Friday, October 30, 2009

The big bank bailout?

Why property prices did not fall enough in 2008

The real estate industry may have run into fresh trouble. Having emerged fresh from a crisis that threatened to take a few companies belly up, the worst was perceived to be over for the industry. However, data that emerged from a recent Reserve Bank of India (RBI) document shows that just when the industry was in the throes of the downturn in 2008, banks stepped in to lend generously when they needed capital to survive, saving developers the trouble of cutting prices to stay afloat.

here’s the hard data: as per the RBI document, loans to the real estate industry grew as much as 41% last year even as loans to homebuyers grew about 5% in the same period, confirming the trend that demand for property was indeed down.
In fact, in the monetary policy review that the central bank came out with earlier this week, it made loans to the realty industry stricter and ordered banks to arrange for coverage should any of their loans default and get classified as non-performing assets (NPAs).

Chetan Ahya of Morgan Stanley says that the real estate industry got easy lending from banks, due to which they were able to hold back sales and not cut property prices too much. “The RBI governor, post the monetary policy, was clear the RBI would like to see more adjustment in the property sector on the pricing front and that there should not be aggressive price increases,” he said.

Developers, though, were not pleased and on the contrary said the RBI move could result in project delays and make property costlier or impact their margins.
“Property prices are a function of the market, supply and demand. Therefore it at all the hit has to be taken and the prices cannot be increased it would obviously impact the margin,” said Pujit Aggarwal, Managing Director of Orbit Developers.
With the RBI turning on the heat on real estate companies, what will the outcome be on the industry and property prices? Time will tell.

42 comments:

shailesh said...

This is real outrage. No policy was announced, no legislation was involved, nothing !!! In US, at least people knew Banks were being bailed out.

Why were builders suddenly considered so critical for economy? What analysis led RBI or Banks to believe that this money will not become NPA?

Maninder said...

Before any major market moves (up or down) attitude & behavior change noticeably. This is a warning signa and conformation that real estate crash is round the corner.. how much more time it takes is anybody's guess.

Mani

Anonymous said...

I think corrupt CHidambaram was trying to please the banks/RE lobby. Where is the democracy in the country. No one really knew of this except the people who were benefitting.

Anonymous said...

BB kahan mar gaya?
Tell us if it time to buy or sell?
I'm sure you are selling big time as you know what is coming.

shailesh said...

Shobhana Subramanian: What're the builders so worried about?

It’s a pity that home buyers in this country have got such a raw deal all these years while developers have been almost a law unto themselves. Finally, the ministry of housing is trying to help protect consumers and keep a check on the construction of residential property with the proposed Model Act for Real Estate (Regulation of Development). Of course, developers are upset that they will now be made far more accountable, but the government owes it to ordinary, middle class citizens of this country not to drag its feet on this piece of legislation. And since the Act has to be adopted by states, the Centre needs to incentivise state governments to enforce the new rules. Otherwise, home buyers in this country will continue to be at the receiving end. If developers are playing by the rules, then what are they so worried about? After all, there is an appellate tribunal that’s been thought of and with the civil courts out of the picture, decisions can be speeded up; indeed the tribunal is expected to sort out disputes in three months.

shailesh said...

Any truth to such news? Can someone close to ground comment.

CASA BELLA GOLD – By Lodha gets unprecedented response

The largest & latest project by Lodha does a record 400 bookings in just 2 days of launch!

Vik said...

The lodha apts are in Dombivile and priced real cheap. Not surprising to see the response. There are enough speculators who have the 10-20% down. so this is not a harbinger for Mumbai real estate by any standards

Cool Head said...

Even then, by Dombivli standards the prices are way too high. And you are paying for a booking, not a ready to move in flat. As they say, there's many a slip between the cup and the lip. Plus the older Dombivili residents say it is pretty far off from actual Dombivli.He says he is building a "mega city". Who will pay the running costs for this mega city when all the flats are sold? The fixed costs will be another albatross around the buyers necks, which nobody seems to notice.

Anonymous said...

9 more banks fail in the US.

