Wednesday, January 07, 2009

Satyam land scam

Leverage gone bad. As I had said, black money operators have been "sub-primed". Expect more of the same as the unwinding continues.
Economic Times reports.
Thanks to Observer for the link

Politics-property combo may have trapped Raju

MUMBAI/BANGALORE: An audacious real estate play is seen as the backdrop for the 54-year-old B Ramalinga Raju’s sudden exit from Satyam Computer
Services, India’s fourth-largest IT company.

The Raju family, said real estate industry sources, might figure among India’s top 10 landlords as it had embarked on a massive land-buying strategy to cash in on the real estate boom in recent years. While the family holds over 6,500 acres through Maytas Properties, the individual members in their personal capacity have significant holdings of agricultural land across south and western India, industry officials said.

Industry and banking sources said the Rajus leveraged their ownership of Satyam, both in terms of shareholding and management control, to fuel other businesses. In fact, one banking source surmised that a key reason for cooking the books could have been to leverage the bull run in the Satyam stock before the market meltdown in the second half of 2008.

The promoters may have needed cash for land acquisitions, particularly around their infrastructure projects that were won on the back of ‘goodwill’, according to these sources.

So how did the Rajus land up with a severe liquidity crunch? One of the theories doing the rounds suggests they were trapped by a murky cocktail of political developments and a real estate crash. In the recent past, Maytas Properties and Maytas Infrastructure had won a number of prestigious projects.

These include the Hyderabad Metro Rail project, Machilipatnam port project and airport projects in Andhra Pradesh and Karnataka. In return, prime land near some of these projects had to be ‘offered’ to the supportive establishment. Several real estate sources claimed there were some instances of Maytas being awarded road projects even without proper bidding. However, ET could not confirm all this independently at the time of going to press.

With the real estate story turning sour, political circles were said to have demanded funds from the family instead of land. “Upcoming elections may have also forced members of the establishment to change their preference from land to money which put them in a fix,” said a Hyderabad-based developer.

Observers said Raju’s sudden admission of fraud had compelling reasons, and was probably done under external pressure to thwart bigger revelations.

In this context, it must be mentioned that Delhi Metro managing director E Sreedharan had called Hyderabad Metro Rail project a “future political scam”. He had objected to the way the government allowed the private consortium to develop land commercially.
Some other rumours floating in Hyderabad claim Satyam’s promoters raised huge funds from tobacco traders in Rayalseema district by pledging Satyam shares. The promoters may have assumed that they would be able to raise funds to recover the pledged shares through an IPO of Maytas Properties. But the downturn in the real estate market derailed Maytas’ IPO plans leading to the promoters being unable to meet margin calls on Satyam shares.


Observer said...

This makes it clear that people should wait. Like someone else said on CNN, whenever one cockroach comes to light, you can be sure there are hundreds hiding behind the walls. The auditors (PwC India) also must have been in on the scam of 7000 crores. How can real estate companies still report profits when everyone knows that transactions are down so much. One cannot trust any of the results of the big real estate companies. There is absolutely no transparency in pricing, land holdings and other matters. It all arises because the very law-makers in our society are law-breakers. Everything they touch turns to garbage. Real estate, education, crime and justice, defense and other fields.

Do not invest in the stock market on in real estate until some more cockroaches are exposed, of which there are surely many to be exposed.

Vik said...

Is the market closed today ?

Prashant said...

Indian markets seem to be closed for a holiday -

A possible good news for ADR holders ...

"Satyam faces class action lawsuit in US" -

Prashant said...

Just finished talking to my father who is in Pune. Last month he had gone to see a flat (new construction) at Pimpale-Saudagar (Aundh-Annexe). The price was quoted as Rs 3500/- psf. This week the builder's rep. came back with an offer for Rs 2900/- psf and seems willing to sit and finalize across the table. The high-light is that my father who was until now not convinced about the RE bubble is starting to see the reality. Another thing which is contributing to his change of mindset seems to be the fact that some big factories in Pune are keeping the plant closed for upto 3 days in a row.

Shailesh said...

Everyone knows one cannot build empire like what Raju did without Politician's help.

I work in sales in US and I work with almost all US and Indian IT companies. I was always amazed at Satyam, as they never seem to have presence in large companies to the scale the other IT companies have. Even then they seem to take coveted 4th number position. I seriously doubt the claim on number of clients and projects etc...

I think whole Indian outsourcing IT model will get revised to some extent. It will be tough for other 3 IT vendors to beg new projects. Trust in Government is also very less abroad.

Shailesh said...

Prashant - I posted earlier on Pune market. Apart from high flying areas near IT parks, in rest of the areas, prices are even quoted at 50% of peak prices. If you need place urgently, bargain hard. If you can wait market will take care of prices.

Shailesh said...

Corporate Governance: Stocks that gained & lost yesterday

Experts agree that January 7 clearly separated the wheat from the chaff. Stocks with high perceived corporate governance gained, while the others – with even a whiff of poor corporate management standards – lost. Here’s a list of top 100 stocks on the BSE – losers and gainers.

