Friday, September 12, 2008

Real estate developers caught in downturn

DNA has a article on the pithfalls of the use of leverage in the real estate business. Expect rapid unwinding in Mumbai and land prices in developing areas of all cities in Mumbai. The wind below the PE wings have been taken out. With the collapse of Lehman, Fannie, Freedie and impending doom of Washington Mutual and Wachovia, we are in a very deep downturn. I think Mumbai prices will collapse 50% under these circumstances. Antything over 5-6k per sq/ft is not capable of being repaid using a loan based on Indian salaries. so prices have to drop to these levels whether funded by black, white or yellow money. If prices don't drop there will be zero buyers for all expensive properties owned by builders. They can keep it and rent it out for 20-30k a month. If the PE guy comes callingthey better have a good way to repay their debt, maybe by raising money on the black market at 4% a month

Increase in interest rates, private equity players’ demand for assured returns hit realtors, delay project launch
MUMBAI: Increase in interest rates and demand from private equity firms for assured returns have landed a double whammy on realtors: a severe liquidity crunch that’s delaying projects and launches; and, two, narrowed fund-raising avenues.

Till some time back, developers preferred to invest money in one project at a time. So, if a realtor injected Rs 1,000 crore into a project, he would wait for free cash flows to come in before announcing the next project.

But the realty boom of the last two years saw many developers aggressively announcing multiple projects.

As a result, over 1,000 million sq ft was earmarked for development with a fund requirement of Rs 205,400 crore over five years.

Spurring their aggression was the entry of private equity investors, who invested heavily discounting the risks.

When the market slumped this year, PEs turned chary of investing so started demanding assured returns.

For realtors, this meant funds wouldn’t come as easily as they used to.
Pankaj Jaju, head of the real estate practice at Enam Securities, said deferred cash flows are affecting the rate of return on projects.
“And there is more pain in store as capital values are expected to correct across markets and input costs have increased, which would lead to contracted margins of the developers,” Jaju said.
Another action that lead to funds crunch is that developers who had easy access to liquidity started jumping the gun when it came to projects.
In a recent report, Enam elucidated how this happened and who is paying for the sins.

Earlier, if a realtor had two projects in hand —- say A and B —- worth Rs 1,000 crore under development, he would invest the entire amount in the first project, complete it and after getting returns on A, and then invest in B.

With PEs coming in, builders began splitting the Rs 1,000 crore into two equal chunks, investing in both A and B at the same time and expecting PEs to contribute 50% of the net asset value (NAV) of the project (or half of Rs 1,500 crore).
The real estate company having Projects A and B first starts executing Project A by investing Rs 500 crore in a special purpose vehicle (SPV).
The PE investor brings in 50% of the project NAV - Rs 750 crore, into the company, taking the total equity capital to Rs 1,250 crore.
A debt to equity ratio of 1:1 meant the builder is able to raise debt worth Rs 1,250 crore. Thus the total investment in the project becomes Rs 2,500 crore.
With the project cost at Rs 2,000 crore, the company’s estimated free cash flow stands at Rs 500 crore at the end of the first project.
This Rs 500 crore is invested in Project B, which is a bigger project with a bigger project NAV. The same procedure of bringing in a PE investor etc is again followed with Project B. The real estate company thus ends up with an estimated free cash flow of Rs 1,000 crore.

But trouble came when the estimated free cash flow didn’t arrive because construction work started getting delayed, land acquisition became a problem and costs shot up by more than 50% of estimates.
The crunch is affecting realtors who have stretched their balance sheets thus, and did not achieve financial closure for projects.
The exit of investors, who were one of the biggest sources of working capital for realtors, landed another blow.

Realtors therefore sought quicker rotation of capital by putting money into high-earning activities of land banking, which left many a developer in the lurch.
Things have come to such a pass, says the Enam presentation, that developers are pitching projects against each other at lower costs to gain sales volumes and earn much-required cash to resolve working capital issues.
“No heed was paid to real estate cyclicality, slowing demand or aggressive execution,” the report said.

11 comments:

Unknown said...

what have Lehman, Fannie, Freedie has to do with mumbai real estate? Most Investment in Mumbai real estate is black money which otherwise is kept buried with 0% returns, and the fluctuations in money markets has little effect on it.

Do not expect any down turn in the near future.

Unknown said...

Your dream home is 100 km away
By: Varun Singh
Date: 2008-09-13

Mumbai:

Shift of focus: Ongoing construction at a site in Karjat. Builders want to sell property on the outskirts of the city as the next hot destinations. file pic
There's more bad news if you plan to buy that dream house in the city. Prominent builders in the city, who attended the FICCI real estate summit on Thursday, said the common man can now afford a house only more
than 100 km outside the city.

Most of the builders stressed that one has to consider options as far as Karjat and Kasara to buy a flat within one's means. Mohan Deshmukh, former president of the Maharashtra Chambers of Housing Industry, said, "In the current scenario, if one has to find an affordable house, he has to go at least 100 km away from the city. There aren't many affordable houses in the city." The builders defined affordable housing as anything between Rs 1,500 per sq ft and Rs 3,000 per sq ft.

