Tuesday, September 16, 2008

Lehman fall may deepen Indian realtors' credit woes

Enuff said

NEW DELHI/MUMBAI: Lehman Brothers’ bankruptcy is likely to cost Indian real estate dear. It may impact the financial major’s existing investments worth $500 million in realty firms, including DLF and Unitech, besides drying up another $500-million worth of potential investment which was expected to flow into Unitech’s Mumbai projects.

The news of Lehman’s collapse brought the BSE realty index down by 7.65% on Monday, while the benchmark Sensex declined 3.35%. Both DLF and Unitech fell 7.5%.

Lehman’s fall signals a deepening of credit crisis for Indian developers, who have lately been battling falling sales, rising cost of construction and tightening credit. It is expected that the US-based firm is likely to go for a fire sale of its assets.

The financial services major was very bullish on India and was among the active investors in Indian real estate. Early this year, it had leased out an office space in Mumbai paying Rs 1 crore per month as rental. This would divert a part of fresh funds seeking to invest in Indian realty.

This is because global fund houses have country-allocations. And as they buyout Lehman’s stake in some of the Indian assets, they will end up diverting some of the fresh funds-in-hand to existing assets rather than investing in new projects.

“Lehman’s departure will impact future cash flows of real estate companies. In a market situation like today’s, it will be all the more difficult for the firms to raise funds,” says Karvy Stock Broking vice-president Ambareesh Baliga.

Lehman invested $200 million in DLF promoter group company DLF Assets last year and bought 50% stake in Unitech’s Mumbai project for $175 million a few months ago. It had also invested $80 million in Bangalore-based SEZ Gandhi City and was likely to hike its share to $300 million.

Lehman’s other investments include a 40% stake in an IT park project of Peninsula Land in Hyderabad for an initial investment of Rs 50 crore. It had also teamed up with Mumbai-based developer HDIL to bid for the redevelopment of Asia’s largest slum Dharavi.

Wherever the developers had received fund, they are safe. But where the funds are yet to come, the developers could get stuck. Some analysts say a distress sale by Lehman will impact the valuation of existing projects.

DLF CFO Ramesh Sanka had earlier told ET that Lehman’s sale of investments in DAL would not impact DAL’s valuation. Unitech MD Sanjay Chandra said that his company had already received funds. So, the company won’t get impacted by Lehman’s bankruptcy.

Some industry executives say that FDI norms of a three-year lock-in period may prevent Lehman from making an immediate sale. But analysts argue that the lock-in period in case of bankruptcy may not hold.


mallapottell said...

MUMBAI: Speculative buying in the real estate market in leading cities has declined to 5% from 30-40% earlier and genuine end-users account for nearly 80% of total property sale, a report on real estate by Ernst & Young and FICCI has said.

The report said, “The last three to four quarters have witnessed a significant shift in the buyers’ profile with real estate prices reaching a level where speculators\investors cannot realise significant returns.”

Speculators used to account for 30 to 40% of total sales earlier, according to the report released at a real estate summit.
The report has divided non-genuine buyers between speculators and long- term investors. The report defines a speculator as one who would sell the real estate property within 18 months after purchase, while long-term investors tend to sell their property after three to five years.

While the speculative buying at present is estimated to account for 5% of total sales, the buying by long-term investors, who have been found to be active in premium segment, currently account for about 15% of the sales. The report said developers in leading cities believe that genuine end-users have taken over from the investors and account for nearly 80% of sales in their current projects.

mallapottell said...

If you have investments in real estate, now is the time to pull out. All indicators point out to the possibility of government take over/auction the vacant flats.

Observer said...

IT companies freeze hiring. Almost 25,000 to 30,000 people may be laid off this year. The North America/Euro financial sector accounts for almost 40% of Indian IT companies' revenue. Also, fresh hires will be at a lower pay scale, as senior people are being laid off. Freshers paid 25,000 Rs/month are not going to be able to afford these 50+L apartments. I think the real estate slowdown will sharpen after these layoffs, and if buyers do not turn up in large numbers this Diwali season. Credit is tightening, and the cash flow position of many builders, particularly smaller ones, is going to become very precarious.


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