Saturday, March 29, 2008

Record real estate deals aborted

Two record real estate deals in Kalina that were supposed to bring a windfall to local residents have tanked as the buyers have abruptly pulled out as a result of the recent, sobering 'realty check' in and around the Bandra-Kurla Complex.

In December 2007, 159-odd residents of Vivek Apartments at Kalina, located not too far from BKC which was then seeing real estate prices go through the roof, were offered nearly Rs 46,800 per sq ft by a pharmaceutical company, Sterling International Enterprises Ltd, that wanted to set up an office there. The residential complex has

flats ranging from 465 sq ft to 785 sq ft, so the deal meant residents would get anywhere between Rs 2.10 crore and Rs 3.75 crore each after the deal was executed in March 2008.

Residents of Kailash Prabhat, located a few metres away from Vivek Apartments, were at the same time offered Rs 210 crore for the residential building. The deal was therefore going to fetch Rs 32,000 per sq ft, so a flat of 750 sq ft would have got Rs 2.4 crore.

Both offers were unprecedented as the prevailing rate in the area then was around Rs 4,000 per sq ft.

However, both deals were called off recently in the wake of the very first signs of a meltdown in the property market and the turbulence in the stock market.

In a letter to the secretary of Vivek Apartments dated March 11, 2008, Sterling said it had decided not to go ahead with the deal citing the due diligence report and advice of its legal team. It asked the society to return the Rs 25 lakh paid as earnest money while making the Rs 403 crore offer.

Muralilal Chaturvedi, a real estate expert, said rates of property at the BKC were exorbitant and were putting off prospective buyers.

He cited the March 18 auction of five MHADA properties — three commercial and two residential — at BKC. There were no bidders for two commercial plots, and the third had just one bidder; the saving grace was the record prices paid for the two residential plots.

The lack of interest came as a rude shock to MHADA, which had auctioned three commercial plots at record prices as recently as November 2007.

A broker said rental rates too had come down of late. Apparently, owners have reduced their demand from Rs 500 per sq ft to Rs 250.

Chaturvedi cited the uncertainty in the stock market, which began in January 2008, as another reason for lack of enthusiasm among buyers.

Residents upset but still hopeful
Yakub Rais, secretary of Vivek Apartments, said Sterling cited a financial crunch as well as a steady fall in share prices for withdrawing its offer. The housing society has returned the earnest money, he added.

The cancellation of the deal at the eleventh hour has stunned many residents.

One of them said, "Since my financial position is not so good, I was looking forward to the Rs 2.75 crore that I would have got for my 500 sq ft apartment. I thought of purchasing an apartment in a nearby locality for Rs 1 crore and investing the remaining amount in a business. The letter has shattered my dreams."

However, Rais is unfazed by the cancellation of the deal. He said other builders would come forward with similar offers due to the strategic location of their property. "We are looking for other prospective buyers and hope to strike a deal of a similar nature soon," Rais said.

Residents of Kailash Prabhat too said they were optimistic. According to Tajammul Hussain, chairman of the society, the deal with the builder could not go through, but negotiations with two other interested parties were on

Indian property sale flop could cause wider flap

One thing that has never been a hard sell in Mumbai over the past few years is property.

But last week, for the first time in 13 years, Mumbai's metropolitan authorities failed to sell government land in an auction in India's financial capital.

Up for sale were five plots in the Bandra Kurla Complex - a prime commercial real estate district where the existing tenants include the country's largest stock exchange, the securities market regulator and Citigroup's India headquarters. But the government was able to dispose of only three plots, raising Rs13.2bn ($326m) rather than the Rs19bn originally targeted, according to Bloomberg.

Only a few months ago, the government was holding land sales in the same area that the domestic press touted as the most lucrative in the city's history.

So what does a government property sale have to do with Indian equities? While there is no direct link, property prices are an important indicator of sentiment in India's financial capital, where real estate and stock market valuations often move in tandem.

Just as the long-running rise in Indian property prices seems under threat, so too there is talk that the country's great five-year stock market bull run is losing steam.

The benchmark Sensex Index of 30 leading stocks closed last week at 14,994.83 points, down about 29 per cent from its highs in January when the market was still one of the world's hottest.

India's stock market is being buffetted by the same global pressures affecting its peers worldwide - concern surrounding the subprime crisis and uncertainty about the potential impact of a US recession on the country's economy.

The jitters in India started in the information technology outsourcing sector, the Indian industry most dependent on the US economy for business and one of the country's biggest earners of export dollars. IT stocks are down almost 30 per cent from last August.

But now concern has begun to shift to whether the country's significant domestic economy, which is based largely on consumption, can sustain its momentum. Indeed, headline economic growth has already begun to slow from levels near 10 per cent to between 8 per cent and 9 per cent.

The problem is partly a structural one. High commodity prices are putting upward pressure on inflation, forcing the central bank to keep interest rates frozen near their peak at 7.5 per cent.

The central government, meanwhile, is preparing for general elections by May next year and is in an expansive mood, in February announcing tax exemptions and debt waivers for lower income earners that will pump more money into the economy.

