Monday, February 02, 2009

Builders and their inflation predictions

It comes as no surprise to me that the members of the real estate community including investors are disappointed at the contents and comments on this blog. Lets put things in perspective and maybe they can understand a bit more about investing and economic boom and bust cycles. When the biggest builder DLF makes a comment on national TV that real estate prices will to return to inflation adjusted prices of 1998, that is a pretty strong statement.
Lets examine the official inflation numbers from 1998 as reported by Reserve Bank of India publication. I'm no economist but cursory look at the inflation numbers shows an average WPI inflation of 5.1% over 1995-2004. If we go with another average for the subsequent period of 7% for the period 2004-2008, we have a combined average of (5.1 + 7)/2 = 6.05% inflation adjusted numbers for a 10 year period 1998-2008. To keep up with the compounded inflation of 6.05% annual inflation 100 rupees in 1998 should be worth Rs 187.71 in 2008, a total return of 87.71%%. If DLF is correct prices have to be roughly 1.87 times 1998 prices. A 3 bed room apt worth 20L in 1998 should be worth 37L in 2008, however we have seen that this apt is now worth 80L, a 400% return over a 10 year period instead of an 87% percent return. This apt has to drop 50% from the 2008 level to revert to the inflation adjusted number of approx 40L.
Even we we assume the alternative inflation number of 8.1% listed in the document for 1995-2004 and assuming an 10% inflation number for 2004-2008. We still have an inflation number of 9% compounded leading to a return of 137% over a 10 year period, still far cry from the 400% number we have seen in real estate pricing.
Either prices have to fall 50% to return to mean, or DLF is making statements they don't believe in.
Real estate using leverage is a great investment when money supply is infinite and loans are granted without scrutiny. Under any other situation, the game is going to end only one way, with a big thud. If this was not the case, we wouldn't see block buster ipo's of 2007 now trading at 5% of their peak value in a period of 15 months. For all the perma-bulls like Dilip who are still hanging by the thread of godly deliverance and hope, I have a bridge to sell.
I just started reading this article on economic theory and I hope Dilip reads it. He is probably surfing at 28.8k bits right now so expecting him to read and understand it is akin to asking a caveman the boiling point of water. Many people didn't buy over-priced real estate and missed the big boom. However they ended up leaving the apartments mentally bankrupt folks who are now keeping awake all night worrying about EMI's, while they the smart ones are sleeping soundly in their rental bliss.

22 comments:

Anonymous said...

Vik great observation. I thank people like Vulture, Observer, Yogesh Chabria and all others for making sure Indians do not buy overpriced property.

I know of buildings all empty in places like Bandra/Khar in Bombay. Someone wants to sell per sq. ft. at rate of Rs. 8,000 but still no buyers. Till some time ago they were asking over Rs. 16,000. It should go down more I feel. To as low as Rs. 5,000.

Bombay suburbs will be as low as Rs. 1,000. As price of steel has crashed and so has cement.

This blog rules! The common man has finally got power which corrput brokers and builders don't anymore.

K said...

REALTY - COMES TUMBLING DOWN


The markets opened on a weak note today morning for trade and the biggest anchor was the realty sector. DLF was the top loser.Others – Unitech, Ansal, Indiabulls, Parsvath, Sobha; all were in the red.



We all know for a fact that the realty sector is down in the dumps right now. So what was the reason for this sector start losing round anew, once again? Well, its “results” season, so naturally the third quarter performance acted as the dampener. Though the market was aware that the results would not be good, the actual numbers were way below expectations and this ruined the sentiments further.



The biggest realtor, DLF reported a whopping 69% fall in consolidated net profit at Rs.670.79 crore. The company's consolidated net sales also plunged by more than half to Rs 1,366.67 crore in the quarter ended December 31, 2008, from Rs 3,598.42 crore in the year-ago period.



