Thursday, August 21, 2008

What is a bubble ?

There are many definitions of the term bubble and bubbling prices of real estate are known to everyone in India. We need to define what is considered a good price for buying property in India. There is the obvious "sour grapes" syndrome which people succumb to when they discuss property prices so an objective analysis is needed on what constitutes fair price for a given property. The guidance value is of some relevance but in Mumbai and other urban cities it has lost its meaning due to the high component of black money. Given the growth of money supply by rising incomes and accessibility of loans we have seen the steep rise in property prices. Some 15 years ago when I joined an IT company in Bangalore I used to get 5,500 rupees a month. That was considered a princely amount and it was more then 2,000 rupees then what my mother earned a school teacher after spending 25+ years. At about the same time in 1993 someone I knew bought a 4000 sq ft plot in Jayanagar for 4 Lakhs which is 100 rs sq/ft. In 2008, Infosys should be paying 25000 to a fresher, A teacher of the same experience will probably at 10k (my guess) but the plot in Jayanagar is now 8000 rs per sq/ft. The point of the story is that land appreciation is something which cannot be predicted, however apartments have a finite value and will not show the same stellar returns.
If an investment is to be made it has to done at a low entry point for maximum return. For those who had the money to buy land in 1993, they can safely plan for their grand kids retirement. For those like me who didn't we can debate.

Realty slowdown delivers late punch to buyers

Economic times reports on the hard times facing the builders. Speculate and pass the buck to the consumer seems to the mantra of the builders.
Economic times reports
NEW DELHI: Realty slowdown is delaying delivery of homes. Several developers have postponed execution of their housing projects as funds become scarce, demand softens and raw material prices rise. While some others are deliberately delaying projects in order to reduce supply as demand weakens.
Several projects across the country are getting delayed as developers aren’t able to generate enough cash to continue construction work. Projects are delayed by as much as 6 months to over a year. “Funding is largely unavailable. Those developers who can access funds are also shying away from it since it has become very expensive. In addition, income from sales of housing units has declined with the softening of demand ,” says Cushman & Wakefield executive MD Sanjay Verma.

All developers are facing the heat on account of high interest rates, which the country’s central bank has been hiking in order to tame inflation . Mid and small developers are faring worse as banks have almost shut their door on them.

“It is a tough time for real estate firms. A weak demand is affecting cash flow. Moreover, the cost of debt and construction has risen. How can one continue construction with the same pace in this environment,” says a senior executive at Omaxe.

Some developers cite usual reasons such as delayed government sanction and unavailability of men and material for the current unusual delays. “Till the last month, steel was difficult to procure even at a very high rate delaying execution of projects ,” says Gaursons joint MD Manoj Gaur.
Not all delays are forced by just funding or material constraint. Says Sanjay Verma of Cushman & Wakefield, “Some developers are not minding delaying projects as they feel a reduced supply of homes will help them sustain prices in the face of slowing demand.”
In such cases, early buyers in the project are surely going to suffer as they will have to wait for a much longer time for delivery of their dream homes. Verma feels the scenario in real estate is unlikely to improve for at least one year as interest rates are expected to remain high.

Tuesday, August 19, 2008

Chennai : OMR plot goes for 10.5 crore an acre

Economic Times reports

CHENNAI: The Bangalore-based Mantri Developers has successfully bid for a 4.9 acre plot of land at Siruseri IT Park on the IT Highway for developing an amenities centre. The price — Rs 10.5 crore per acre for a 75-year lease — is considered a new benchmark in Chennai’s real estate market.

The plot of land, located at the entrance of the IT Park and adjoining the IT Highway, was originally acquired by the State Industries Promotion Corporation of Tamil Nadu Ltd (SIPCOT). It was handed over to the Tamil Nadu Road Development Company (TNRDC) — which develops the IT Highway also known as Old Mahabalipuram Road (OMR) or Rajiv Gandhi Salai — on a 99-year lease for developing world-class facilities for the IT and ITES sector as well as the road users.

The TNRDC’s earlier efforts to identify a business partner for the project failed because all were far below the upset price of Rs 10 crore fixed by the company.

