Sunday, October 12, 2008

Run on FMP's causing panic

This could be India's subprime and credit crisis which will affect the realty industry the most.

Sucheta Dalal & Debashis Basu say that withdrawals from Fixed Maturity Plans can turn into a huge problem

A full blown panic in the real estate and financial services sectors has led to the withdrawal of nearly Rs 30,000 crore from Fixed Maturity Plans of Mutual Funds in the past week alone. These funds are meeting all redemption demands by borrowing money at high rates of 20% to 24%. This may end up destroying parts of their corpus and may lead to losses for retail investors. Retail investors have (as usual) foolishly remained invested in FMPs lured by their pitch which touted them ‘safer than fixed deposits and offering higher returns and lower taxes’, on the assurance of ‘indicative’ returns, although MoneyLIFE magazine (FMPs Lose Shine) had repeatedly pointed out that the risks of FDs and FMPs are so vastly different that comparing them are like comparing oranges and apples. FMPs may end up being like the unregulated Overseas Corporate Bodies of the previous market decline. Someone needs to urgently look at what is going on inside them. Unfortunately, SEBI does not even gather data about the FMPs issued by mutual funds or the quality of securities in them.

The other problem today is super-liquid schemes that invest in the call money market. There was no regulatory oversight on these schemes and they have been allowed not to mark their investment to market and could claim to hold them to maturity even when it was a one-year paper. This has created a very dangerous situation today.

Finance and realty companies are the weakest link in the chain. Many FMPs have subscribed to short term AAA rated paper of finance and realty companies. The credit rating of these papers now looks doubtful. One finance company (belonging to the bluest of the blue chip business house whose previous finance arm was deeply involved in the 2001 scam), has also renewed its paper at an exorbitant rate of 32%.

The smarter, corporate investors are taking no chances and pulling out funds and exacerbating the salutation leading to panic. No regulator has bothered to collect data on the investment pattern of FMPs and liquid schemes and keep tabs on it. As result, the systemic risk posed by the redemption runs on these schemes and the shaky underlying debt securities in their portfolio is suddenly upon us and nobody knows whether the RBI should look into it or SEBI or both. Mutual funds that are borrowing to meet redemption are refusing to utilise their bank credit for this emergency, because they feel that it will only put information in the public domain and cause a run on the fund.

46 comments:

Kannan Pothi said...

RE COs. cannot deny for ever.... will start accepting the fact very soon.

http://businesstoday.digitaltoday.in/index.php?option=com_content&task=view&issueid=40&id=8014&Itemid=1&sectionid=4

abdulla said...

Kannan Pothi anne,
r u in real estate. If not, why u misleading people. If your kundi needs oil, get it from malapuram mapillas who are more than willing to meet people like you

Meanwhilr. contribute something positivex

Anonymous said...

Just commenting some positive on blog you can't change the reality. The pary is over get ready to clean up the mess.

Anonymous said...

Abdulla: Are you a jerk or what?

Kannan is speaking the truth : positive or negative to you.

One cannot put makeup on the current mess as the current bubble is unsustainable and has to crash.
If you like to be positive, please go ahead and buy more flats.

Kannan said...

abdulla...take your ammai to malapuram mapillas....let her get oil from all malapuram mapillas...

Observer said...

Abdulla, are you from the real estate lobby? A broker whose income is going down? How many people have you cheated and encouraged to buy expensive properties they can barely afford? Or is your black money investment coming down in value? Who is misleading who? Already houses are unaffordable to most Indians, and you want to prevent people from knowing the truth? From your language, it looks like you are a street urchin.

If the buying public gets really angry, all of you guys will be chased down the streets and thrashed. The public is getting outraged, so be careful you do not end up on the streets.

Shailesh said...

RBI governer is singing different tunes in US compared to what Mr PC is smoking in India. The decoupling is quickly going thrown out of window.

