Wednesday, September 17, 2008

Lehman bankruptcy hits Indian developers

DNA reports
Unitech’ll miss crucial cash
MUMBAI: The collapse of Lehman Brothers, the world’s fourth-largest investment bank, has left some Indian real estate developers gasping.

Unitech Ltd, India’s second-largest developer by market capitalisation, had received Rs 740 crore from Lehman Brothers Real Estate Partners (REP) for its mixed use development project at Santacruz in Mumbai just two months ago on July 17.
That day, Unitech said Lehman will invest about $175 million (Rs 740 crore) and will acquire a 50% stake in the initial phase of a project on the Western Express Highway in Mumbai.
This initial phase entails development of 1 million sq ft of office space out of a total developable area of 18 million sq ft.
“Lehman and the Western Express JV will each contribute 50% of the construction costs,” Unitech said.
The Western Express JV meant Unitech and its local partner Rohan Developers.
A Unitech spokesperson said the company “has already received the $175 million in July, so there is no problem”.
The construction cost for the first phase of the project is pegged at Rs 300 crore.
As per their stake equation, Lehman has to invest Rs 150 crore but hasn’t to date, according to sources familiar with the development.
Also Unitech was expecting further investments from Lehman Bros for the same project and its Worli project also.
Unitech was expecting an additional Rs 500 crore from Lehman including for the Worli project.

The Ashok Piramal-backed Mumbai-based realty major, Peninsula Land Ltd, had signed a memorandum of understanding (MoU) with Lehman whereby the US-based company was to invest $125 million or Rs 576 crore in its projects for minority stakes.
The first tranche had to come for the Hyderabad project where Peninsula is developing an integrated township and IT Park on a 31-acre plot bought from Rallis India.
To a query by DNA Money on the investment status, Peninsula said: “The investment for Hyderabad would come once we start the construction … which would begin in the third quarter this year.”
The company said it would not be affected because most of the money was raised from non-Lehman sources.
Peninsula Land has earmarked Rs 2,500-3,000 crore for land acquisition in the next three to five years.
The investment was to come from Lehman and some of Peninsula’s domestic and offshore funds. But DLF, India’s largest developer, may be thanking its stars.
That’s because Lehman has already paid $200 million or Rs 921 crore to DLF Assets Ltd, a subsidiary.
“We have already received the payments so we are not facing any trouble,” a DLF spokesperson told DNA Money.

19 comments:

Anonymous said...

I think the party for Indian people is over. All those riding high on great salaries, high house prices, clubbing and walking with their chests out would be seeing a big difference. They would be crushed by this coming bloodbath in stocks and very soon in the RE market. Indian economy is going to be toast and if Obama wins in US, it will get deep fried.

mallapottell said...

People have started pumping out money out of India, despite the $-Rupee exchange rate, which indicates panic in marwari circles and an impending doom. Real Estate is going to be hit hard. Already, sale price of Mindspace apartments in Malad has reduced by 25%, but there are no buyers.

mallapottell said...

Debt is worse than AIDS and I feel sorry for the guys who have taken mortgage from ICICI/HDFC/or any banks without any backup assets as the banks are already busy in signing up contracts with recovery agents that include gangsters.

Anonymous said...

Where is Chutiya Ashish and Boss now? These idiots have been touting to buy RE all the time in the past few months. My advice to everyone is to cash out now before it is too late. This time it is going to be real bad. Something that never happened in Indian history. A lot of layoffs are coming, salaries will be reduced, RE will go down by at least 50% in 2009 and even more by 2010.

Observer said...

The exit of private equity funds from US/Europe is going to hit the real estate sector significantly. Developers are scrambling for funds to finish projects by borrowing at 20% from High Net Worth Individuals (Politicians?) This, coupled with upcoming layoffs and freeze in hiring is also going to dent the demand for residential real estate.

Ashish and Boss are missing in action. Did they get laid off? Maybe it is poetic justice. After shamelessly encouraging people to buy flats at these inflated prices, they must have collected their money and disappeared. I still remember Ashish's posting "Flats will continue to go up by 12% every year for the next few years".