The story of pain continues in Unitech too. Its consolidated net profit fell 74% to Rs.136.05 crore in third quarter ended December 31, 2008, primarily due to ‘negligible’ sales in the commercial and retail space. Unitech’s total income for Q3 at Rs 507 crore was lower than the PAT notched in the year-ago period at Rs 525.7 crore.



The other realtor – Parsvnath registered a 95% fall in the consolidated net profit at Rs 5.42 crore in Q3, while total income fell to Rs 98 crore from about Rs 497 crore in the year-ago period. Pressure on sales, increased interest cost and personnel cost led to this complete run down on the profits.



The gloomy picture of falling topline and bottomline is seen across the board, in all the companies.



But one common thread running through all of them – falling sales and rising interest costs. This in short tells one the entire story of the sector. The falling sales show the lack of demand – people are just not buying. The expectation is that prices have to come down further or else, there would be not takers. The realtors have not really dropped the prices drastically. They continue to hold on to properties in the metros and this in turn is running down their margins. The borrowings have gone up and as interest rates were at their peak in Q3, naturally borrowings costs have gone up too.



Effective today, SBI has reduced the interest rates for home loans at 8% and this news was supposed to have bought some cheer to the markets but it went largely unnoticed. This 8% rate is sure to trigger off a rate war soon but how many would actually want to buy is the moot question.



The fact that there were serpentine queues for the MHADA forms and the demand which we saw for indicates that there are buyers. It sold a total number eight lakh forms and all this for 3,868 houses on the block in the suburbs. What this indicates is that there is a demand – but only for affordable homes not the luxurious apartments being built by these builders. The realtors go for luxurious apartments as the returns are huge and in affordable homes, the margins are not as high. But now with no demand at all for these “high margin” homes, its better that the realtors see the writing on the wall and get into making homes which are affordable and needed. Give what the people want and not what the developers want.



So what does the future hold for this sector?

Ø Outlook remains bleak and will do so till first half of 2009.

Ø Interest costs will be the biggest fixed cost eating away the bottomline

Ø Topline will see a fall as it would take a while for demand to pick up.

Ø Interest rates are coming down but one has to wait and see if people bite the bait or will they wait for more.

Ø Insecurity on the employment front is also a big concern and till things stabilize globally. Given this acute sense of insecurity, people might not want to commit at this juncture.

Ø If sales have to go up, realtors have to bring down the prices. Tier II and Tier III cities have shown a drop of 35-40% but this is yet to percolate to the Tier I cities.

Ø More and more affordable homes in the 1 BHK configuration are now expected to be developed.

Ø Weak demand and limited ongoing projects show that the coming two quarter will be tough.

Ø Liquidity will remain an issue for developers. Companies will sell their assets or stall more projects to raise money and remain afloat.

Ø Debt repaying ability and slowdown in demand will remain the biggest bones of contention.

Ø Realty stocks would take a while to recover and best to take positions after the fourth quarter.

Vik said...

yeah at 5000, I wouldnt hesitate to buy in Bandra/khar/santa cruz(w). I've seen my expat friends paying 1.5L as monthly rent in Bandra over the past few years. I don't think those rents will continue to hold when they go in to renew their lease.

Anonymous said...

Hi ,
I live in New York and recommend that you read MIsh Global econmic blog. I believed in the decoupling and invested 1 million in India. I paid all cash to a builder and now he is not finishing the prject and refusing tor return the money>
I am so screwed. Till the US des not come out f this mess no one else will.

Anonymous said...

Why the banks are not reducing the home loan rates or resorting to the tactics of luring the buyers with the teaser rates. Just a few days back they were touting about the "Sound Judgment" and giving "Gyan" to their Western counterparts about how they refrained from sanctioning the subprime loans. Following was their sound strategy for issuing the prime loans.

1. Employ an agent and give him some fancy name e.g. Home Loan Consultant etc and make him wait outside the campus of the IT/BPO company throughout the day/night.