India’s businesses feels the pinch

The calls came as Duvvuri Subbarao, India’s new central bank governor, warned at a meeting of the International Monetary Fund in Washington that large emerging economies would not be able to avoid fall-out from the crisis in western markets.

“Even emerging market economies which do not have direct or significant exposure to stressed financial instruments and troubled financial institutions are experiencing the indirect impact of the financial crisis, and this impact is by no means insignificant or trivial. Indeed, it could intensify in the months ahead,” Mr Rao said.

Anonymous said...

If US goes to protectionism in the coming years to save their economy and jobs, all emerging countries are screwed including India. Only China would come out fine as it is basically embedded in the day to day fabric of western countries.

No hopes for India. Indians should cash out on their asstes before it is too late.

abdulla said...

Do not rely on cut&paste articles from punks like kannan pothi. Current situation is not favorable to the market, but in business there are always ups and downs. The global financial crisis has hit the stock market but not the real estate. Have the prices gone down? No.

Kannan Pothi may be a peon or clerk in a bank who has plenty of time to surf newspapers and internet. He is picking up all negative mews and posting it here to mislead people

Anonymous said...

Tough luck Abdullah. There is only so much money in the world and the FII's have pulled out and crashed the Indian market, whether it is stock or real estate doesn't matter. If you have black money, please buy an apt with my good wishes. We need the builders to stay solvent due to the generosity of morons like you , Ashish, Reality rider and others. A fool and his money will soon be parted. Already lakhs of Indian investors are down 50% of the stock market funds. It is the turn of real estate investors, specially in Mumbai, Delhi to bear the brunt of the crash. Welcome to the real Realty.

Anonymous said...

Abdulla: Why don't you go ahead and invest for yourself. I think you yourself are in a big denial mode. When the shit really hits the fan, you'll not have time to even sell.

RE is not like stock market. It takes months and even years to go down. Bottom line is it, is it smart to invest of assets that are declining in value and would do so in the near 4-5 years. I feel that the bottom may come in 1-2 years with 50-60% drop in RE prices.

If you don't believe, please buy some flats.

Abdulla said...

Sorry Guys, I was angry at kannan pothi, whoever he is. He has no right to hurt religious sentiments of others, kannan=lord krishna , the god. pothi= woman's private part. This guy is trying to provoke hindus against muslims.
Real estate is doomed like stocks.
What i don't like is spreading hatred. Muslims are not responsible for stock/real estate crash

Anonymous said...

abdulla..stupid... that name doesn't mean anything like you said... keep shitty mouth shut and lick your RE boss...

Kannan Pothi

Anonymous said...

The con men have started luring the gullible customers with freebies LCD TVs,Car etc
http://www.ibnlive.com/news/real-estate-giants-lure-clients-with-free-cars-lcd-tvs/75769-7.html
This is certainly the sign of low sales, shrinking business. Lets be patient till the correction happens.

Anonymous said...

Anon above:
Let me tell you clearly from my experience that there will be no correction. The prices have to return to sustainability and have to drop by more than half. Correction is only 5-10%. We are talking more than 50% drops.

The party is over. In western countries people were in RE business found some other jobs like in fast food chains etc., but in India these people will not get anything and they will keep on increasing crime in the country.

Anonymous said...

The following were my predictions in July02, 2008 blog at this link:
https://www.blogger.com/comment.g?blogID=19740856&postID=9057194567034938215

See how many are correct now:

My predictions:
--The stock market to go down by another 2-3K points in the coming 3-4 months and the US financial sector will crash. A lot of US banks close to 40% will go bankrupt. And it will definitely have an impact over world economy especially the emerging markets.

--The US investors will withdraw billions of dollars of retirement funds of US citizens from BRIC countries which will bring another downfall to stocks.

--US housing market will further crash this winter and Indian market will start to see major corrections.

--By 2009 summer, US will be in a major recession or I would say a depression compared to the magnitude of 1929 depression and India would have lost a lot of wealth in stocks, housing and jobs.