That is why every time they posted on here, I made sure to respond to save poor home-buyers from getting trapped. Or to at least make them think very carefully about their personal situation before committing to buy these expensive flats.

I think these 50+L flats will be selling for 25-30L in the next year or so. With IT salaries being frozen with minuscule bonuses this year, no more "investors" will be appearing for now.

http://economictimes.indiatimes.com/US_financial_crisis_set_to_impact_Indias_real_estate_sector/articleshow/3496683.cms

Anonymous said...

My comment is a bit out of context.

Its regarding the huge building being built by Ambani.


Just wondering whether the crores going into developing the same is from his personal wealth or part of RIL shareholders profit being pumped into this.

Observer said...

The impact on the real estate sector in India is going to get worse in the next year or so. This from two Professors in IIM-A.

Where are Ashish and Boss currently? Can they please tell these IIM-A Professors that they are mistaken, and can they please give these Professors at the top business institution in India the "RIGHT ADVICE"? I am sure these IIM-A Professors will be eager to learn about economics and finance from Ashish and Boss and get the "RIGHT ADVICE"!


http://economictimes.indiatimes.com/Global_crisis_hits_layman_on_streets/articleshow/3500304.cms

The general sense of doom caused by collapse of Lehman Brothers, problems at Merrill Lynch, AIG, Morgan Stanley, et al, has been validated by the experts. “The impact (of global financial meltdown) on the Indian economy could be severe,” warns Sebastian Morris, professor of economics at the Indian Institute of Management, Ahmedabad.

According to Mr Morris, India might be vulnerable to the crisis due to the current account deficit (of around 10%), which in turn is covered by services surplus, remittances. If the services surplus is reduced to half, it might lead to drying up of remittances and leave our economy with a gaping current account deficit of 7%.

“Taking into account contingent liabilities, we might not have sufficient dollars to tide over the crisis if it lasts for more than a couple of months,” adds Mr Morris. This, in turn, might lead to severe downgrading of the rupee, rise of inflation and fall in the real estate prices, he explained.

And it might get a lot worse before it gets better for the common man. “Liquidity is already under pressure and would stay under pressure. The cost of capital and credit is likely to go up and the clean-up is not yet over,” says Ajay Pandey, professor of finance at IIM-A.

Anonymous said...

Ashish, boss, got fired as crash is inevitable.

People who bought at pre-boom prices are still finding it tough to manage the finances, so even if prices drop much, still buying activity will not be like witnessed in boom period as fallouts of economic overspending are known now by all.

Observer said...

Copying this from www.indianeconomy.org. The below is a story that came out in 1997, when the last property crash in Pune was getting underway. Isn't it extremely similar to what is happening now? People should not forget that prices declined almost 40% and stayed flat for quite a while before the recent bubble began. Even some of the same builders like Gera etc are mentioned. Indian memory is quite short, what happened 10 years ago, is clearly forgotten.

http://www.business-standard.com/india/storypage.php?autono=41755

---------------------------------

Real estate bubble bursts in Pune

Avertino Miranda / BSCAL May 01,1997


Real estate prices in the city have witnessed a sharp fall in the last six months.

The prices were holding firm for quite some time due to booming industrial development and concerted efforts by a cartel of city builders.


According to V N Rao, a branch manager with Housing Development Finance Corporation (HDFC) here, the prices of flats in the city have dropped in the range of 10 per cent to 30 per cent.



Rao admitted that there had been a slowdown in the demand for funds in the city due to the depressed real estate market.



We have disbursed around Rs 100 crore in fiscal 1996-97 in Pune which is an increase of 15 per cent over the previous year, he said.



With real estate prices still ruling high in Pune, Rao said there are very few people who can afford to put their money even after seeking substantial loan amount to buy flats.