2. The "Techie" takes a break for the smoking and steps outside the campus for a while or he visits the branch in the campus.

3. He is chased to take the loan and it is sanctioned within a week provided following documents are provided.

- last three salary slips
- six month bank statement
- offer letter
- 2 photos
- some proof Passport, PAN Card.

4. Zero down payment....this seems to be crazy it has to be 20%...ok ask the developer to inflate the price by 20% and get the fake receipt of 20% down payment

The guys with experience of hardly 1-2 years have taken the massive loans to the tune of 30-40 lakhs.

So if this a sound strategy and all the prime rates (CRR, Repo rate) have fallen to the record low then why the heck banks are not lowering the home loan rates. The loans are turning out to be bad bets because the IT/BPO companies are laying-off debtors by hook or crook and reducing the variable+fixed components of the salary. So these lenders are watching this drama unfolding with fingers crossed. But these suckers don’t know that the train has already left the station and it is just a matter a time before they get crushed. (yes there is a light at the end of tunnel).

Please check rediff article Are banks hiding something?

"The other problem is the continued refusal on the part of banks to pass on policy rate cuts RBI has already made. RBI has in fact, decided to maintain its current monetary profile despite its own predictions of lower growth and lower inflation. The reason is probably that it's waiting for market rates to come down further.

The most expensive thing is money itself. This seems irrational because logic suggests that cutting rates sharply would be a win-win decision for banks. The only rational possibility is that banks are sitting on massively increased non-performing assets. However, the Q3 results don't reflect that. Nor is there a shortage of liquidity if credit-deposit ratios are to be believed.

Therefore, banks may be collectively concealing big holes and these will perhaps, come to light in Q4. Or, every bank has got its strategy wrong. Both conclusions seem to be dire."

Yoko Ono's Owner said...

Prices will not fall below 2002 to 2003 levels. Afterall Inflation has been higher than recorded. I urge everyone to be realistic. Especially the perma-bulls who may be in denial. For those who are really pissed with the real estate pricing in India especially the scale of price escalation in Mumbai region, just like I am, I would suggest, be patient and also adjust to the fact that while prices will fall....50% from the peak. 80% and all other wild calculations will not see the light of day.

Vik said...

Prices will fall to the levels of affordability. A person making 5L can afford an apt worth 20L, it doesn't matter if this person is in Mumbai, Bangalore, New Delhi or Pune. The variance for apt costs should be +/- 10%. Not 50%. Mumbai is always running out of space, however cheap money was the reason why prices went up. Now that this money has dried up, prices have nowhere else to go but down. I know many people who have bought 1cr apts in Mumbai and are wilting under the weight of the EMI's. They would do anything to get out of the EMI hell-hole. Also the first few years of EMI payments go towards the bulk of interest payments. So if you sell after 2 years and prices have gone down, you are in double loss. What kinda investment strategy is this where you pay the bank interest to lose your capital. Just a house of collapsing cards, thats what the Indian housing market is in 2009.

Except for some exceptions, I anticipate a deep correction. If builders wish they can use euphemisms like affordability, correction but to me the bubble has popped and booyah to it.

Anonymous said...

Well, builders lagged to accept the economic downturn & tried to rollover the debt
hoping that market will turn around, but as said earlier this time the rules of game are different. Now we have reached to the point where stimulation of demand even after price cut is in question. Citing affordable housing demand example to interpret the demand for overall market is another flaw in the predication. Without job security people can’t make long term financial commitment & without economic recovery job security is impossible. So government need to help other sectors as well, not only friends & relatives. Yes it’s a close & dependent economy which constitutes a common man as well.

Now Obama is trying second solution to pull the economy out of depression like situation but the effect of stimulus is yet to be seen. Even after capital injection US banks are insolvent, which are left with bitter choice of Nationalization. If the economy does not show the sign of change till 2ndQ then depression is not away.