--Indians will start realizing how much shit it is to be in housing and housing will have a major collapse by 2009 winter or early 2010.

Anonymous said...

I think your timeline seems to be very long. I foresee a big crash by December 2008 itself as most of the housing stock won't get cleared in the Diwali sales. Also just like people buy because the prices are going up, on the downside, they wait to buy as they expect the prices to keep on dropping further. The ITES industry may also be in trouble as many of their clients in US may go bankrupt. Hence the demand for more malls, lifestyle homes, second homes, etc will be muted to say the least. PLUS there is already a overcapacity. Plus some mutual funds who had loaned their funds to the RE industry are having to be bailed out to the tune of 20,000 crores by RBI. They may pressure the RE sector to liquidate their assets. So tighten your seat belts, get your popcorn and watch the biggest spectacle in happen in front of your eyes!

Observer said...

To Anonymous above:

Yes, these were similar predictions that I had made too. I think the next year is going to be very hard to get through. I read about TCS freezing or reducing variable pay this quarter. While I do not think the US will enter a depression, it would be a serious recession, maybe like the one in 1980-82. Unemployment went up to 11% in the US. It is already at 6.1% now, and is going to go higher. Europe is also going to enter a recession. Germany is already in a recession. Japan is also entering a recession according to its Finance Minister.

If people think India will be immune to this, it would be a mistake. 80% of commercial real estate development in India is geared to the IT/ITES sector. Most of the recent prosperity in India has been due to the IT sector. It led to more commercial construction, and then residential construction, which led to people buying cars, which led to more car factories and more employment, expensive furniture, increased air-travel and other side effects. Even domestic help in IT based houses profited as they made more money to spend on TVs and other
appliances.

If countries are in recession, they will freeze their IT projects also. Once the IT job engine slows down, the resulting oversupply will result in at least 40% correction. Prices will come down to 2003 levels, in line with wage growth over the last 5 years.

Anonymous said...

Do the financial experts on this forum see a similar fate for Indian banks as US banks, i.e, some going bust? Do you think that things in India might go as bad as nationalized banks failing?

Anonymous said...

Indian Banks:
I'm no expert but there are banks like ICICI that have a lot of exposure to CDS/MBS etc. ICICI is not in a good position. Moreover how much does Indian Govt. insure for depositors? Does the Govt. have money to pay depositors in case of failure? I guess NO.

What will happen is people will start withdrawing and start putting in their mattresses and buying the age old almirah/safes/tijori.

SBI will come out ok. A lot of small banks will get taken over or go bankrupt. The bank employees want raised salaries as per new pay commission, but I think they should be worrying about their jobs and not raises.

Anonymous said...

First thing I would suggest to folks here is to cash out of any flats/houses they own. They can easily rent the same or similar place at 1/5th the price of the mortgage.

Next is pay proper taxes and let the country grow.

Third is to put the remaining money in Govt. secured bonds.

Finally, relax and watch the happenings.

One other thing is make sure you keep your job, whatever you are doing as you need a paycheck everymonth. Else have a backup.

sabbalseshu said...

To all doomsday prophets:

Real Estate prices may remain stagnant for some time, but unlikely to come down. There are plenty of people in cities like Mumbai willing to buy property. What is holding them is income tax worries. Shortly you will see white:black:: 20:80.

Kannan Pothi said...

Look at this new ponzi scheme...by Landmark group.

From BusinessWorld

The advertisement has attracted eyeballs. “Invest Rs 6 lakh and get an assured return of Rs 9,96,000 in three years,” it claims. The ad sounds too good to be true. But executives at Gurgaon-based Landmark Group say it is.