Anonymous said...

My concern is that Slumbai is facing water and electricity crisis on and off...Slumbai has been going down in a catastrophic manner.

If a builder builds a megapolis far away from the city and plans say captive power and maybe water harvesting..can you trust enough to buy into such a project? If you do, you will get what you deserve...

Anonymous said...

I am bloody furious .. come to think of it .. I am sure a large part of this money lent to the builders came from the money we "the middle class" put in our savings accounts and Fixed deposits .. its OUr "freaking savings" that have been used to screw us over

The Unholy Trinity .. Builders, Brokers and Bankers .. have been holding us "the Indian middle class" to ransom .. properties in Indian cities are MORE expensive than those in equivalent areas in US or even in Europe .. how many of us can today afford to buy a place in the locality we live in currently?

The Govt won't do anything .. this power hungry, corrupt Congi govt won't do anything for the middle class .. they are too busy doling out houses and money to the jhopadpatti wallahs because they form vote banks and help them come to power .. the middle class does not matter to them

These damned Bankers are behaving like rogue arms dealers .. arming both the warring sides with weapons .. the only difference being that in this case the weapons are our own .. man .. these people are nasty .. no wonder they get paid in Crores

Can someone publish the list of banks that did this kind of irresponsible lending .. Let's hold them responsible for their actions .. We need to teach them a REAL lesson in "Demand" and "Supply" .. we should all boycott the top 3 banks who funded the builders and averted the lowering of prices .. let it be known to them that they are losing our business because of this .. if enough people do that it will surely teach them a lesson

Anonymous said...

well RTI is one such mechanism to get hold of information. But activism will be a long drawn out affair which will get you nothing but derision..

The only choice left for indian middle class is somehow be able to grow their savings to be able to beat the price rises....the way to do this is to look at investments like bonds, stocks and commodities. Else, your savings will lie in the banks and erode in value..Fighting the govt. or the builder or bhai's is a waste of time. Withdrawing your savings from bank will send a message to the govt./bankers.

The same thing happened in china, the govt. there was using people's savings for rampant growth of 10% and this was leading to over heating of the economy and spiralling prices...the people of the country withdrew their money and put it into the stock market..they actually became active day traders and a lot of them walked away security and retirement money..

Anonymous said...

IMF says India is in a massive housing bubble. Massive Froth in the housing sector in India.

http://www.midasletter.com/news/09100502_Property-values-still-deteriorating-in-most-countries.php

Anonymous said...

Top Business Executives and CEOs seen in Indian companies including even Infosys head Narayana Murthy and Nilekani are the true beneficiaries of globalization and the liberal rich-friendly policies set by successive governments in India. What they know is not ethical business practices and social responsibilities but crookedness and the various ways of taking advantages of the visionless policies set by the government and the result, they all became billionaires within no time. I emphatically say Satyam Raju is not an exceptional case but he is just one among thousands of culprits in Indian companies. Others think they are highly intelligent but in reality what they know are all unethical business practices. They are all impotents who don’t have the courage to express their views but will say this and that on condition of anonymity. The Finance Minister who is after MPs and Ministers to teach them austerity must look into this grave issue with immediate effect because it is unfair asking Ministers and MPs who represent millions of people in India to travel economy class when these so called CEOs and even a fresh computer professional traveling in executive class.



Indian businessmen spread filth wherever they go and moreover, they don’t know how to respect fellow Indians. If it is what they taught in MBA classes, there is a need to change the syllabus.

Anonymous said...

Stop being loosers and do something constructive yourself. If Ambanis did not do any business several thousands would not have got any jobs. Same with other businessmen. And if you expect them to live like a common man, why would they work extra hard for it? kill all media, industires, businesses and learn to stay in forrests with no power, medical or any other facility. This is all that you are saying.

Move your lazy bums and start working rather than cribbing about other people's success

Anonymous said...

Group Housing Myth & Mystery.