Here is a question about banks exposure to housing sector. When prices has corrected to the extent of 30% how come 5-20% down payment has acted as a cushion against the price correction? If banks have realized this fact & trying to avoid the loan in the wake of 50% correction, no wonder loans will be delayed. But the existing toxic exposure will not evaporate so easily.

So guys let it fall then only pick up, minimum 50% price cut is guarantee.

Vulture.

Anonymous said...

Well we all can dream what we want but a lot of dreams seldom come true.

In 1998 the house which we used to live was worth 20L and today the same is at 50L.(Mumbai)It had touched almost 60L during the peak.

From 98 to almost 2004 the prices was more or less the same it only in later part of 2005 the prices started appreciating. This happens in most of the asset class.

I don’t know what is the average inflation for this period but if i look at this house as asset then the same has grown at 9% CAGR.

I would request everyone in this forum to carry out this exercise and let us know your findings.

We have to be more responsible in giving this forum some credible information so that people can take an informed decision be it to buy or not to buy.


Bindas Bhai

Observer said...

Bindas Bhai (Dilip),

The same 20L apartment in 1998 was probably 30L in 1994-1995 boom period. Real estate moves in cycles. Holding on foolishly to a declining investment is not a smart investment move. Hope is not a good investment strategy.

The smart ones anticipate these cycles. That is what separates the naive from the smart investors. The foolish from the Vulture investors. The vultures are higher up in the food chain from the simple investors, and usually are proven right in the end.

When DLF itself is saying prices are going to come down by another 20%, I think it is the height of foolishness to cling to the romantic notion of ever-appreciating prices. Life does not work that way. Fortunes are made by the smart ones, and lost by the simple ones.

Anyway, good luck with your hope strategy. You can check back in later this year and let us know how you are doing.

Observer said...

Professor Shiller has shown that housing prices do not outpace inflation in the long run. So unless inflation from 2004-2007 was 80% a year, it makes absolutely no sense that prices shot up by a factor of 300% or so during this boom.

DLF is right, housing will return to inflation adjusted prices from 1998. A 20L apartment in 1998 would be fairly priced at 30-35L at most.

The other issue is that Mumbai is not representative of India. In fact, most colleagues I know in Bangalore would never consider moving to Mumbai, given its extreme congestion and acute lack of open space anywhere with massive slums and lack of sanitation. Even my colleagues in Bangalore now want to move to Mysore given that this is becoming somewhat crowded. Mysore is still green, spacious, and has few slums. Even if someone pays me a 1cr salary, I would not move to Mumbai. So I do not really care what prices are in that city.

Abeer Bagul said...

I am building a bunglow in Pune (Nigdi, Yamunanagar to be precise). The land was bought by my parents 20 years ago, and just now only construction costs are being incurred. I would like to tell you my costs since that would give all readers of this blog an idea of current construction costs. This includes taxes, govt fees, architect's fees, everything.
So people like Dilip, Bindhaas Bhai, please dont try to raise doubts saying that some extra costs are incurred by builders.
The construction is being done by a reputed builder of Pimpri who is a family friend.
Plot area: 1900 sq ft.
Built up area: 2600 sq ft.
This built up area has been certified by PCMC Corporation in the sanctioned plan and not a inflated figure used by builders.
Cost of project: Rs. 36,00,000
(As qouted by builder). This includes high end fittings like Jaquar, vitrified tiles, granite, Godrej locks, Asian paints Royale Play paint, etc.
All material is branded high end stuff.

This is higher because economies of scale are not possible in a bunglow construction.
Extra: Architects fees, taxes, govt fees, etc approx 2 lacs.

Thus, cost of construction is Rs.1461 per sq ft.

This is max. Builder will incur cost of construction at around Rs. 1200 per sq ft. Everything above that which he is charging is inflated land cost and inflated profit.

This construction cost is the same in high end areas of Koregaon Park and low end areas like Wakad, for luxurious apartments.

Anonymous said...