The scheme works like this: Each investor is invited to buy 100 sq. ft or one unit of property at Landmark Cyberpark, a ‘green’ IT park for Rs 6 lakh. Anil Lakra, president of marketing and sales at Landmark Group, says investors will get assured minimum returns of Rs 72,000 a year, right from the first year. This will continue until the building is complete in 2011, netting Rs 2.16 lakh. After this, if they want, the investors can sell their units back to the builder for an assured 30 per cent return or Rs 7.80 lakh per unit. The total, therefore, comes to Rs 9.96 lakh.

Lakra says that most of the returns will have to be paid out of pocket as the project is still incomplete. “Whether we pay the banks or customers, the money going out will be the same for us,” he says. Actually, it isn’t. What’s gone unmentioned is that Landmark’s actually getting a better deal than what it would have, had it got private equity (PE) investors to invest in the project. Real estate analysts say PE investors in real estate usually expect returns of 25-30 per cent on such projects. In current market conditions, they are unlikely to take the risk. Small investors, on the other hand, are being promised Rs 72,000 a year, which is effectively a 12 per cent rate of interest. Even after factoring in the buyback return of 30 per cent after three years, the cost still works out to be 5-6 per cent lower than what Landmark would have to pay PE lenders.

If investors choose to hold the property units at Landmark Cyberpark after three years, they could get a rental, at least 7 per cent higher than that compared to conventional buildings. The buildings’ ‘green’ design features include energy-efficient AC systems and lighting and specially tinted widows to reflect heat, which Lakra estimates could save at least 30 per cent energy.

But the rentals also depend on the green ratings of the project. The building’s architect Christopher Charles Benninger has applied for Leadership in Energy and Environmental Design (LEED) certification as well as Teri Griha certification — given by The Energy and Resources Institute (Teri) — which indicate the eco-friendliness of projects. However, Gaurav Shorey, a green building expert at Teri, says the project is “not on our list”. He adds that practices such as energy efficiency and rain water harvesting are mandatory for office buildings that are above a certain size under the Bureau of Energy Efficiencies Energy Conservation Buildings Code (ECBC). Shorey says, “Landmark’s minimal list of green features may at best fetch them one star out of five on the Teri Griha system or a basic Leed rating.”

A word of caution also comes from Sandeep Singh, director of capital markets at Cushman and Wakefield, a real estate consultancy. He advises investors to check two things: one, whether the rentals they will earn are worth the investment; and two, whether the company or the project is sufficiently capitalised to back up the assurances it has made to investors. “One good indicator is to check whether they have a foreign direct investor on the board of the parent company or of the project,” says Singh. This could prevent foul play, he says.

The Landmark scheme brings back memories of similar collective investment instruments from yesteryears such as the Anubhav Teak plantations project, which turned out to be a scam. It was only when the cheques from the company began to bounce and the management went underground that investors realised they had been tricked. This time round, they would be wise to do their homework.


http://www.businessworld.in/index.php/Corporate/Too-Good-To-Be-True.html

Shailesh said...

I am amazed at how reluctant Indian News papers are accepting the reality. On the contrary, they portray India's situation as superior compared to US.

In reality, the home prices in India has risen much faster than US at all. In US, even in most high demand areas, prices doubled in 7 years. These are only 5 major markets. More than half of US show appreciation of only 50% or so. And some areas declined as well.

On the contrary, in India, prices almost tripled in most major metro areas within just 3 years. The incomes have increased primarily for professional salaried class. I know few years ago ICICI was touting 85% loan. The IT boom is ending soon. In US companies are retrenching like crazy on IT spending. India still will get increased BPO share, but high value work such as application development is reducing. The affordability is never mentioned in any articles.

The reality is Indian banks, financial companies, builders and government is not transparent. No transactions are published. I personally feel the downturn in Indian market will be severe. Especially in cities like Mumbai, where both Stock market has effect and IT had moved out long time ago already.

Anonymous said...

Shailesh,
Excellent points which I agree whole heartedly. Let the bozo builders keep touting their properties and let the news papers stay away from the truth to keep the advertising revenue going. One day the reality will be in print. You can only fool all the people for some time.

