Monday, September 29, 2008

Buy your house - next year!!!

Since when did we start seeing these headlines. Now the original prophecy laid out in my original postings of the collapse of WAMU, Wachovia has come true, what do we expect next.
Based on today's 777 point drop in the DOW, I would expect the Sensex to hit 8000 fairly soon. We are at 12500 and the journey to 8000 should be swift and painless. Mumbai as a property market is dead. I think prices can easily drop 50% and rentals down 60-70%. Any apt which is quoting over 5k per sq/ft is not viable. If the developers have paid over 5k as their acquisition cost, they are the sub-prime of India. They have borrowed funds to acquire sub-prime assets and they will have to pay the price. Nobody in the right mind has 1cr to buy an apt in Mumbai, let alone other cities. I think the paradigm "Real estate never goes down in Mumbai" is now dead. Real estate has collapsed under the weight of the Sub-prime and the flow of cheap money, funded by unscruplous bankers. All the I-Bankers buying properties of 4-12 crores better find ways to find their purchases. The party is over, and the drunks are straggeling to get home. The Rahejas and the Hirnandani's now have to go back to the common people who were priced out of the purchase and if they don't drop prices, they can keep their apartments for themselves and their relatives or friends. With the implosion of the US banks, credit is weak. Amercians with retirement plans funded over the past 20 years are now bailing out to the safety of money market funds. How does Mumbai survive this huge gigantic iceberg. The real estate buildings spring up all over Mumbai will collapse like the Titantic and will remain unfinished if they are not sold at below market rates. Witht he media also harping on the slowdown, expect everyone except the diehard optimist, like Realtly rider and Ashish to keep buying properties and these folks deserve to have their money parted for a fool and his money will soon be parted. For the rest, lets keep watching the party unwind. It was a great run and an even greater drop. Gravity rules.
The time for buying in projects breaking ground or just starting has ended. With the collapse of credit, there is no way to know if projects will be completed and bills paid. This happened in the 80's where there were many unfinished buildings since the developer ran out of money. Whenever the time comes to buy, sometime next year and prices have fallen steeply, it is best to buy an property which is ready or almost ready. Project execution risk has too be taken out of the equation. With so many developers folding only the biggest and ones with deep pockets will survive. Everyone else will be road kill. As of now in terms of banks, there are only 4 major banks left in the US, Bank of Amercia, Wells Fargo, JP Morgan Chase and Citigroup. Citigroup had to be bailed out by the Arabs, so what is the guarantee that a company like ABC Constructions will survive in a fastly deteriorating market
DNA India reports.
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.”