Observer,

There is no point in cribbing when others make a fortune. I have made investment in 05 and it looks like you have missed the bus. Time alone will tell where the property prices will head.

Observer said...
Bindas Bhai (Dilip),

The same 20L apartment in 1998 was probably 30L in 1994-1995 boom period. Real estate moves in cycles. Holding on foolishly to a declining investment is not a smart investment move. Hope is not a good investment strategy.


We are not as smart as you, yes but we have brought in 05 and for sure i know that Mumbai will never see that levels. If you feel it will come back to those levels please wait and keep waiting.



Observer said...
Professor Shiller has shown that housing prices do not outpace inflation in the long run. So unless inflation from 2004-2007 was 80% a year, it makes absolutely no sense that prices shot up by a factor of 300% or so during this boom.


Another loose statement and out of the context. Prof is talking for what market/time frame.


Observer said

DLF is right, housing will return to inflation adjusted prices from 1998. A 20L apartment in 1998 would be fairly priced at 30-35L at most.

Yes thats why he has reduced the prices by 20% and after doing he has made this statement.


Observer said:
The other issue is that Mumbai is not representative of India. In fact, most colleagues I know in Bangalore would never consider moving to Mumbai, given its extreme congestion and acute lack of open space anywhere with massive slums and lack of sanitation


That’s a view a lot of people share but the fact remains that Mumbai is still the commercial capital of India.

Property prices are area specific and if Bangalore goes up by 20% do not mean Cochin will go up. I have being telling this forum to look at opportunities and buy but a lot of people still disagree with me.

All the best.

Anonymous said...

Abeer Bagul said...
I am building a bunglow in Pune (Nigdi, Yamunanagar to be precise). The land was bought by my parents 20 years ago, and just now only construction costs are being incurred. I would like to tell you my costs since that would give all readers of this blog an idea of current construction costs. This includes taxes, govt fees, architect's fees, everything.
So people like Dilip, Bindhaas Bhai, please dont try to raise doubts saying that some extra costs are incurred by builders.

One more smart cookie in this forum,
Assuming the construction cost is 1400 and land cost in slums of Mumbai is minimum 4000,(I have discounted TDR benefit in this price) that itself comes to 5400. Now there is finance cost, Mafia/political cost and off course profits. Today a lot of builders are selling at 5000 to 6000 price in Bhandup/Mulund/Borivali because they have brought the land at cheaper prices and off course loading of 40% from carpet to built up area is where they make money.

Land is a scarcity in Mumbai and Developers are going for society redevelopment. Areas which are held by the state govt start bidding at minimum 20,000(off course you can utlise TDR which comes at Rs 1200 current price). So in effect you get 2 sq ft at Rs.21,200 . This is only the land cost.

Tell the Govt to give land to middle class people at cheaper rates let them give to a group of genuine people and then see what happens to the prices.

We can dream of as we are currently dreaming of crash in property prices.

If you can remember Railways and MMMRDA did not get the expected bid price but instead of bringing down the price they have postponed their decision of selling the plot.

Nasty bears in this forum are only looking at their personal agenda and giving bullshit.

Dilip

Observer said...

It looks like our 2005 investor has some reading comprehension problems. DLF said they are willing to fight a price war, and that they will price their new projects 20% lower than most others. Also, when the other poster is talking about Pune, this 2005 investor keeps harping upon some investments he made in Mumbai. Sad. I think as another poster mentioned, investors on losing investments go through 4 stages:

Denial
Anger
Acceptance
Resignation

Our 2005 investor is in between stage 1 and 2. Stage 3 will come by later this year. There is no way to stop it, it is inevitable.

I feel the day will soon come where worldwide, regulations will be imposed on banks not to give loans for properties which have gone up by more than the rate of inflation. Goodbye to those 300% appreciation rates.

I think our 2005 investor can unload his properties to some politicians, who may need to launder their black money. I do feel for the trapped investors, with their shrinking exit options. May God have mercy on you guys.