Lets black market players like Sabbal and others buy properties in dozens. The reason they are on blogs like these is that they are unable to find buyers for their over priced properties. They come here to sway the crowd with their rosy outlook. However like I have maintained anything over 5k a sq/ft is unaffordable to the professional class, whether it is Mumbai, Delhi or Bangalore it doesn't matter. The biggest hits will come to Mumbai where there is huge supply of super built up flats priced over 1cr each. As compared to other cities, the buyer loses almost 25% more due to the high super built up ratio's. In Pune/Bangalore/Chennai/Hyd you can find super built up at 25%. In Mumbai it is almost 45-50% in many areas. The end is near as we know it. Sabbal, Please buy some more

Anonymous said...

Why are people waiting to buy ? They should be buying and waiting for the price to go up. Even black money markets are down and builders are in deep pinch. Lots of projects are getting delayed with slabs being constructed every 3 months instead of every fortnight. Underconstruction properties will be most affected so one has to stay away from anything which is remotely not in the final stages, barring a few top builders.

Anonymous said...

I'm very surprised to see here people touting about black money. If they are true Indians, truly love the country and really want the country to grow, why not pay proper taxes to the country.

Let the housing take its time, but people should be paying taxes on the true value of house. And why is the Govt. reluctant to make it a law. Upar se neeche tak sab chor hain. Baaten karte hain US se barabari karni ji.

Greed is good, being ambitious is good, coming up with plans is good, investing is good, all is good except STEALING money from the country.

Anonymous said...

Even builder are not stagnant on prices but our Black ….. King sabbalseshu is stagnant. Saaba…. the current meltdown will wash out the black portion & you will see white portion now. It’s like problem in your secrete place, which you can’t show it or tell it to any body. That’s why all BM owners are talking about huge demand for housing, price rise etc, obviously they can’t reveal the pain in the …. ………

Observer said...

Regarding Indian Banks:

The RBI covers all depositors' money upto a limit of Rs 1 lakh per individual per bank. Of course, for most people on this blog, it is a very small amount. However, no depositor has lost money in a nationalized bank since they are usually recapitalized by the Govt. Nationalized banks in India will not be allowed to fail.

What is more disturbing is the lack of security in Indian banks. There are increasing cases of fraud happening. Just last month, my father's account got debited for an amount of Rs. 1,800 by a bank clerk at SBI. Upon enquiry, he was flippant enough to suggest that a cheque written by another person was incorrectly debited from my father's account. In reality, I believe the bank clerk may have been paid some money to debit small amounts of money from dormant accounts thinking no one will check.

In private banks, such clerks will be fired, but in nationalized banks, due to the strong unions, nothing can be done. If anyone is thinking of shifting money to India from the US/UK, I would seriously advise against this. Yes, nationalized Indian banks may not fail, however one has to be very very vigilant to prevent misuse of money. Dormant accounts are in particular very likely to be misused, and slowly siphoned off.

Also, one should remember that fraud protection is minimal in Indian banks. If the money is taken out, one has to file an FIR with the police station, and it can take months, unless one is willing to bribe the policeman to expedite matters.

For those lucky enough to have US/UK bank accounts, I would recommend they keep it there.

Anonymous said...

Observer:
If any bank has to fail nationalised or not, the depositor will get only upto 1 lac of their deposits. What has not happened in the past is going to happen this time as the 1929 depression happened when India was a British colony.

I would recommend to all people to put money in multiple banks and not more than 1 lac in any bank.
Also they should try to talk to their MPs etc. to have the insurance limit increased to some reasonable amount.

Shailesh said...

Realty players face moment of truth

NEW DELHI/MUMBAI: The fresh wave of liquidity crunch is set to worsen problems for the Indian real estate sector. The sector is already facing a ca
sh crunch on account of diminishing sales, expensive and largely unavailable credit and drying up of private equity funding. And if an economic downturn sets in as feared, many developers may go out of business and others may be forced to drastically cut prices.