The side effects of housing boom has created a movement called group housing. After observing the activities of these groups in Pune, it is creating a dilemma about objective of such activities. In the past one has seen co-operative housing society activities where people used to form a society based on common interest/employee/lifestyle etc & execute a project for the benefit of group members. The 1st step of such activities was, to form a society then collect the funds to buy a piece of land (which is equivalent to 20% down payment). Then take a collective bank loan for construction activity. The loan process could be customized, based on the type of group members to suit everyone’s economic condition. The benefits are endless, low maintenance cost, control over maintenance cost, ownership in common areas; customized amenities, most important is like minded people in neighborhood.

The group housing concept is based on collective bargaining, where buyers form a group & bargain for mass order. But the question here is, are they bargaining for right things & benefits? OR people are just gathering & hoping magical good will happen. The activities of such groups in Pune are really disappointing. None of the member asked for a joint ownership in common areas & amenities but every one was ready to pay. The payment terms were outrageous, on 2nd slab one has to pay 50%. There was no ownership in top terrace area where builder kept rights to construct in future. Only benefit was the apartment cost, cheaper by 100 per sqft compared to neighboring area. After looking at the response, some broker has also started group housing with the help of IT folks & IT folks became underground broker, yes even 1%commission can make a great fortune.
The most stupid act in all these activities was, exposing the demand data in public, through yahoo group. Have you ever seen that BSE or NSE exposing any order data in real time? There also people wants to buy securities.

Social activities are thoughtful actions, not emotional & never intended for praising.

Vulture.

Cool Head said...

To Anonymous @12:24
There is no need for you to teach us to "work hard". If you believe that Ambanis and the others of his ilk, worked hard to become what they are, then you are living in a fools paradise and you have got brainwashed by all the media hype. All they have done is manipulate the govt machinery to serve their own interests.Show me one successful business in the open market of the Ambanis. Whenever they have tried to run actual businesses in competitive environments, they have miserably failed. Look at Reliance Retail or RComm. Ambanis have only thrived only where there is complete opacity (e.g. in getting Oil and Gas fields cheaply, bribing the GOI officials to enter into dubious agreements at ridiculous prices that will milk the country dry). In India to become a really successful businessman you have be a "crony capitalist" who can manipulate the system to his advantage. You cannot become a huge success in India if you follow the traditional business model viz. come out with a very good world class product that can beat the competition, market it well, etc. You become wildly successful by taking loans at easy terms in dubious ways from banks, raising dubious IPOs-bribing the mutual funds to subscribe to these shady schemes, manipulating govt to give tax and other concessions and so on. The end result is that you get large companies that do not care too hoots for any customer and a bad environment for other businesses (they try to restrict others from becoming competitors).

Anonymous said...

I was told by one ethical stock broking house that they dont deal with reliance because of their unethical practices.

That the ambanis manipulated the system and the govt to their advantage is known to everyone.

And certainly it wasn't their business genius they got rich but their unending unethical and fraud praactices.

Anonymous said...

Thanks Cool Head. You have given the true picture of Indian business moguls(Ambani). My way for protesting against Relaince is not to buy any reliance goods.

Cool Head said...

Thanks Anon@5:44 and Anon@6:19

Vik,
Please delete the comments posted for the only reason of "link dropping".
Now that your blog must have very good Google PR (PageRank) you will find many fellows who will want to "link drop" their own links in the comments section (like somebody who calls herself Margaret above), to piggy back to the top of Google search results whenever anybody searches for "properties in india".
IMHO you should delete these comments since they are just "comment spam".

Anonymous said...

anon@12:24 PM

Dawood has created much bigger enterprise than Ambani who is offering jobs to lakh of people in India & abroad. He is not only paying to his own people but also paying for greedy govt. officials & politician, what a great socialism. Why are you jealous about him? Why don’t you send females from your house to kamatipura to join his great enterprise?
Why govt. didn’t accepted Ratan Khatri’s offer to legalize matka? He was ready to pay much higher taxes than Ambani & also provided entrepreneur opportunities to millions of Indian?

Vik said...