When the TNRDC floated a revised bid recently, Mantri offered to pay Rs 10.5 crore per acre and emerged successful. The TNRDC will hand over the land on a 75-year lease to Mantri for setting up a hotel — four star or five star — and an amenities centre with shopping mall and club house measuring roughly 6.5 lakh sq ft. The developer will be at liberty to identify a viable business proposition.

While sources in the TNRDC and Mantri refused to comment, it is learnt that the two firms are working towards the conclusion of the bid process. Mantri will have to make a one-time payment of Rs 51.45 crore for the plot of land. Mantri’s offer is more than double of what many IT companies have paid for acquiring land from SIPCOT in the Sirusseri park.

However, the commercial value of private properties along the IT Highway between Sholinganallur and Sirusseri range from Rs 15 crore to Rs 20 crore per acre. Mantri is also developing a residential project — Mantri Synergy — at Padur on the IT Highway.

The builder is already promoting luxury and business hotels in Bangalore and Hyderabad and IT space in Bangalore and Pune. The group started by Sushil Mantri with a low capital of Rs 10 lakh in 1999 in Bangalore, has so far completed more than a dozen residential projects in Bangalore.

Sunday, August 17, 2008

Home loan borrowers look panic-stricken now

Life comes full circle. 3 years ago people will buying flats like bread and cake. Now the same people are panicking and paying off debt by their bonuses and whichever means they can. The wide-grin of leverage is now bleeding them every month. Singh is King Manmmomhan anmd Montek should be congratulated for allowing the transfer of wealth from the consumers to the builders and banks.

Home loan borrowers look panic-stricken now
ET Bureau[ Aman Dhall & Raja Awasthi ]

NEW DELHI: The fear is palpable. Indian home loan borrowers, who till recently were fuelling a growth story across banking, real estate and other allied sectors, look panic-stricken now. In fact, just two weeks after the Reserve Bank of India hiked the cash reserve ratio (CRR) from 8.75% to 9%, there has been a quantum jump in the number of home loan borrowers approaching banks for foreclosures and partial repayments.

According to industry estimates, the number of home loan borrowers making foreclosures and partial repayments has almost shot up by 20-25% during the past few weeks.

In the last two months since the home loan rates started their northbound journey, all home loan financing companies’ repayments and foreclosures teams have been actively engaged in counselling their customers, making them understand the pros and cons of the decision to forego or go for partial repayment of loans. It may be mentioned that the Central bank’s latest CRR hike has sucked out about Rs 8,500 crore from the banking system.

Uday Sareen, country head, retail banking, ING Vysya Bank, told SundayET that the bank has seen a considerable increase in the number of queries for foreclosures and partial repayments. “In fact, the foreclosures have seen an increase of almost 10% over the previous quarter.

One, however, needs to understand that it’s not a simple black and white decision. Over the last 60 days, our teams have been continuously engaged with customers to explain them the merits and demerits of their decision. We are educating them how it can hurt their liquidity in the short to medium term, if they decide to foreclose their home loan accounts or make partial repayments,” he said.

Deepak Parekh, chairman of HDFC, the country’s largest housing finance company agrees. According to Mr Parekh, they too have witnessed a rush by home loan borrowers to make partial repayments.

“They are trying to reduce the term of their loans, which have increased due to recent interest rate hikes. These borrowers are typically the ones who have taken floating loans in the last 12-18 months and are now trying to make balloon payments through their salary bonuses,” he said. Floating rates account for 90 % of the bank’s home loan portfolio.

Developers across the board too confirmed to SundayET that there has been a spurt in home buyers returning or off-loading some of their home loan. With interest rates on home loans rising in the last one year, consumers are now looking at other options to acquire funds for their investments. Many also feel this will deter speculators from the real estate market.

Says Rohtas Goel, CMD, Omaxe Group: “The hike in repo and CRR rate hasn’t been a good news for the real estate sector and the home loan market. It is certainly a matter of concern for consumers, as even small upward changes in the monthly EMIs can play havoc with their personal finances.

The interest rate trend over the next few months is expected to be northwards, across industry. On the flip side, this may actually prove beneficial for actual users as it will deter speculators from over leveraging themselves and cornering and hoarding housing flats for speculative gains.”