However, most big players in the real estate tried to play down the depressing market scenario. Kumar Gera, managing director of Gera Development Pvt Ltd, said the drop in prices was in the range of 5 per cent to 10 per cent. In the last 3 months, he said the fall in demand from non-resident Indians in particular has affected the real estate prices.



However, Sandeep Sethi of the Citibank (Mortgage) was of the view that the fall in prices in Pune was more of a correction as the real estate prices had shot up sharply in the last 3 to 4 years.



During this upswing period, with a large demand-supply gap, prices of flats in the city went up between 40 per cent to 150 per cent, he said.



Another factor attributed for the fall in prices is that a major part of the demand, around 50 to 60 per cent, comes from people in Mumbai and other places. Besides, several people are holding up their decision to buy flats in the wake of the slide in real estate prices.

Observer said...

In Chennai, in the last six months many realty players have sold only a few flats. One of them says his company has sold only one flat in the last six months. Check the following link:

http://www.indianrealtynews.com/real-estate-india/property-prices-falling-in-chennai-2.html

Chennai had seen property prices shoot up almost by 200 percent in the last two years but the situation seems grim at the present. The real estate sector in Chennai may be witnessing the beginning of a crash. Some realty players have sold only a couple of houses in the last six months. Experts say there has been a 90 percent drop in demand for residential projects since the start of the year.

This area along the Old Mahabalipuram Road was once mooted as the hottest realty destination in the city. It’s now turning out to be a dampener. There have been few takers for the over 14000 units of flats here, mostly due to lack of infrastructure.

Office rentals are also seeing a correction. The Central Business District in Chennai has seen a 15 percent drop. According to a Cushman Wakefield report, the expected supply of the office rental space for 2008 is 18 million square feet. But the absorption rate is a mere third of this. This is because the office rentals are largely driven by IT companies who are now deferring their expansion plans. No wonder then developers are slowing down their project plans. They say funds are hard to come by.

The PE funds are mostly looking at structured deals of the north of 30 per cent post tax ERR; now those kinds of funds they are being very choosy today, looking at valuations realistically from the perspective of what it was done earlier they have given discounting of what about close to 70 per cent now .

Most real estate developers in Chennai say they are struggling to sell flats, with one real estate player admitting he has sold just one flat in the last six months. Analysts say that this is the time for developers to sit back and take a realistic look at prices.

Observer said...

I feel a bit sorry for Ashish and Boss. After their frantic attempts to con home buyers, it looks like the public is holding off for now. So maybe their investments have lost value and that is why they disappeared from this blog.

The following news article mentions the fact that many investors may start defaulting if sales do not materialize by this Diwali. So people, please hold on for a few more months. Do not purchase any property which costs more than 4 times the annual income. Otherwise, one may suffer losses like the following investors.

http://economictimes.indiatimes.com/Market_News/Realty_crash_shuts_investors_options/articleshow/3515278.cms

NEW DELHI: It has become well nigh impossible for those who invested in real estate last year to exit the scene as the downturn has deepened and the prices being quoted do not even cover the purchase costs and interest expenses.

Moreover, the negative global news flow has set off a panic reaction, inducing investors to close deals at losses.

The 35-year-old Rahul Verma, who works with a Noida-based IT company, exemplifies the experiences of late entrants into the property market. He bought a Rs 50-lakh flat in Greater Noida early last year by arranging for a bank loan to finance 85% of the cost.

His EMIs have continuously gone up since the purchase, thanks to a series of rate hikes by the RBI. The flat purchase was a pure investment decision. Rahul had jumped onto the bandwagon after hearing stories of skyrocketing returns made on property investments.

However, the prices haven’t climbed as expected and the interest outgo has made the property expensive. Rahul is now left with the only option of selling at a loss. And given the global economic gloom, he is willing to take a hit.

“Several investors are stuck simply because there hasn’t been enough price appreciation in the past one year,” says Raheja Developers Chairman Navin Raheja.

Several young investors invested in property at the peak of the property cycle last year. Many purchased two apartments simultaneously, assuming that they would finance one by selling off the other at a premium. They are now caught in a difficult situation as they bought at a higher market rate and are compelled to service two EMIs.