While this could act as a welcome stimulus at a time when the economy is slowing, it could also feed inflation, further tying the the central bank's hands on rates.

The tight monetary policy has already forced banks to slow lending to consumers. Industrial groups are still flush with cash from a period of record profits but if the market downturn drags on, they will begin to find it hard to raise money to finance their expansion plans, many of which looked incredibly ambitious even when times were better.
DLF, the country's biggest developer, for instance, plans to build 750m square feet of floor space in the coming years, triple the amount it has constructed in its entire history. A lot of its funding is expected to come from the stock market.

Against the bears, though, there remain many investors in India who hope the market is just going through one of its many corrections.

This has happened 12 times during the five-year bull run, according to Ridham Desai, equities strategist with Morgan Stanley in Mumbai. Each dip has been accompanied by a "V-shaped" recovery, in which share prices have rocketed back up to their earlier peaks.

Another factor containing the panic is that while the market has been battered, it has not fallen below its lows in August last year, a better performance than many of its emerging market peers.

And in many sectors apart from technology, Indian stock market valuations remain above their six-year average, according to Morgan Stanley.

In a show of confidence, domestic investors have continued to pump money into local mutual funds in January and February in defiance of net selling by foreigners.

If the turmoil in the US continues, none of this may make much difference. India's great bull run will surely grind to a halt.

But if the US Federal Reserve is able to calm nerves and commodity prices start to ease, the Indian central bank could cut rates and the party on the Indian market could revive.

So here's to the next government property sale in Mumbai. Its success or failure will mean a lot more than a bit of revenue for the government.

Pune Property Market Is Steadily Witnessing A Slowdown: say brokers

By sachiv, Section Real Estate
Posted on Fri Mar 28, 2008 at 10:40:11 PM EST
Stock market crash, recession in the US, increase in loan rates, reversal of demand-supply, investors moving out, all this or perhaps the fact that what goes up must come down. It could be labelled any of these, but there is little denying the fact that the Pune property market is steadily witnessing a slowdown of the kind not seen in the recent past.

From galloping at an almost manic pace over the last couple of years to a state when there is a decisive lull in the market, the real estate scene-like it's happening in neighbouring Mumbai and also Gurgaon and Hyderabad- seems all geared for a reality check.

"Business has gone down for us by at least 20 per cent in the last two months. It's the same scenario in cities like Bangalore and Hyderabad according to colleagues and there seem no signs of it picking up very soon," said Kshama Ganguly, real estate agent.

"A year ago, a builder told the customer to take the rate being offered right then or pay more Rs 200-300 after 15 days. Last week I negotiated a deal for a client in Wakad where the rate was being cited as Rs 3,100 per sq ft and the developer came down to Rs 2,900 without much ado. A builder who's coming up with a premium apartment at Prabhat Road had launched at Rs 9,000 but has now sent word that he's willing to book at Rs 8,500," she added.

Col (retd) A K Ahuja, real estate agent and member of the managing committee of Estate Agents Association of Pune, agreed. Builders who had earlier eschewed brokers have of late started to send them messages on their properties and want them to get involved, he said.

"I don't know whether this amounts to a slowdown but yes, it's definitely not as easy for a builder to sell properties as it was some time back. It was the investor segment with surplus funds that fuelled the unprecedented rise in rates. Now, with builders asking for high transfer charges and the government stipulating that properties bought have to be registered within a year, the investors are wary. This may also be one of the reasons for the sluggish market," said Ahuja.

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Rohit Gera, executive director Gera Developers however said that historically February and March are slow months as far as property is concerned. "There is a slight slackening but certainly not a cause for alarm," he said. "Builders are finding it more difficult to sell today than say a year ago but the reason is competition - a huge number of projects that have come up and customers are spoilt for choice. In the last one year the number of projects in any upcoming area have been something like 16 to 18," said Gera.

On why such a scenario is not translating into lower rates Gera said builders today are in a position where they do not have to do panic selling. "The basic rule is that even if 45 per cent of your project is sold, your construction costs are covered. Also with the RBI ruling last year that there would be no institutional funding for land acquisition, banks wound up all their dealing with developers. As a result debt levels are very low as far as developers are concerned and this has strengthened their position. They only have project construction debts which are usually covered by the time half the project is booked," he said.

Even if a third of any of his project is unsold today, he'd rather take over those apartments and put them on rent than sell them at a much lower rate, he added.

According to Rajesh Choudhary, partner Prestige developers, builders are also unable to reduce rates due to the fact that the current projects are on land bought a year ago when the prices were at a peak.

"Agreed everyone made a killing for about four years when rates kept multiplying due to market forces, but that situation is over. If everyone is waiting to see a crash, that's unlikely to happen," he said. As to how rates in Mumbai and Gurgaon have decline, Choudhary said it was because both rates and margins were so much more than in Pune.

Gera, however, conceded that the symptoms shown by the real estate market over the past few years could well be compared to a bubble. But will that bubble burst and prices come crashing down? "Not sure of that," replied the developer.