Friday, June 13, 2008

Mumbai builders in dire trouble

Finally the bubble bursts. I expect atleast a 25-30% correction in the market as people begin to walk away from their highly priced apartments.

MUMBAI: After raking in phenomenal profits since 2004, builders, including some top guns in the industry, could be headed for serious trouble with the real estate market sliding rapidly.

Sources in the construction industry, financial institutions and individual investors have told TOI that several builders have started defaulting on interest payments and some of them have backed out of commitments to purchase land. Many builders are facing a liquidity crunch as sales of apartments are in a state of virtual stagnation. Moreover, politicians who had parked their slush funds with builders are now asking for their money back.

Information gleaned through these sources points to a dismal scenario set to unfold in the coming months. As one property expert who tracks the market minutely put it, “The real estate market has now moved from being under stress to a completely distressed condition.’’

A plethora of recent cases seems to back up this claim.

A leading Mumbai-based developer who belongs to one of the country’s leading construction families has backed out after offering Rs 700 crore to purchase the 18-acre Hindustan Composite land at LBS Marg in Ghatkopar. It’s learnt that the same builder has also walked away from buying 3.5 lakh sq ft of the Pramanik Landmark land in Goregaon after having made an initial payment of Rs 40 crore.

This builder, who has constructed landmark buildings at Colaba, Peddar Road, Prabhadevi and the far-off western suburbs, is believed to have overstretched himself with an exposure of Rs 1,200 crore in the form of loans taken from banks and private individuals.

TOI has also learnt that a Delhi-based construction giant which was in negotiations for a 100-acre chunk of land at Kanjurmarg for about Rs 1,000 crore has suddenly turned around and said that it’s no longer interested.
Another Delhi-based developer, currently undertaking a massive redevelopment project near the western express highway and also redeveloping a BEST bus depot, is facing difficulty in servicing its loans. “This company has started defaulting on interest payments to its bond holders,’’ a source said.

A Mumbai-based developer, who recently purchased a plot in the Bandra-Kurla Complex for a phenomenal price, may also end up burning his fingers, say market sources. A confidential report prepared by a private bank, which was accessed by this newspaper, shows that this builder has a total loan exposure of almost Rs 3,000 crore. “He is finding it difficult to find tenants for his buildings. Even if he were to sell office space outright, he would have to sell it at a minimum rate of Rs 54,000 a sq ft. This is not possible because the record price in BKC today has not surpassed Rs 35,000 a sq ft,’’ said an industry source.

Another construction company that may have overstretched itself is a south Mumbai property redeveloper, said a market insider. “His permissions are coming in very slow and he is faced with huge overheads,’’ he added.


Anonymous said...

Foreclosure has already started in India since 2007 but the nature of foreclosure is hidden. Large banks, who had exposure to housing loan segment have started a real-estate service arm, who are selling the defaulting property to another home buyers under the pretext of helping property selection. One can check the various ads by ICICI Property Services Group.
These banks took a position on both side & created the bubble. For an example bank A gave a loan to builder B then they gave housing loan to apartment buyers as home loan. [Pre approved scheme] That’s how bank made a risk less huge profit with arbitrage. This is the big hole in Indian Banking law, which does not have chinees wall policy for financial institutions. There is a high co-relation between bank’s growth & real estate price surge.
For further details one can asses the balance sheet of top 10 banks.
I do agree there was a huge inflow of foreign funds which also heat up the segment but this fund sponsored only large projects. Local bank & black money is the sole contributor for 60% market.

Anonymous said...

Yesterday I was chatting to a friend who has a house north of Delhi which he claims is worth 5 crores. Give me a break. People in India seem to be on drugs, far away from reality. This idiot thinks I'll seel my house when it is worth 6 crores. I think India's real estate market is waiting for a big crash landing. Prices would go south by at least 50-60%. And this idiot can sell his house for no more than 2 crores in the coming years and too if he finds a buyer who has money.

Let the stock market go down to 12000 mark, interest rates go up to contain the very high inflation, let the gas prices go up at the pump and if US economy stalls at this point, India's economy is toast. All the world economy today is built on fals grounds of easy money and low interest rates. It is going to come crumbling down like a pack of cards. My 2 cents.