Some investors have started defaulting, according to a senior Parsvnath executive. “There is a significant rise in the number of people who are approaching us to cancel their bookings and return the money,” he says.

Property consultants feel that investors will have to bear huge losses if the markets do not improve during the festive season. Home buyers in the country are staying away due to the high interest rate regime and expectations of a correction following the realty crash worldwide.

Aditya said...

http://www.equitymaster.com/ht/detail.asp?date=6/26/2008&story=1

A good article. Just thought you might like to read.

Adi

Anonymous said...

Agree the real estate prices are going down or will go down; different people have different time line. Based on the history the Asian market has around 6 month lag to take complete effect of economic slowdown in US market. Everybody must be watching the turmoil on wall st., so in March -2009 we can see the recessionary effect on real estate & job market in India. Many times after reading the news buyer’s immediately inquire to real estate agent or check the magicbricks but the real estate market is not transparent like stock market it takes some time to reflect the price change.

Observer said...

It looks like some people in Bangalore are still living in 2007. I am copying the following advertisements for a 3BHK in Sobha Mayflower, a reputed apartment complex, near IT offices in Bangalore on the Sarjapur Outer Ring Road.

Rent: 16,000/month = 1,92,000/year

http://bangalore.craigslist.co.in/apa/853019394.html

Sale: 63 lakhs + reg = 70 lakhs
http://bangalore.craigslist.co.in/reo/851700972.html

Rental yield is 2.8%. A 5 year FD provides 9.5% interest in a risk-free nationalized bank. Unless the property is guaranteed to appreciate by another 7-8% every year in a risk free fashion, what is the motivation to spend almost 70,000 Rs/month on EMIs when you can rent the same place for 16,000 per month?

If the property is guaranteed to appreciate by 7-8% every year for 5 years, the sale price after 5 years should have climbed up to 92 lakhs + registration. If anyone of you really believes this is possible, then go ahead and purchase as many flats as possible.

Anonymous said...

Here's just a little example of the impending doom for property market in India. Recent article attached below.

Property investors in India forced to sell at a loss by global downturn
Thursday, 25 September 2008

Indian properties being sold at a lossYoung property investors in India are selling at a loss because they can no longer afford to pay the interest and costs associated with owning multiple properties.

The global downturn has set off a panic reaction, inducing investors to close deals at losses. It has become almost impossible for those who invested in real estate last year to exit the scene as the downturn has deepened and the prices being quoted do not even cover the purchase costs and interest expenses.

Typical is 35-year-old Rahul Verma, who works with a Noida-based IT company. He bought a flat in Greater Noida early last year purely as an investment with a bank loan to finance 85% of the cost.

Since then his EMIs have continuously gone up thanks to a series of rate hikes by the RBI. However, the prices haven't climbed as expected and the outgoings have made the property expensive. Rahul is now left with the only option of selling at a loss. And given the global economic gloom, he is willing to take a hit.

'Several investors are stuck simply because there hasn't been enough price appreciation in the past one year,' said Raheja Developers Chairman of Navin Raheja.

He said that young investors bought at the peak of the property cycle last year. Many purchased two apartments simultaneously, assuming that they would finance one by selling off the other at a premium. They are now caught in a difficult situation as they bought at a higher market rate and are compelled to service two EMIs.

Some investors have started defaulting. Others are approaching developers to cancel their bookings and return the money.

Meanwhile developers are finding it hard to finance projects and banks have started taking proactive measures to prevent defaults in their real estate portfolio by cutting exposure to loans against property.

State lender Punjab National Bank (PNB) has taken a lead and has stopped giving such loans, while Bank of India, Bank of Baroda and Indian Overseas Bank have decided to go slow on such loans.

'We are discouraging loan against property by refusing to provide overdraft facilities and charging higher margins,' said a spokesman for Bank of India. Other banks are discouraging such loans by valuing the property at distress level or by valuing the property at the price it was purchased.