It interesting to read top losers on Jan 7th trading. Reliance name appears at least 5 times.

Anonymous said...

$1,000 homes in US now


Prashant said...

Thanks. Actually, my father was helping someone from out of town in their search. Those people have postponed their plans for atleast 6 months to a year, so no problem there. As far I am concerned, I am as bearish as any one can be, so I'm waiting for the mayhem.

Anonymous said...




Anonymous said...

Realtors renegotiate deals, shelve projects
Sutanuka Ghosal & Writankar Mukherjee

WITH the information technology and business process outsourcing companies facing an uncertain future following a recession in the US, some real estate players developing space for these companies are being forced to shelve their projects, while others are slashing their rentals and renegotiating lease agreements to stay afloat.
For these real estate developers, already reeling under the impact of a crash in property prices and a severe credit crunch, the demand from IT-BPO sector is shrinking fast. The rentals for IT ready-office spaces have already crashed by up to 40%.
India’s IT-BPO sector, which was growing at a breakneck pace of about 30% in the past five years, is expected to be affected by the economic crisis in the US market. Work outsourced by the US firms accounts for about 65% of the revenues of the sector.
Mumbai-based realty firm Housing Development and Infrastructure (HDIL), which is developing two IT SEZs in Kochi and Mumbai, has decided to go slow till the real estate and IT industries make a recovery. “Since rentals have crashed by 25-40%, there is no point developing these projects immediately,” said Ashok Kumar Gupta, a director of the company.
Some developers are offering lower prices to push their projects. Ganesh Housing, which is developing a 6 million sq ft SEZ in Gujarat, is negotiating with potential clients. “Gujarat can offer cheaper space compared with IT hubs like Pune and Bangalore,” said Bhavin Mehta, in charge of business development at the company.
Several real estate players in India’s IT capital, Bangalore, are facing the harsh reality. Srinivas Reddy, who has developed some 18,500 sq ft space in Bangalore’s Electronic City, has been quoting a rent of Rs 40 per sq ft. Finding no takers, Mr Reddy is now open to negotiations. Bangalore-based Ranka Group, which has developed 1 lakh sq ft at KR Puram, finds itself in a similar situation. “We are demanding a rent of Rs 45 per sq ft but potential clients are not willing to offer more than Rs 35 per sq ft,” said AK Shetdy, the group COO.
Several real estate brokers are now doing the rounds of IT firms to renegotiate lease agreements. “Renegotiations on lease rentals are bound to happen now since the real estate prices have crashed considerably. The biggest problem for the realtors will be the projects that are under construction and those that have not yet been occupied,” said Raman Roy, CMD of Quatrro BPO Solutions.
Consultants say IT companies will increase pressure to reduce rentals when the date of renewal of the lease agreements comes near. “Typically, these lease agreements are signed for a period of three years and have an automatic rental escalation clause. Since rentals have crashed below the levels prevailed 2-3 years back, renegotiations will happen for sure,” said Anshuman Magazine who heads the South Asian operations of global real estate consultancy CB Richard Ellis.
(With inputs from Tapash Talukdar in Ahmedabad)



Anonymous said...

Pune builders adamant on price cut
Imtiaz Jaleel
Wednesday, January 07, 2009, (Pune)
With banks lowering interest rates and realty rates in most of the big cities coming down, home loan buyers had something to cheer for, but not for those looking for a house in Pune as builders here seem to be adamant not to lower their prices.

In the past years two, three and even four bedroom homes were the norm but now a new trend has come -- the return of the one BHK.

"Builders in Pune are now revising their building plans to accommodate one-BHK flats," said Shantanu Ranade, manager, marketing, Arti Properties Pvt Ltd.

Unlike Mumbai or the other metros at least, on the face of it property developers are refusing to cut prices.

Instead Pune's developers are opting to build smaller homes and when necessary, offering what's now considered basic almost everywhere else: freebies.

Like furnishing your home or fitting it with white goods.

"The housing sector in Pune was driven by demand from IT and ITES but now there is uncertainty about their jobs, so the affordability factor also came. Realising all this the builders are now making smaller houses," said Mohammad Aslam, MD, JLLM.

The consumer though is not biting just yet. Homes sales in 2008 have dipped by almost 30 per cent as compared to the same in 2007.

"The rise was not steep so obviously, the downfall will not be steep but still there is some correction," said Lalit Kumar Jain, president, Pune Promoters and Builders Association.

The argument does not hold especially when data shows that property prices have shot up by at least five times in as many years. Not just inside the city but beyond city limits as well.

Traditionally in Pune, demand has always exceeded supply. In 2008 alone there was a shortfall of over a lakh residential units, but with the slump in sales supply now exceeds demand.

The psychological warfare between buyers and builders continue and with builders being adamant on slashing prices it's all a question of who will blink first -- the builder or the buyer.

Anonymous said...

“It's tangible, it's solid, it's beautiful. It's artistic, from my standpoint, and I just love real estate.”