Property consultancy firm Cushman & Wakefield estimates that real estate activity in the current fiscal is not likely to be more than half of what it was in the previous year. “If market fears actually come true, we will see a number of small and medium real estate players exiting the business,” says Cushman & Wakefield joint MD Sanjay Dutt.

“SBI has stopped overdraft facility and many banks are not disbursing sanctioned loans. All companies, including those from real estate, will face serious problems,” says DLF CFO Ramesh Sanka. He was also not very sanguine about the prospects of investors shifting their funds from the stock markets to the property market. “Where is the money? Money is getting eroded every day,” he said.

Developers feel liquidity is a must for companies to survive. “RBI had put in restrictions on banks on lending to real estate, fearing an asset bubble. We feel asset bubble is under control and it is time that RBI relaxed lending norms,” says Unitech MD Sanjay Chandra. Adds Mr Sanka: “Ultimately, RBI will have to release cash through relaxation in CRR and SLR.” Parsvnath Developers chairman Pradeep Jain hopes that the RBI will cut repo rate by 150-200 bps.

The biggest challenge for realty firms today is to boost demand for property. And many of them know price cuts are perhaps the only way to do that. “Consumer sentiments are down in the market. We have cut prices by around 20% last week in our two projects. We hope it will revive sales,” a senior executive of Mumbai-based Orbit Corporation said.

Shailesh said...

Column : Bubble in our backyard

While Indians have been worrying about the spillover from the global financial crisis, a homegrown crisis has been brewing gradually. Like in the US, this crisis has its origins in a bursting real estate bubble and its effects are likely to be similar.

It is a mistake to assume that the US financial crisis was caused by the kind of securitisation and financial innovation that has been repressed in India. The deadliest financial innovation at the heart of the global financial crisis is a millennia-old innovation called the mortgage loan. We have had plenty of that in India.

During the last few years, India experienced a bubble in both residential and commercial real estate fuelled by easy availability of credit. Indians have been buying expensive houses almost completely financed by banks. The cumulative loan to value ratio including “furniture loans” and other forms of financing has been close to (and has sometimes exceeded) 100%. Unlike in the past, many of these transactions have been largely free of black money and therefore there is no hidden cushion in the loan to value ratio. Moreover, our young upwardly mobile professionals have been taking on large mortgage payments (EMIs) assuming that these would be affordable on the basis of projected salaries one or two years down the line. With declining salary growth, the affordability of these mortgages is now questionable.

Commercial real estate has been equally if not more frothy. Much of recent corporate lending by the banks has been to sectors like infrastructure, SEZs and retailing that have been essentially real estate plays. The real estate bubble has also helped banks to reduce non performing assets as companies have been eager to settle old problem dues in order to monetise their real estate.

The real estate bubble in India is clearly bursting. Anecdotal evidence points to declines of 20% or more in key markets. But this understates the severity of the problem. Real estate prices are sticky and they fall only gradually. Hidden discounts are more common than public price cuts. Evidence from the stock prices of real estate companies indicates that the value of their land bank has fallen by over 50%. Even if this is exaggerated, it is clear that a 30-40% nationwide fall in real estate prices from peak to trough is very likely.

Under this assumption, a large fraction of recent home buyers would have negative equity in their homes.

Shailesh said...

Continued from previous article,

They would also face increasingly unaffordable mortgage payments as the job market deteriorates. As in the US, we too have witnessed a significant easing of credit standards in retail lending in the last few years. We have anecdotal evidence that the retail unsecured lending portfolio of some large finance companies (including some foreign owned ones) received exit valuations of as little as 30% of face value early this year, and are probably worth even less currently. If credit standards in mortgages were similar, the home loan portfolio of the banking system could see severe losses as home prices fall.