Coolhead:
Spam deleted.
Margret,
If your post is not a spam, please mention in detail which property you are interested in and folks can comment on its viability. If I were you, I will not go any property priced greater then 5,000 unless I have black money or I have surplus cash from the stock boom, inheritance of other sources.

Anonymous said...

Stocks market in India to go down by 400 points today. At least a 3% drop. And in a few months it will be close to 8K.

shailesh said...

Egg-shaped building plan shelved

"It would have cost me Rs9,000 a sq ft to build the egg-shaped building. So, I opted for this standard design, which will cost Rs3,500 a sq ft. The project cost for the new building is Rs375 crore," said Vijay Wadhwa, managing director of the company. He, too, was eager for the building height to be raised to 90 metres, he said.

shailesh said...

7 builders left in fray for 5 Dharavi sectors

So one by one, many left from this lucrative biz.

shailesh said...

Builders revive stalled commercial projects on early signs of recovery

Analysts, however, remain sceptical and say the commercial and retail segments, unlike residential housing, may be far from a turnaround. Real estate consultancy Cushman and Wakefield said in a 27 October report that the estimated absorption of office space in the first three quarters of 2009 was 4 million sq. ft and is expected to be 5 million sq. ft for the entire year—a 50% drop from the 10.36 million sq. ft sold in 2008.

Developers had shifted their focus from commercial, retail and hospitality projects to residential sales during the slowdown. DLF and Unitech led the way, saying they would concentrate on mid-income homes, and suspended other projects. While a Unitech official said on condition of anonymity that the company has changed its stand and gotten back to commercial development, DLF is also developing about 2.5-3 million sq. ft of commercial space.

shailesh said...

Real Estate finding a new track in Indian economy

With the global economic crises on one side, leading players of real estate India like DLF and Unitech are focusing more on the repayment of debts as soon as possible.

This has resulted in big real estate players selling their personal office properties, shifting their focus from core property business to some other businesses like insurance and hospitality and selling off some part of the company by getting listed on the capital market.

However, according to the recent study conducted by several industry watchers, the real estate of India is coming back on profitable track with the demand for offices is increasing in major cities like Bangalore and Mumbai, however Delhi and NCR are still far from witnessing growth in demand as many are expecting further fall in rentals here.

Besides the growth factor in office and shop rentals, a slight growth is also seen in the buying and selling transactions of properties.

With the Indian economy coming on track again, the demand for flats are seen rising in past one month. The real estate developers like Amrapali, Parsvanath and Unitech are nor registering some potential bookings on their order books.

The recent festive season has also added some profits to the real estate industry when many were keen on buying a new home.

During the last festive season, a very low rush was seen for the real estate buying but this year, the banks came up with some attractive home loan schemes with the help of rebate provided by Reserve Bank of India.

Anonymous said...

At least the developer was right when he said 'price is a function of demand of supply'. The price of RE is decided based on supply of housing relative to demand for MONEY or credit. What he forgets is that RBI is the entity that tunes the demand for money. Has the demand for gold suddenly went up? India consumed over 100tonnes of gold in 2001 and this year it is set to consume around 400 tonnes of gold. If RBI works hard like US Fed to destroy any demand for cash, I am pretty sure rice & fuel will become best investments of the future.

Anonymous said...

Anon above who predicted 3% drop in Sensex was so right. Monday was closed and Tuesday we saw it. COuld you please identify yourself.

Anonymous said...

I hope anon's second prediction of 8k also comes true soon.. :)

Anonymous said...

Real estate stocks take a beating

- Anil

Anonymous said...

Right time to buy stocks, slowly start buying by June next year we can hope to get good appreciation.

Bindas Bhai

Anonymous said...

BB,

Welcome back!!. What is your source of information, at 9:12 you write that the market will go up whereas we all thought that market will fall even today. Now at noon the market is up by almost 400 points!!

Anonymous said...

Urs Truly RKA
I told you that when insiders sell (CEOs) their stake in the company the stock prices fall.
HCL Tech went doen to 280 . and I had sold them at 330+.

confirm earlier post

Anonymous said...

