they mean it to be around 50L. I think any purchase around those levels should be a good entry point. Anything beyond that is courting disaster. I'd rather move to Pune instead of taking a 1cr loand and dealing with something which will bite my behind in the days to come.

Venky said...

Stocks with good fundamentals and high dividend yield hold up more during downturn. I think same should go for apartments too. The ones which will yield more will survive the downturn once mumbai real estate is out of the growth mode. Right now I dont know which event will cause it to go that way but there is no bubble till now which hasn't burst. This one just hasn't blown up to its limits

Ramesh said...


I stumbled upon this blog and Anshu's blog post ( only today.

I enjoyed reading all the comments and the views, and I am glad I am not the only one who is scratching his head trying to rationalize this bubble.

I plan to track and follow this further through my new blog

As an investor in Indian real-estate who is based in the US, I share the angst of many others who are trying to figure out what to do. My short take, as I noted in my recent blog, is that this bubble has room to run due to one thing: poor infrastructure.

Poor infrastructure (highways/roads) means that people have to crowd around in cities. Others have noted this. But I think this is the key issue. I doubt if infrastructure will improve any time soon. So, the only other solution is creation of self-sufficient satellite towns, like the US suburbs. Self-sufficient means these are de-facto new towns/cities, and people don't have to commute to the main city for basic needs (schools, hospitals, jobs etc.).

So, for example, like Naperville is to Chicago. However, people still commute for jobs from Naperville to Chicago. So, India will need not just Napervilles, but actually a mini-Chicago in Naperville, so people don't have to commute.

Hope that makes sense. More on my blog down the line.

Venky said...

Ramesh, I will track your blog as you keep posting. I think all euro/US centric development will fail in India except for expanding cities at their periphery. Most of India has power problems, water problems and transport connectivity issues. Budgets are spent on expanding peripheries of major cities since that is where the corruption moolah is, thanks to the developers who find it easy to hawk properties based on some fact or other. I think Mysore will see stellar growth once the Nice expressway will complete. As for other cities I don't find anything interesting right now