I do hear people argue that while property loans in the US are without recourse, this is not the case in India. Actually, only in a few states of the US is it true that mortgages are without recourse to the borrower by law. However, elsewhere in the US and in other countries, where legally the lender has recourse to the other assets of the borrower, this makes very little difference in practice. The part of the loan that is in excess of the sale value of the house is an unsecured personal loan whose recovery in default is quite low and often lower than the costs of litigation.

Globally, therefore prudent lenders regard mortgages as being without recourse in practice. The lenders’ best bet is to modify the mortgage terms to persuade the borrower to stay on in the house and keep paying the reduced EMIs. This is because a house is typically worth more to the existing owner than to a potential buyer.

The picture in Indian commercial real estate is even worse because of the greater possibility of negative cash flows and acute liquidity stresses. There is of course a lag between dropping footfalls in malls to rising vacancy rates and then to negative cash flows, but the trends are clearly in evidence. It does appear that the situation in Indian commercial real estate is worse than that in the US.

Indian banks, mutual funds and other intermediaries have large exposures to residential and commercial real estate and there is a significant risk of their facing liquidity and solvency stresses similar to those faced by global banks. A “quiet run” is already beginning on some of these institutions. The question is whether Indian policy makers would respond to these stresses with the same speed and flexibility that the Americans and Europeans have exhibited.

Kannan Pothi said...

REALITY OF REALTY



Realty stocks are facing the harsh reality – they are no longer the toast of Dalal Street. The bubble of the Indian realty sector had burst some time ago and this disenchantment for realty stocks has only grown as the crisis in US grew.
The US housing market is facing a deep slump and is stated to be the main culprit behind bringing down the entire financial system of that country. And the effects of this slowdown, is being felt acutely by the Indian realty sector too.

Realtors are today caught in a bind. The sector which was on a roll for over 4-5 years, finally seems to have hit a speed breaker. Call it a “correction” or fall, it all means the same – the boom seems to have come to a halt, at least for now. Home buying season is typically between October and March and with sales not happening, companies plan to cut prices between 5% and 15%. Even bigwigs like DLF, Puravankara, Unitech and Omaxe, for the first time, officially plan to offer lower rates and get into more middle priced properties.

CAUSES FOR THE BOOM GOING BUST

Higher interest rates,

which has become a deterrent for people to go in for home loans. Those with existing EMIs itself are finding it difficult to pay. Many salaried people are preferring to sell their property at a loss rather than bear the cost of the EMI. Those who got in last year are facing the maximum brunt as they have purchased properties at peak rates, from where they have now fallen considerably. So they are left paying an EMI on a property which is earning losses.

Inflation. This is the single largest cause, affecting the builders as well as the buyers. With costs of steel, cement and other raw materials going up, builders are finding it tough to deliver the homes at the aforesaid rates. Hence to cut down on their costs, builders have scaled the size of their projects, delayed their delivery schedules, cut down on the promised amenities and in some cases, just stopped work altogether. And on the buyer’s side, with lesser disposable income, people have put off their home buying plans. Salaries have not gone up in tandem with the rising costs, thus killing the want for a home, even if needed.

Lack of liquidity.

This is by product of the first two reasons. Lower demand, lower sales higher costs, higher interest outgo; altogether have sapped out all liquidity from the builders. Plus in most of the cases, builders have purchased land at very high rates and for them, to now service that cost is becoming virtually impossible. Many builders have scaled down the prices but most cannot just afford to bring down the prices, which is why we see them offering various “carrots” like free lifetime parking space, waiver of stamp duty, gifts galore including even cars. Yet no one seems to be biting the bait.

SO WILL THE PRICES COME DOWN FURTHER?
Prices have been seeing a correction all over India. Mumbai, like Manhattan is considered to be in a piquant situation as it is the commercial capital. Rates all over India might correct but Mumbai remains up or stable. But in the current background of the meltdown on Wall Street, property developers say that in Mumbai too, prices would come down, especially commercial property, both for rental as well as outright buying.

