Financial times reports
http://www.ft.com/cms/s/0/8f5eda74-e064-11e0-ba12-00144feabdc0.html#ixzz1YMpFUNdU
The Indian real estate sector, once the realm of high-risk investments with astronomical returns, is facing a liquidity crisis in the face of escalating commodity prices, interest rates and inflation.
With the sector carrying a debt burden of about $24.6bn in the year to July 2011 – up almost seven times from $3.8bn in September 2005 – many small- and midsized Indian property groups face the risk of default. Major developers are delaying projects, discounting properties and looking to sell big assets.
“This is one of the worst liquidity crises the sector has ever faced,” says Dipesh Sohani, an analyst at MF Global. “Investors are staying away from the sector as the risk associated with it is too high.”
DLF, the biggest developer, has been trying to raise as much as Rs100bn ($2.2bn) by selling its non-core assets, such as hotels and land. Its debt burden rose to $4.4bn on the back of a tenfold increase in its interest costs since 2008, according to Bloomberg data. DLF paid Rs25.9bn in interest in the year ending in March 2011, compared with Rs2.78bn in 2008.
“We are living in a difficult environment,” says Saurabh Chawla, executive director of finance at DLF. “We see some moderation in demand. The cost of capital and cost of mortgages is high.”
Meanwhile, other major players are having trouble completing their projects and are seeking new buyers. Orbit Corp, which operates mainly in Mumbai, has been seeking potential buyers for its unfinished building in India’s financial capital since the start of August.
In the three months to June, an 8.7 per cent increase in annual industry revenues was accompanied by a nearly 20 per cent annual decline in profits, according to research compiled by Edelweiss Securities, a Mumbai-based brokerage firm.
In such dire times, the banks have almost stopped lending to the sector, and there are few companies willing to take a high-risk bet on high-priced development projects or buyers able to pay high mortgage rates.
“Basically, no one is lending to the sector right now because they see a risk attached to it,” says Sharan Lillaney, real estate analyst at Angel Broking. Total banking industry exposure to real estate was 3.1 per cent in July, down from 3.7 per cent in July 2009.
Meanwhile, residential demand in India’s financial capital dropped to a 30-month low in the second quarter and sales fell 11 per cent during the same period, according to real estate research company Liases Foras.
Between slumping demand and recalcitrant banks, developers find themselves in a catch 22 situation. “The builder can’t reduce prices because then they have to restructure the loan with the bank [at a higher rate],” says Mr Lillaney. “But they have to reduce prices because otherwise they can’t get any bookings.”
Many buyers are unable to secure a mortgage because record high interest rates, which India’s central bank raised to 8.25 per cent on Friday – the 12th hike in 19 months – are taking a big toll on the industry. The average loan rate to buy a house in India is 16.5 per cent, according to the Housing Development Finance Corp, India’s largest home lender by revenues, up from 10.25-11.25 per cent in December 2008.
The industry is facing strong headwinds, says Mr Sohani, including high commodity prices. “Steel and cement ... are up more than 20 per cent, [and] are hitting the companies’ margins,” he adds.
Ramesh Nair, a managing director for real estate consultancy Jones Lang LaSalle, adds that the government’s Rs3.14 per litre petrol rise would further hurt the industry.
Those higher costs, coupled with project delays, have caused private equity investment in real estate between April and August to drop by 20.2 per cent – at about $831m, down from $1.04bn during the same period last year – according to Venture Intelligence, a research firm. It all adds up to Indian property launches being down 42 per cent in June compared with the average number of launches in the past 12 months, according to Kotak Institutional Equities.
http://www.ft.com/cms/s/0/8f5eda74-e064-11e0-ba12-00144feabdc0.html#ixzz1YMpFUNdU
Indian real estate faces cash crisis
With the sector carrying a debt burden of about $24.6bn in the year to July 2011 – up almost seven times from $3.8bn in September 2005 – many small- and midsized Indian property groups face the risk of default. Major developers are delaying projects, discounting properties and looking to sell big assets.
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DLF, the biggest developer, has been trying to raise as much as Rs100bn ($2.2bn) by selling its non-core assets, such as hotels and land. Its debt burden rose to $4.4bn on the back of a tenfold increase in its interest costs since 2008, according to Bloomberg data. DLF paid Rs25.9bn in interest in the year ending in March 2011, compared with Rs2.78bn in 2008.
“We are living in a difficult environment,” says Saurabh Chawla, executive director of finance at DLF. “We see some moderation in demand. The cost of capital and cost of mortgages is high.”
Meanwhile, other major players are having trouble completing their projects and are seeking new buyers. Orbit Corp, which operates mainly in Mumbai, has been seeking potential buyers for its unfinished building in India’s financial capital since the start of August.
