Friday, January 09, 2009

New York Real Estate Outlook: Mega-Crash

Here is Henry Blodget, the analyst who put a $600 target on Amazon summarizing Goldmans latest analysis on NY real estate. On similar lines Mumbai should crash as well. No more excuses including the followng will be able to prevent this steep drop. Lack of land availability, density, growth, 20 million population, migration, jobs, stock market, diamond market, financial center, Reliance, black money.
Henry Blodget January 8, 2009 4:31 PM
Lockhart Steele at Curbed summarizes Goldman's latest tome on the New York residential real-estate market. . Here's our summary of his summary:
Look out below.
Goldman: "New York apartment prices are very high relative to the observable fundamentals. Using three alternative yardsticks—price/rent, price/income, and affordability—we find that prices would need to decline by 35%-44% to return to the valuation levels seen in the 1995-1999 period, before the start of the recent boom."
Goldman: "Under the (admittedly unrealistic) assumption that prices decline by the same percentage in each market segment, this type of drop would imply that a 1-bedroom condo whose price currently averages roughly $800,000 would decline to $480,000; a 2-bedroom condo would decline from $1.7 million to $1 million; and a 3-bedroom condo would decline from $3 million to $1.8 million."

Goldman: "It is instructive to consider the potential implications of a return of relative Manhattan incomes toward the national norm prevailing before the Wall Street boom of the past two decades, either because of pay cuts in the financial industry or because of a possible out-migration of affluent individuals. From 1969 to 1986, Manhattan per-capita income averaged 2 times the national average, with no clear trend. Over the next two decades, however, it grew to 3 times the national average. If incomes fell back to the pre-1986 level of 2 times the national average—and if national per capita income remained unchanged—prices would need to fall as much as 58% to return to the 1995-1999 price/income ratio.
Goldman: "In addition, it could be that societal and demographic changes will keep New York apartment valuations above the levels that prevailed in earlier periods. For example, one might argue that the memory of high crime rates was still fresh enough in 1995-1999 to make this period an excessively pessimistic benchmark. If crime stays low during the current economic downturn, perhaps Manhattan real estate will retain its higher valuation in coming years. Alternatively, one might argue that the aging of the baby boomers will continue to support the New York market as "empty nesters" want to live closer to the city's attractions. These types of arguments are difficult to quantify and are often heard just prior to the start of a real estate downturn, but they do underscore that our analysis of the observable data on prices, rents, incomes, and interest rates only provides a very partial view of the New York apartment market."

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.

Slumdog Billionaire - Truth be told

"The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones," Raju said in his letter. "I am now prepared to subject myself to the laws of the land and face consequences thereof."

If there is someone who knows to tell a dramatic story, it is B. Raju. Thanks to Anon for the post where the Satyam CEO announced in painless detail the Satya(m) of the balance sheet. Satyam as most employees will attest is a sweat shop. Employees in the US work ridiculous hours and get peanuts for all their efforts. I'm not sure how employees in India are treated. It goes without saying that Satyams's customers will switch to other outsourcing companies and I wont be surprised with US based companies get the right to choose customers as opposed to the India big three. It also looks like we can easily see a layoff of 50% of the workforce in Satyam. What happens to all the mortgages which have been sunk into Hyderabad real estate ? As we saw the stock market took a beating down 750 points, Satyam investors have been wiped out. This is just beginning to get ugly. Maytas and Satyam will be remembered as Worldcom and Enron. The last straw which broke the market's back. Wonder how many more books are cooked by Indian management. The auditors are a joke. God save outsourcing.

Here is good analysis on how the books were cooked.

Here is Raju's candid letter to the SEC. Without regret or remorse, the criminal has bankrupted the company he has founded and will bring Hyderabad to its knees.