Deals for office space have slowed over 30% in the last three months. This is because mainly IT and BPO service providers and finance firms, with significant US businesses are cutting back expansion plans and expensive leases would be the first to come off. Also given the tight liquidity scene, companies are also deferring their property bookings. Companies are not signing deals at earlier rates and many continue to wait, hoping for a further fall.

Oversupply could also start to have an effect. By early next year, Mumbai and its suburbs will add 15.4 million sq ft of office space, more than the commercial space now available at the Bandra-Kurla Complex or seven times the office space at Nariman Point.
Analysts say that there could be correction up to 40% in over-heated markets such as Noida and Jaipur, which are already down 15% to 20%.

REALTY STOCKS? A GOOD IDEA?

Now that would not be such a good decision at this juncture. But if it’s a compulsion to own realty stocks in one’s portfolio, tempted by the new lows being touched by realty stocks; then its best to back big realty projects, especially those with exposure to infrastructure. Best to avoid small and mid cap realty stocks, especially those which are purely into residential projects development. And it would be prudent to wait it out, let the Q2 results come in; maybe you would get your stocks at further new lows?

http://www.premiuminvestments.in/cover-feature-22177/106/Reality-of-realty.html

Observer said...

Shailesh, that article was quite thought-provoking. And it is written by a Professor of finance at IIM-Ahmedabad. I wonder what Abdulla, Ashish, Boss, and Realty Rider will have to say about this article. Will they threaten the Professor in street-urchin language also? I actually think the Professor should be careful, otherwise he may get thrashed by real estate goons for speaking frankly.

It is well known that the stock market is a good harbinger of upcoming trends in the industry. I have stated many times on this blog, in agreement with the Professor, that a 40% correction in prices is to be expected. Airlines are laying off pilots, ground engineers and flight attendants. Real estate construction is slowing down. IT salaries are going to be hit, and silent layoffs may increase. I really feel sorry for those who took on those 20-year loans, and emptied all their savings to make the 15% downpayment. Some even disposed of their jewelry in their craze to own a flat. How can they assume they will continuously have a job for 20 years? I can only imagine the stress the people must be feeling, working for 12-14 hours a day in constant fear of layoffs.

I think this quarter developers will try their best to con more people into buying properties before people become aware. Maybe that is why goons like Abdulla are now showing up on this website in an attempt to shut up people, and prevent them from knowing the truth. I wonder how many lives they have ruined. Real estate companies have made enormous profits on the backs of the poor techies for the last 4 years. But more people are now becoming aware, and I would request everyone on here to mail the Professor's article to at least 10 other friends in their companies to help spread the word.

Abdulla said...

@kannan pothi or pooti or pooru or whatever your name means

This is a serious discussion blog and we would appreciate if you dont post articles from waste paper basket from some financial analyst office.
@To others:
My intention is not to pour cold water on your plans. There is lot happening in real estate, but it is not a doomsday scenario . Like every business, there are ups and downs. Just because other industries are failing, don't assume real estate will follow the same path.

The prices might see a 5% correction during Oct~ may period, but the ever increasing demand will make the prices spurt.

Meanwhile, I wish you guys all the best

Abdulla

Anonymous said...

Abdulla:
If RE prices were to stay the same or even have a spurt as you say, the stock prices of all builders would be 200% and not -90%.

The investors know what they are doing and what is coming. You should not be wasting space and time on this blog. You should be screaming on the streets: Buy, buy, buy.

Anonymous said...

Abdulla:
If RE prices were to stay the same or even have a spurt as you say, the stock prices of all builders would be 200% and not -90%.

The investors know what they are doing and what is coming. You should not be wasting space and time on this blog. You should be screaming on the streets: Buy, buy, buy.

kumar said...

Abdulla,

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