Anonymous said...

Observer,

Keep dreaming, guys like you will not be seen in this forum before June 09.

Denial
Anger
Acceptance
Resignation

Time alone will tell us who will go thru these stages in immediate future.

God willing we have nothing to loose. A lot of guys like you have not brought properties and we will sell it to them.

Even today people who are buying property at a discounted price will stand to gain then the guys who will buy just before the crash( God knows when).

I am fully confident that for Mumbai there wont be any crash.

Vulture, Observer and others will be doing the disappearing act before June 09.

Dilip

Dilip.

Anonymous said...

I am actually shocked to see this forum where people are fighting on topics where they have little control on.

I can see one Gentleman writing rudely to prove his point and the other giving baseless argument.

No one can tell where the property prices go but yes we can only make a fair judgement.

Same old things are written over and over again.

Why dont we add some value to this blog by writing what actually is happening in the market and not by just posting media reports and fighting on it.

Thanks,

Guntur

Anonymous said...

The real estate firms will be going bankrupt before the end of 2009 and disappear without a trace. Even if they fly with a begging bowl, the foreigners are going to kick them out since the source of cheap money has dried up. They have been left to their own fate and rub the nose at the doors of Indian lenders.

Realtysector in death spiral, BSE Realty down 86% y-o-y

"Despite the BSE Realty Index correcting 86 per cent year on year, experts are advising investors not to go bottom fishing in the real estate sector. Some experts feel that the sector is in a death spiral and given the future valuations, some stocks are expensive and need to correct further. "

Observer said...

Very interesting link above. Maybe Dilip and the gang of Mumbai brokers on this site should read this passage from the above link:

Experts opine that the core issue in the real estate sector has shifted from 'affordability' to 'demand'. Job cuts and increasing insecurity and low business confidence have become key concerns. Studies reveal that during times of severe economic uncertainty, consumers postpone big ticket purchases.

As such, developers indicate that they do not expect demand to resurface in the near to medium term, even if real estate prices correct 20-25%, and mortgage rates decline 200-250 basis points.



Developers have been forced to cut prices for new and under construction projects by 30-45%. Until recently, such discounts were not publicly reported and were available only to large investors. In the last two months, several large reputed developers have issued public advertisements about discounts, hoping to stimulate demand and lower inventory.

Rahul said...

Irrespective of how much we argue over the issue of Real Estate getting bust & prices getting realistic, the ground reality has been totally different.
I have been open to look for a apt to live for myself and I honestly am not seeing any meaningful correction in the prices of projects I have seen till now.
The prices for sure hasnt gone up but no builder or resale apt is available at a price comfortable to me, which is around 50-70% more than the prices people initially paid around 2005 period & I am willing to pay.
Inspite of making a healthy return on property investment during this bad time, I am really amazed to see the greed of people in making astronomical returns. I dont know what they really expect to make out of their investment.
But I am still firm and wont concede and will wait for something meaningful to come my way before taking the final call on the same.

Lets see who wins !!

Anonymous said...

Dilip,
You calculations on cost of apt make sense only if the FSI (I hope you know what that means) is 1. IN slum redevelopment projects the FSI will be higher, in areas like Bandra-Kurla Dharavi, it will be 4.
This means your cost prices (even including ancillary costs) will be much lower not 6000 et al.
When the govt inceases FSI it is actually creating "land" out of thin air.

Anonymous said...

Rahul,
Wait after the elections are over, you will get the same houses at much lesser rates. The politicians are just trying to delay the inevitable crash but forcing the banks to reduce interest rates, the mutual funds owned by govt (like LIC) to roll over debt, etc. This will delay the crash, not prevent it. Many real estate companies are effectively insolvent. Somebody has to just shout out that "the emperor is not wearing any clothes".
Somehow this facade of "bullishness" will be maintained till April/May 2009, after which the bottom will fall out after elections. Wait, watch be patient.