Monday, January 05, 2009

Strong headwinds ahead for outsourcing vendors

Its amazing how much critical mass we have amassed on this blog that real estate folks are now watching it with some more scrutiny.
I appreciate all bouquets and brickbats on behalf of the bulls and bears since this platform is only as worthy as its readers and commentators. Observer, BindasBhai, Shailesh, Shrinwas, Anil, Jayaram, M and others who I've missed deserve credit for their comments.
The goal of this blog to cut beyond the marketing hype perpetuated upon us by the builders thru the media. I am tired of reading soft-marketing articles planted in the newspapers/web which tout moronic analysts quoting the usual bullish rhetoric for real estate.
Just three months ago we heard the FM saying we will grow by 9%. I don't know how a crystal ball gazing FM can make such ludicrous predictions. As soon that the FM makes a prediction all the touts latch on to it and make the rest of us believe that growth will spur demand for real estate/stocks etc. Now when the FM changed his forecast to 6%, who will compensate those investors/buyers who predicated their purchases on this crystal ball ? We all all herd at the mercy of the big bad wolves. If only we can understand this, maybe we will know opportunities arise when sentiments change from euphoria to depression. It is only then when money will regain its worth and gold is found.
I'm not predicting a depression in real estate, however I'm saying a serious correction is in progess and any purchase now without a major discount is just bad investment. It is not often that a buyer is in a driving seat but now is the time to bargain hard and get value for your hard earned money.
The bottom line is cashflow, yield, affordability, credit availablity and job security to sustain any boom in any sector. As of today the Sensex is up 300 points. We'll see how long this rally lasts.
Business Standard reports.
Slowdown to shift focus to hard asset-intensive biz: Tholons.
New Delhi, Jan. 5 The global downturn is expected to impact the growth and margins of the vendors in the outsourcing space for the first 2-3 quarters of 2009, before picking up and ending the year on a stronger note as clients look to cut costs and improve revenue, advisory firm Tholons said.

According to its latest report, ‘Top ten trends in service globalisation — 2009’, the slowdown would also see reduced number of start-ups in the services sector as the focus shifts to sponsoring hard asset-intensive businesses.

“There are strong headwinds for vendors in the outsourcing space … It has become increasingly clear that the downturn is impacting revenue and we expect most large firms will see a decline in the quarter-on-quarter earnings,” it said.
Impact already felt

Service providers have already started feeling the effects of decreased margins and employee downsizing, while buyers are reducing IT budget allocations for outsourcing engagements. This is evidenced by drying pipelines, cancelled bookings and increased pressure to deliver value beyond cost.

“Buyers will need to re-assess their outsourcing strategies and implement a better mix of multi-sourcing, combining nearshore and offshore models, while service providers will look to tap growing domestic markets such as China, India, Argentina, Brazil and even the US as a means to hedge against the volatility of existing offshore contracts,” Mr Avinash Vashistha, Global Managing Partner & CEO at Tholons, said.

Clients, with reduced IT budgets, are expected to turn more selective, demanding greater contractual flexibility and output- or result-based payment schemes.
Eye on opportunities

Terming 2008 as a “tumultuous year for outsourcing”, Tholons said that although it continued to advise clients to remain cautious this year, it did not discount the opportunities and potential evident in the market.

It further said that the global downturn is motivating service providers to focus on recession-proof industries such as healthcare and education. “The healthcare industry globally has been a good adopter of global outsourcing in the last couple of years and we see this trend continuing on a steep curve as we look towards 2015,” says Dr Garima Vashistha, President (Healthcare) at Tholons.

Other sectors like manufacturing, retail and telecom would start to look attractive as they come under pressure to reduce cost drastically to survive.

Consolidation in the financial sector is inevitable due to the global financial crisis. Increased merger and acquisition activity in the financial sector would also mean that merged entities would want to integrate their outsourced services — leading to an increase in spending for integration projects — software applications, data centre consolidation and tighter integration of other operational platforms.

With financial institutions such as Lloyds TSB/HBOS and Bank of America/Merrill Lynch merging, service providers would also find themselves bidding against incumbent transnational rivals like IBM, Accenture and HP-EDS for several large-scale integration contracts (valued anywhere between $500 million and $1 billion over five years). Pricing pressures would kick in as suppliers scramble to meet their quarterly target through the year.

Large India-based providers are expected to see EBITDA margins plunge below 20 per cent over the next three years, as they move more IT projects offshore (mostly to India), and struggle to balance operations with rising wages, Tholons said.