- Donald Trump

By Haresh Soneji, CNBC-TV18

Finally, real estate players are giving in to reality. From offering freebies to attractive schemes, things are finally moving in to the ‘price cut’ zone. The catch however is the price cuts are only for new properties that will be developed. For such ‘to be developed’ properties a 10% price cut is in the offing, although it’s been promoted as ‘offer open for limited period only’. Many builders are evaluating demand through this price cut. Should you bite the bait or is there something fishy behind this? There are multiple answers to this obvious question.

Let’s analyse things before leading to a conclusion. For most of us, buying a home is once in a life time phenomenon. And many of us do not want to get caught on the wrong foot while making one of the most important investment decision – a resolve that impacts not only you but your loved ones too.

First things first. The Maharashtra Housing Policy clearly states that sales purchase transactions should be in terms of Carpet Area. However, many builders have not implemented this policy. Flats are continued to be sold at super built up area. Carpet area works out to be roughly 60-65% of the super built up area. The end result is that what is offered to you is actually 60% more expensive when worked out on a per sq ft basis. For instance a flat sold to you at Rs 3,000 per sq ft on a super built up area basis would convert to Rs 4,700 odd on carpet area. And mind you, this is without any add-on costs.

What are the add-on costs? Floor rise (now charged from floor two itself), infrastructure costs for creating roads and gardens in the complex, up front maintenance costs for the next two years, compulsory parking space charges (even if the space is open air), legal charges for forming a co-operative society and land conveyance charges – all bundle up to 15-20% (sometimes 30%) of the basic costs offered to you on the super built up area. If you convert these into carpet area, the add-on costs shoot up to 30%.

What this implies is that your Rs 3,000 per sq ft apartment works out to be Rs 6,000 plus on carpet basis with all add-on costs included. Yes, suddenly the price of the new property works out to be in the ‘not-so-affordable’ region. And this property will be available for possession some three years down the line, if everything works out according to plans. Going by the history of builders, there is always a delay in completion of housing projects – even the ones offered by reputed builders.

The most important question therefore is to ask – “Is this the right decision you are making in such times?” Going by expert analysis that showcases at least a 30% correction in real estate prices, the answer seems to be in the negative. Then again, the ‘next best’ options will correct faster and deeper than properties situated in prime areas. There are other concerns too. The world is in a big mess and so is India Inc. Stock prices of real estate companies have corrected nearly 90%. These companies are facing liquidity crisis. The stimulus package offers some perks for housing loans of less than Rs 20 lakh with the government stating that 96% of the housing loans are sub-Rs 20 lakh. But, the big monies are made in properties that are offered above Rs 20 lakh. In metroes such as Mumbai, Delhi you don’t get a home for sub-Rs 20 lakh. The demand-supply scenario is worse than expected. Look at the table below:

million sqft
Mn sq ft
Excess Supply
Excess Supply

Supply (2008)
Demand (2007)

Average across all cities








Source: Cushman & Wakefield, CEIC, GS

The situation is worse than reflected in the above table, which factors in demand actuals for 2007. Since Mar ‘08, the ground reality has changed significantly. Demand collapse was evident since Mar ‘08. So, the supply demand mismatch has further deteriorated. Prices no doubt are bound to move southwards. When is the BIG question?

The answer may not be soon. Here’s the reason. The 1996 correction, where property prices moved back to levels from where the real estate rally started, was more like a bubble. An artificial demand supply mis-match was showcased to move up prices. Many of the purchases were not investments, but pure speculation. It was a shift in asset play for speculators which led to price spurts. When builders couldn’t afford to hold prices by selling prices at exorbitant rates to genuine buyers, prices moved down drastically. The case is a little different this time round. Booked profits from the equity market were transferred into the real estate market. So, the demand to that extent is genuine. The correction may therefore not be as deep and as fast as expected. No wonder then, builders are holding the price steady for developed properties even when there is a liquidity crisis. Select real estate players allowed to access external commercial borrowings (ECBs) could also defer the fall in real estate prices.

This leaves you all confused. But, prevention is better than cure. In such uncertain times, when any real estate company could go bust one must live with caution. Here is a checklist

Stick to reputed builders
Opt for developed properties rather than ‘to be developed’
In case of latter, check the number of properties that are currently incomplete
Several ‘to be developed’ structures do not have proper documents and/or clearance
Don’t bite the ‘freebies’ bait
Developers are providing fancy timelines of project completion in 2 years or less
Townships don’t develop in 2-3 years
Ask for penalty clause in case of delays
Ask for cancellation policy
Ask for re-sale policy
Stick to prime areas
Rates of ‘next-best’ options will fall faster
Go for homes which you can afford over your earning career
Bargain, bargain, bargain – remember the builder needs your money
Stick to city limits
Go for fixed interest loans (if your banks agree to provide you)
Get a term insurance for yourself (or the home loan will become a liability in case something goes wrong with you).

Anonymous said...

in above article

Mumbai Supply (2008) = 14
Mumbai Demand (2007) = 4.5
Mumbai Excess Supply = 211%

LOL, it seems to be new stupid report by some this rating agency.

If Mumbai has 211% excess supply then why the hell prices are not falling.

I am too waiting for prices to fall so that I can buy flat in bandra area but prices are not falling there.

- Jay