Shailesh said...

Mumbai commercial property feels the pinch of the US financial crisis

Though property developer Indiabulls Real Estate is leasing office space at One Indiabulls Centre, an upcoming commercial complex at Lower Parel, at Rs 325 per sq ft per month and closed deals with big companies for Rs 275 per sq ft as anchor tenants, property brokers said they are now getting queries for Rs 200-225 a sq ft, 40 per cent less than the quoted price.

Commercial rentals in Mumbai are beginning to crack and deals for office space have slowed over 30 per cent in the last three months. Leading property brokers and consultants in Mumbai say things will be worse with prospective tenants asking for a 50 per cent cut in rates.

Anonymous said...

Vik,

Post more articles. There is so much bearish news out of India now. If possible at least one article every few days would be great for the readers of this blog.

Thanks.

sabbalseshu said...

Buy your dream house next year
Rajshri Mehta
Sunday, September 28, 2008 03:10 IST

A survey of brokers shows that enquiries to buy homes have fallen, with Mumbai registering a 90% drop. Brokers expect prices to drop soon.

The word is out on the streets. About 60 per cent of brokers expect prices in the Mumbai island city and up to Borivili to come down in the next year. Pranay Vakil, chairman of Knight Frank, global property, says he is also concerned about the volumes, which currently are 10 per cent of the sales recorded last year in Mumbai alone. “Prices are a function of demand and supply. But if volumes do not sustain, the problem will be greater and will bring the industry to a halt. Currently, only long term investors who have seen the ups and downs in the market are holding on.”

According to a pan-India survey of local brokers on the residential property market carried out by Edelweiss, global research analysts, almost 80 per cent of brokers across India have witnessed a reduction in enquiries over the past month and about 90 per cent of brokers in Mumbai have seen a drop in transactions over the past one month.

Hundred brokers in 20 micro-markets like Bandra-Borivili, Mulund-Thane, Gurgaon, Noida, Whitefield-Marathalli, Annanagar in the cities of Mumbai, Delhi, Bangalore and Chennai were polled.

According to Vakil, in order to increase volumes, developers will now cut down on quality in big projects. “In a total of 10 buildings, two will maintain high quality at a high rate, but in two he might offer low quality tiling in bathrooms and use it as an excuse to reduce his prices,” he says.

According to property experts, volume is driven by sentiment. If a buyer is sure of his ability to retain a job — essential to maintain a bank loan — he will go ahead and borrow money to buy a flat. “The situation is rather flexible. Apart from high property prices, high interest rates have cast a big question on the affordability of a flat purchaser these days,” said an equity analyst.

That the lack of demand and growing liquidity crises has developers worried was obvious at an informal meeting of 35-odd developers at a suburban five-star in Mumbai recently. With banks like Bank of Baroda, Bank of India recently announcing that they will not lend money against property, developers are worried about how to source funds for their projects. “The tightening money market has made IPOs redundant.

Venture capital funds have stopped lending and developers do not want to go to money lenders because of high interest rates of about 25 to 30 per cent. So, the only option is to either start selling faster by reducing rates (something they do not want to do) or curtail production which many of them have already started doing,” said a property consultant with a global real estate major.

According to Anuj Puri, managing director of Jones Lang Lasalle Meghraj, a global real estate firm, “Developers will have to reduce their prices if they have to beef up their quantum. I believe there is still a lot of depth in the market but at the right price. The faster the developers understand it, the better it will be for all concerned.”

mallapottell said...

If stock market is an indicator, then the real estate value should have declined by 75% from last year which has not happened so far. The question is why. One reason could be that the investors are holding on to their properties in the hope that some miracle will happen and they can at least recover their investments. With the worsening financial market combined with the law and order situation in India, the future looks gloomier than ever.

The wisest decision one can make at this point of time, is not to invest in real estate and stocks for what we have seen until now is just the trailer, and the main movie hasn't started yet and it is unlikely to be pleasant.