Sunday, August 03, 2008

What goes up comes down doubly fast

This is not a time to gloat about being right which we are but its time to reflect on how to asses the pitfalls which could encounter if we ever were to step into buying a house at some point in our lives. As the story will unfold we will see small builders being wiped out, projects delayed indefinitely, legal problems between landowners and developers magnified, large mega projects by tier-2 builders getting stalled due to cancellation in bookings, outskirt prices dropping like a rock. redevelopment deals shelved and many more black swan events out of scope of the human mind. The key to a good property is location so the good ones as always the case will suffer the least damage. The sun has stopped shining and most of the bulls have gone to the cow-sheds or tabela's they are called in Hinglish. The occasional bull who is still roaming the fields is going to be dinner for some big bad bear out there.

By CNBC-TV18s research analyst, Niraj Shah

Well, the biggie said it on Friday and it may well set the tone for what could be a full-blown cyclical downturn for the real-estate space.

DLF, in a press conference, mentioned about a possibility of volumes getting impacted due to a hike in interest costs (No wonder Dr Y V Reddy's actions have seemed like a sharp wedge in the hearts of Indian realtors). At the time of its IPO, DLF has mentioned that while residential prices may start to stagnate, the commercial customers will be strong and keep the company in good stead. The company has stated today that it believes that the upside in the rentals is capped and they, at DLF, do not expect rental incomes to go up here on.

Secondly - in an interview earlier, V Hari Krishna, CIO of Kotak Realty Fund came up with an interesting observation. He said that since January 2007, most of the consumers have withdrawn from the market and this is reflected in the fact that when one looks at home loan disbursements, they have declined by 22% on a YoY basis from 2006-07 to 2007-08.

The drop, in fact, would have been more had HDFC and ICICI Bank not increased their disbursement rate in this period. Ex-HDFC and ICICI Bank, the disbursements would have fallen by 50%, which is obviously a worrying factor as it indicates that end users have withdrawn from the real estate market.

Thus, one would be inclined to believe that the meteoric rise that one saw in property prices in regions such as NCR and some Tier-II and tier-III areas was more of investor and/or speculator demand rather than end-user demand. And thus, these prices tapering off have lead to a switching-off in that trade and thus a moderation in demand and prices.

Sure - in select pockets such as Mumbai, Delhi CBD, etc, you would still see the odd expensive land deal, rental increase, etc. But make no mistake about it-the property market is looking south. And the biggest property developer, both in terms of size and repute, coming out and sort of affirming it does speak a lot.

CNBC TV 18's MF team did some digging and figured out that while the number of PE deals, both outbound and inbound, have declined by 60% for Q1 on a YoY basis, there is increased traction in the PE deals in the real-estate space. With the Primary market route closed and the debt becoming expensive, it would either lead to a PE deal at a much lower valuation - or a faster tick of sales leading to increasing cash-flows, which would sustain the highly geared realty companies.

For the faster tick in sales to happen - which essentially means wooing the buyer in a high interest-rate scenario - the prices will have to drop significantly - and that is the way the real-estate space is poised to go, never mind the odd-exception here and there. How soon we get there? Anybody's guess - but from the looks of it, sooner rather than later.

13 comments:

mallapottell said...

interesting blog

http://eclectic-investor.blogspot.com/search?updated-min=2008-01-01T00%3A00%3A00%2B05%3A30&updated-max=2009-01-01T00%3A00%3A00%2B05%3A30&max-results=50

Anonymous said...

This is nothing mallapottell. The prices will drop by 60%-70% in the coming 2-3 years. Builders have already made a lot of money. Now they will file bankruptcy and enjoy their savings.

Shit is going to hit the fan soon.

Anonymous said...

Yes. The crash is inevitable as the boom was there due to low interest rates and low prices.

Now both the factors are reversed. So prices will continue to fall.

Realty Rider said...

The present time is not ideal for the realty market. The decelerated pace has affected the sector. The leading banks have increased the interest rates of home loans and the inflation level is also rising. Therefore, putting together, the probable property buyers are feeling dejected. But perhaps there may be a silver lining. The prospective buyers are delaying their home-buying decision to buy properties because of a widespread conjecture of probable price reduction in times to come. How long one should wait and watch is however not known. Anuj Puri, the chairman and country head of the operations of the international real estate consultancy Jones Lang LaSalle Meghraj (JLLM) in India, says that the correction will take 4 to 6 months depending on the local trend of the market and the holding power of the developers operating in that location. JLLM also makes a forecast of 5 to 15% probable price reduction in different hyped micro markets of Pune, Bangalore, Gurgaon, Noida, and other such locations. The real estate India appears to be going through a rocky period. The real estate markets of South Mumbai, several other places in Mumbai suburbs, and some locations in New Delhi may experience a price reduction of even up to 10%. These areas already have seen unreasonable price trends. As per Mr. Puri, the problems for the developers to finish the existing projects as well as initiate new projects will escalate which will result in reduced incoming supply. This will also increase the consumption time needed for the existing supplies. The prospective buyer of India property will reschedule the decision of purchasing property because of his or her limited disposable income. Sonepat and Ghaziabad property market however has been quite stable and has attracted a lot of investors.For more view- realtydigest.blogspot.com

Anonymous said...

Anuj Puri should go and fuck himself after 4-6 months if the market doesn't stabilize. He is one of those high paid idiots who doesn't know what is happening but has to speak. The market will take 3-4 years to correct and the prices will be down 50-60% and not 5-15% what this ass is quoting.

Anuj, If you are reading this blog, you should be ashamed of making such incorrect statements when you yourself don't know what is coming. You don't have any right to bring false information to naive buyers. Would you pay for the loss of these buyers. Loser.

Anonymous said...