Builders claim an upsurge in the construction cost and land rates is responsible for the skyrocketing property prices in the city. Mofatraj Munot, chairman of Kalpatru Properties, said, "Rates in Mumbai are high because construction cost and land rates have increased considerably in the past few years. I spend approximately Rs 4,000 per sq ft on construction." Builder Ashish Raheja seconded Munot's views.

However, real estate experts say there are other reasons behind the picture painted by the builders. According to Ajay Chaturvedi, a real estate expert, "After garnering enough profits from the city, the builders are targeting the outskirts.

"They want to shift the focus from Mumbai to far off places. Almost every prominent builder has bought property in Karjat, Kasara, Panvel and beyond and are developing them quickly. They want to sell those areas as the next hot

Unknown said...

Following is a illustration. Mumbai is no better. Draw your own conclusions.

Lokayukta raids yield close to Rs 20 crore
By: Imran Gowhar
Date: 2008-09-12

Bangalore:


imran.gowhar@mid-day.com

Lokayukta sleuths raided houses and offices of eight officials from various government departments and confiscated ill-gotten wealth worth Rs 19.46 crore from them.

An assistant engineer from BBMP alone had disproportionate income worth Rs 10 crore, which is half the amount of the total seized property.

Lokayukta Justice Santosh Hedge said that this is only the beginning, as the officials are unearthing more unaccounted money hidden by the tainted officials in benami accounts.

Reacting to a minister's remark earlier that Lokayukta officials glorify and exhibit the confiscated wealth before the media, Justice Hegde said that the Lokayukta was not running a beauty salon, and were just doing their job.

The tainted officers and their ill-gotten wealth:

Chandrashekhar, assistant engineer, BBMP
>>Joined service in 1987 as AE and has a salary of around Rs 25 lakh, but the officials seized property worth Rs 10,59,00,000 from him.
>>This includes several sites and houses in the names of his brothers-in-law B K Nagendra and B K Ashok Kumar. But the documents of the property were seized from his house.
>>When officials checked the financial status of the brothers-in-law, neither of them were income tax payers, nor were they earning enough to buy such a lot of property, Justice Hegde said.

T V Ramadas, joint director, watershed development department, Cauvery Bhavan, Bangalore
>>Amassed wealth worth Rs 2,59,80,000, which includes a 40x60 house in Tumkur, Shakthi Bhavan, a lodge in Tumkur in the name of his wife, four sites measuring 30x40 in Tumkur, 15 acres of farm land and a farm house, a temple, 10 acres of coconut groves, 15 acres of agricultural land, poultry farm, 250 g of gold, one locker that is yet to be opened.
>>According to Lokayukta, Ramadas joined the government service in 1987 and as per the records he would have earned Rs 30 lakh through his salary.

H A Hafeez, deputy director of town planning, and his brother H A Iqbal, inspector of motor vehicles, Bidar, together amassed Rs 1,42, 83,000 worth property and valuables.
>>This includes three houses and three sites in Tumkur and Mysore, one acre of land, a shopping complex, a service station, gold weighing 750 g and Rs 13,000 in cash.

Dayananda Poojari, deputy commissioner of commercial taxes, Mangalore
>>Poojari joined the government service in 1996 as probationary officer and his legitimate earnings to date would be around Rs 15 lakh.
>>Officials unearthed Rs 1,08,90,450 including a house and a site at Mangalore, 10 acres of farm, gold and silver articles worth Rs 5.25 lakh and a bank balance of Rs 15,000.
>>The officials also seized other bank accounts which are yet to be verified.

K G Manjappa, assistant director of agriculture, Shimoga
>>Manjappa joined the services in 1979 and his earning in terms of salary is around Rs 18 lakh. But the officials recovered property and other valuables worth Rs 1,01,70,000 from him.
>>This includes two houses and three sites in Shimoga, 10 acres of agricultural land, shares and other valuables.

Govindaraj, CEO, Zilla Panchayath, Tumkur
>>Govindaraj joined services as a KAS officer in 1991 and his earning according to his salary would be around Rs 25 lakh, but he has property worth Rs 1,15,65,000.
>>Two houses in Tumkur and Bangalore, 43 acres of land in Nelamangala and Doddaballapura, gold worth 250 g and cash of Rs 1 lakh.

Teja Naik, assistant executive engineer, GESCOM, Bellary
>>Naik joined the government services in 1998 and had earned Rs 12 lakh in terms of his salary but the officials seized property worth Rs 52,24,750 from him.
>>This includes two houses, five sites, gold and silver articles and cash worth Rs 30,750 from his home.

D B Naik, chief executive officer, Belgaum
>>Naik joined the government services as KAS probationary officer in 1984 and has earned Rs 30 lakh to date through his salary, but the officials confiscated property worth Rs 1,06,50,000 from him.
>>This includes seven houses, 35 acres of land in Khanapura, a guest house. This also includes investments made at PU College in Mudhol in Bijapura taluk.

Anonymous said...