The stock markets in emerging economies will always be higher and go high as there is massive buying from funds from US and Europe. Primarily from US, the retirement funds of of US citizens are being used to earn profits from India, Brazil etc. These funds are so big that even all of Indian investors cannot invest that much money.

So, these wall streeters will keep buying and selling and keep the market high unless there is some policy change from Obama to limit ETF's etc for emerging economies. I don't see that happening.

Anonymous said...

Wilbur Ross Sees ‘Huge’ Commercial Real Estate Crash

By John Gittelsohn and Thomas R. Keene

Oct. 30 (Bloomberg) -- Billionaire investor Wilbur L. Ross Jr., said today the U.S. is in the beginning of a “huge crash in commercial real estate.”

“All of the components of real estate value are going in the wrong direction simultaneously,” said Ross, one of nine money managers participating in a government program to remove toxic assets from bank balance sheets. “Occupancy rates are going down. Rent rates are going down and the capitalization rate -- the return that investors are demanding to buy a property -- are going up.”

U.S. commercial property sales are forecast to fall to the lowest in almost two decades as the industry endures its worst slump since the savings and loan crisis of the early 1990s, according to property research firm Real Capital Analytics Inc. The Moody’s/ REAL Commercial Property Price Indices already have fallen almost 41 percent since October 2007 , Moody’s Investors Service said Oct. 19.

Dexter said...

Someone wrote: "These funds are so big that even all of Indian investors cannot invest that much money."

This is all speculative activity. Right now dollar is falling and dollar borrowing cost is very low. The carry trading at borrow at -20%, thats right once you include impact of currency depreciation.

Once dollar stops falling (it is already 10% undervalued on PPP basis), this -20% borrow cost will become positive and carry trade will become risky. We will then get an unwind.

- Dexter

Anonymous said...

Very true Dexter.

A lot has to unwind. More so at Wall Street. I wonder if there would be any demand for Finance MBAs in the next decade as there may be stricter regulations for any financial engineering leading to massive scams like reselling derivatives or mortgaging the future of our children. Greed is good but what has been happening is unethical looting by big corporations and educated folks at the wall street.

Anonymous said...

Looks like socialism is not dead in India. Folks looking for others to help them out in buying apartments, or hoping that stock market and job market and real estate market will crash, but somehow their own employment will be unaffected are living in a dream world.

Anonymous said...

Anon above:
I think people here are wishing anything that goes out of proportion without any logic to grow 400% in a few years, to become more reasonable based on fundamentals.

Everyone wishes well for India and Indians. There has been no investment in the world that would have APY of more than 8-10% logically in the last 200 years.

People don't want to get hurt by buying in this market. I know that I cannot buy the same flat I live in today again at the prices of today. My flat is worth 1 crore now and if I don't have the capacity to buy it again, not many people will be able to afford it as I make pretty decent money. I don't live like a slob, I spend good on family with very good food, vacations, clothes and a good car etc. My monthly salary is close to 1.1 lacs. But I would definitely not buy my own flat at One Crore. I know it used to be 23 lacs in 2003 and at the most it should have been not more than 50 lacs.

I feel that we are living in massive bubble times. The new generation doesn't even know what tough times are/were and reality has to come to surface. I believe that the stock market in all BRIC countries and US are in another bubble and housing in Asia, Australia/NZ etc has to go down by 50-60% at least. If India were doing really good, why would the prices all over the world go up by 400%. It is a world problem created by the easy money policies of the mastermind " Greenspan/Bush".

shailesh said...

This is BB's Mumbai where you pay crores to buy decent house.

Mumbai - Killing You Softly


Figures published in the Human Development Report 2009 - confirm the worst fears of every local commuter in Mumbai. Maximum City's average life expectancy for men is 52.6 years (!!!!) compared to India's life expectancy figure of 63.7 years. In Mumbai people are dying faster BY SEVEN YEARS - it's as simple as that! (This study incidentally is supported by the UNDP / Govt of India / Min of housing and poverty alleviation etc.)

rajni sharma said...
This comment has been removed by the author.