I visited Chennai, and I see lots of uncompleted construction. Prestige is building a mall in Vadapalani, Chennai, and they were supposed to have started construction early this year and the foundations ready by now. Nothing seems to have happened.

Also, a few IT/BPO companies have started laying off people because of the slowdown in the US. They are not calling it a layoff, just a performance issue. My cousin who works in the corporate division at ICICI bank says that things are deteriorating. Internal loan loss provisions are being increased.

The figure of 10% by realtyrider above is wildly optimistic. My cousin tells me they expect something like 30% at a minimum over the next 2 quarters. In fact, most of the major builders are now forming an association which can provide bridge funds to smaller developers who might capitulate and sell their projects for less.

Of course, the big builders are not doing this out of charity. They want to ensure that rates remain high. I get the distinct feeling that a significant correction is coming for the metros. If the IT industry takes a hit, I think we are looking at major corrections of upto 40-50% in prices. Almost 80% of commercial space is being built for the IT/ITES/BPO/KPO companies. If the commercial segment sees a significant slowdown, then the residential one would too. Let us wait and see.

I really feel sorry for the investors like realtyrider, Ashish, Boss etc. Please check the following link.

http://economictimes.indiatimes.com/Real_Estate/Property_investors_exit_as_downturn_worsens/articleshow/3326185.cms

The Boss said...

It takes certain amount of gall to say that "This is not a time to gloat about being right which we are". The predictions of crash are going on for quite some time with little to show as results. Even now, there is a slowdown but no crash in sight. But don't worry, it is always imminent! Some wise fellow elsewhere on this blog 'educated' me about how realty bubble is like a balloon slowly losing air which could take 3-4 years. Wow! So what is a first time home buyer who failthfully followed these posters' advice since 2005 going to do? Stay on rent for 4 more years! So the bears are not worried about timeframe anymore, they are just trying to prove the law of gravitation: what goes up comes down, but don't know when! If this is all you were planning to accomplish, why didn't you toss an apple in the air and watch it come down? That would have saved you lots of blushes.
And now this anonymous dude is 100% sure of a crash because:

He saw incomplete buildings in Chennai
He got a distinct feeling of a crash
His cousin thinks it will happen
His uncle said it will happen
And finally the favorite argument of all: IT and BPO jobs are leaving.

This bearish theater of the absurd cannot get any more bizarre than this!

http://rightadvice4u.blogspot.com

Anonymous said...

The Boss: In India most people live with their Parents, even after marriage and having kids. The need to buy bigger buy is always there, but is not necessity for majority. In fact in US, most kids leave parents house at 18 and when they get married they almost always buy a house. Even with such social requirements, the housing has fallen. India had much bigger bubble (almost 200%), the downfall would be greater. The need to buy now, can wait in reality of falling prices. Catching the falling knife, is worst investing strategy.

Anonymous said...

Boss: You are right. Staying on rent makes perfect financial sense.

The bubble will take long to deflate because it is not easy for any seller to lower the value unless they are forced to do so. It was easy for a seller to up the selling price when a neighbourhood house would sell for 15 or 20 lacs more, but it is not the otherway. If the neighbourhood house sells for 5 lacs less, the seller will still be adamant and demand the old price.

The only way sellers would be forced to lower prices would be builders cutting the prices, a lot of inventory building up, people walking out of their houses and most importantly with sentiment going down as an investment and higher interest rates.

Boss, this time the bears are right as it is coming. My advice to you would be to cash out for your own good.

Or instead of wasting your time here with all bears and if you really believe in yourself, go and buy more properties. Banks are willing to give loans to anyone. You will be a billionaire in the next 3-4 months. You don't have to educate us or prove anything. One can definitely be rich by staying on rent in todays market. RE had always been a good investment but not for the last few years.

Anonymous said...

The Boss:

Can you please define what is your understanding of the terms "correction" and "crash"? All I am claiming is that there will be a correction in average house prices by approximately 30-40%. I believe the data and metrics for this is quite clear based on historical norms. And as others have pointed out, usually house prices are "sticky" on the way down, since sellers/investors keep hoping that prices will go up and hold on to the property.

Normally, the property prices stay flat in nominal rupee terms, while they fall in inflation adjusted terms. Assuming inflation averages 8% over the next 4 years, prices would have fallen 40% in inflation adjusted terms, even if they had stayed the same in inflation-adjusted terms.

Observer.

Anonymous said...

In the last sentence above, I meant to say nominal instead of inflation-adjusted.

Observer.

mallapottell said...

The rental prices in Mumbai western suburbs have decreased by a whopping 75% in a years time whereas the there is no significant reduction in buying prices. This indicates that investors are holding on to their overvalued properties, renting them out, hoping for a boom. Bookings for new apartments too has dropped to o (zero) but the builders are publishing fictitious figures to keep the market alive. Come Diwali, the real scenario will surface and proprieties will be up for grabs. The present scam involves the govt/builders/investors/banks which are up for a quick buck. Most of the paid blogger s are either working for financial institutions are big investment companies whose job is to inject investor confidence. For the real estate agents who blog, it is a matter of their survival.

Anonymous said...

Hi,

Anuj Puri or whoever this is..talks like an inexperienced college graduate or has no clue of what he is talking...It wont take 4-6 months but 4-6 yrs to recover..Please go back to 90s and see how property market took a sever downturn after 1997..People get stuck with property at higher prices and they spend years servicing those high EMIs and with high inflation , there is no way the levels in Mumbai or other metros are sustainable..I only ask all housebuyers not to get carried away by analysts or reports which only help builders sell such high priced apartments..KEEP AWAY..If people have patience we can see property fall by atleast 50%..If people dont have patience and jump into the fray, then we will see a US like subprime in India too..