Real estate downturn leads to a 25% drop in retail rental rates. Residential rates may follow. No amount of black money can prop up this market. After all, the number of people with black money in crores is probably a small fraction of home buyers.

http://economictimes.indiatimes.com/Retail__office_rentals_witness_sharp_drop/articleshow/3481195.cms#write

Anonymous said...

The Black money is not the today's case; it's been there since years. If you want to say that only because of black money the prices got tripled in last 3 years, it's a foolish assumption. The phenomenal change happened in last 3years is that lot of PE, hedge fund [wall street firms] invested heavily & drove up the real estate prices. Just for ref

http://economictimes.indiatimes.com/Markets/Real_Estate/News_/Unitech_bags_700_mn_Lehman_investment/rssarticleshow/3135561.cms

http://economictimes.indiatimes.com/Markets/Real_Estate/Lehman_Bros_Morgan_Stanley_eye_40_of_Parsvnath_SEZs/articleshow/2430458.cms

Today wall St. is facing sever credit crunch & got beaten up on home ground, to run up the day to day business they finding various funding alternatives & selling up assets from the balance sheet, the Indian real estate & stock investment is one of such assets. One can see the change in Sensex level & the stock prices in last 6 months, similarly the real estate prices has gone down, due to absence of clarity in real estate market it’s not coming up openly. Off course the speculator, builder & advertorial are not accepting the price slide but every one knows the truth.
It’s hard to digest the fact that you had a property worth of core & suddenly some one told that it’s worth is now only in lakh, take a hajmola -.

Anonymous said...

Anon,
YOU ARE VERY RIGHT. ALL THESE PONZI SCHEMES OF BANKS AND WALL STREET SCAMMERS SCREWED IT UP ALL OVER THE WORLD. WHEN PEOPLE IN INDIA ARE IN DENIAL MODE, THEY WILL GIVE ANY EXCUSE TO CONVINCE THEMSELVES THAT THE PRICES WILL NOT GO DOWN. BUT THE DOWNTURN IS INEVITABLE.

THE DOW JONES FUTIRES ARE DOWN MORE THNA 300 POINTS. LEHMAN IS GONE. MERRIL LYNCH IS BOUGHT BY BOA. AIG IS GOING TO GO DOWN NEXT. THEN WAMU AND WACHOVIA AND THE LIST GOES ON AND ON. I THINK A MAJOR FINANCIAL CRAH IS COMING. IF THE CRASH COMES IN THE WORL MARKET, INDIAN STOCKS WILL TAKE A GOOD BEATING AND THE HOUSING WILL COME DOWN FASTER THAN ANTICIPATED BY MANY OTHERS. WE COULD SEE A CORECTION OF 40-50% IN 6 MONTHS FROM NOW.

THERE WILL BE LIQUIDITY CRUNCH AND A MAJOR ROUND OF LAYOOFS AWAITS FINANCIAL AND IT SECTORS. KEEP YOUR JOBS IF YOU CAN AS THE PARTY IS GETTING OVER. INDIANS HAVE TO COME DOWN TO REALITY AND LOOK AT THE AVG. SALARIES BEFORE EXPECTING HOUSE PRICES MORE THAN NY CITY.

Unknown said...

Indian beggars are very creativersfb

Anonymous said...

IT industry is already feeling the pinch of US financial markets turmoil and layoff (Wipro, Satyam) is already underway..
http://economictimes.indiatimes.com/Satyam_Computers_to_axe_4500_employees/articleshow/3483960.cms

Anonymous said...

This week is going to be bad for India. Reality will come to some high flying idiots as the stock market goes down by 1500 points in a week. Or more.

I think the right value for sensex is around 8000 or below. That would happen soon, maybe by the end of this colorful winter.

Anonymous said...

As warned by myself and others on this blog here, the IT industry, the real target of the 50+L apartments, is going to feel some pain. Layoffs are beginning to happen in large numbers in companies like Satyam and Wipro. Also, what is not reported is that many smaller IT companies which had sprouted up in the last few years are now beginning to freeze wages. In Bangalore, some companies are privately telling employees to start looking for other jobs. I heard this from my cousin who is an auditor for some of these companies.

I wonder where is Ashish and Boss now. I would like them to provide their address and phone numbers so that these laid off employees, some of them who may have bought those 50+L flats, can call them. They claim to have the "RIGHT ADVICE", and I am sure they will help out with the EMIs for the affected employees, who listened to their "RIGHT ADVICE" and bought flats.

At least those employees who were renting will not lose their savings. At worst, they may have to move back in with their parents if they do not find a job in the next month or so. In India there is no stigma associated with living with parents, unlike in the West. This downturn will not be over quickly. Black money alone is not going to fill up all those apartments that are lying vacant. Yes, developers made enormous profits in the last few years, but even they cannot hold out for more than a year, since their cash flow for ongoing projects will be affected.

I hope people will not believe those real estate shills like Ashish and Boss, who will not feel one bit of remorse at those unfortunate employees who lost their jobs and now may lose their flats if they do not find a job quickly.

Anonymous said...

Indian beggars are not only creative but very intelligent who is not waiting for bankruptcy. When Lehman has lost money in 700 million Indian real estate markets, sabbalseshu should have offered his dream analysis there. lol .....