In such dire times, the banks have almost stopped lending to the sector, and there are few companies willing to take a high-risk bet on high-priced development projects or buyers able to pay high mortgage rates.
“Basically, no one is lending to the sector right now because they see a risk attached to it,” says Sharan Lillaney, real estate analyst at Angel Broking. Total banking industry exposure to real estate was 3.1 per cent in July, down from 3.7 per cent in July 2009.
Meanwhile, residential demand in India’s financial capital dropped to a 30-month low in the second quarter and sales fell 11 per cent during the same period, according to real estate research company Liases Foras.
Between slumping demand and recalcitrant banks, developers find themselves in a catch 22 situation. “The builder can’t reduce prices because then they have to restructure the loan with the bank [at a higher rate],” says Mr Lillaney. “But they have to reduce prices because otherwise they can’t get any bookings.”
Many buyers are unable to secure a mortgage because record high interest rates, which India’s central bank raised to 8.25 per cent on Friday – the 12th hike in 19 months – are taking a big toll on the industry. The average loan rate to buy a house in India is 16.5 per cent, according to the Housing Development Finance Corp, India’s largest home lender by revenues, up from 10.25-11.25 per cent in December 2008.
The industry is facing strong headwinds, says Mr Sohani, including high commodity prices. “Steel and cement ... are up more than 20 per cent, [and] are hitting the companies’ margins,” he adds.
Ramesh Nair, a managing director for real estate consultancy Jones Lang LaSalle, adds that the government’s Rs3.14 per litre petrol rise would further hurt the industry.
Those higher costs, coupled with project delays, have caused private equity investment in real estate between April and August to drop by 20.2 per cent – at about $831m, down from $1.04bn during the same period last year – according to Venture Intelligence, a research firm. It all adds up to Indian property launches being down 42 per cent in June compared with the average number of launches in the past 12 months, according to Kotak Institutional Equities.
223 comments:
«Oldest ‹Older 201 – 223 of 223anonymous at 7:38
is the perfect example of the mindset that believes in bullcrap.
Only way that kind of prise rise can happen is if INR collapses.
The right way to think about it is in your question itself , if the INR remains pretty close to where it is and the price goes up from 50 lakhs to 5 crores. Who can buy? the transation cant happen without a buyer.
http://www.moneycontrol.com/news/wire-news/deflating-china%60s-housing-bubble_594988.html
What has happened in China is a tragedy, like India, the result of currency exit controls. You can't easily take your savings out of the country (unless you're a well-connected elite) and local investment vehicles (stocks, bonds, etc.) are rigged to the extent of making Greece's accounts look like they were prepared by Harischandra. So what do you do if you're a middle class Joe-Schmoe with no connections? Well, invest in what looks like the "safest" asset class available that does not depend on credit or counterparty risk, i.e. (what else?) housing.
However, unlike China, India's housing bubble is built on leverage. The Chinese may see their savings wiped out when real interest rates rise and the Renminbi appreciates but Indians will see intergenerational wealth (i.e. gold jewelry) wiped out before they can be free from their mortgage commitments.
@anon.
I don't know if you are being sarcastic or doing timepass on the blog.
Why would house price rise from 50 lakhs to 5 crores ? So I relate that theory to why prices have risen currently from 5 lakhs to 50 lakhs.
Question - what can happen if Rents are on par with current house prices? say Rent of Rs 50,000 for 1 BHK on average.
- Either everything will become shit expensive.
- Or quality of everything will go down.
- Combination of both.
There is no way out - it has to be one of the above. Only breakthrough is innovation - to come out ahead - to do more with less. Lesson from western countries. But India is not USA or UK.
The bubble may take a good 4 to 5 years to deflate. I suggest you guys all take a deep breath. Have a coffee and pursue other worthwhile pursuits until that happens.
Remember, bubbles burst only when you least expect it. This is not the time that the bubble will burst because everyone is expecting it to burst at this point.
Looks like many morons are expecting prices to go from 50L to 5 Cr just because it went from 5L to 50L in the last 5-6 years. Kind of wonder what drugs they are taking these days.
Ever wonder that if RE have to go 10 folds, salaried will have to grow 10 folds also, which means IT coolies will have to make much more than their counterparts make in the West which will never happen in anybodys wildest dreams.
SO for all you morons who are doing drugs in the spare time and who are hallucinating of a wild ride up, be prepared for the hard landing.
I can cite several examples of people who have become penniless and bankcrupt or have committed suicde after killing their entire families because they lost fortunes on real estate speculations. Leverage is bad, especially when it comes to speculating on RE. It is like betting on the stock price buying options when you know that 9 times out of 10 you are sure to loose.
"SO for all you morons who are doing drugs in the spare time and who are hallucinating of a wild ride up, be prepared for the hard landing. "
If you are hallucinating of a hard landing of RE in Rupee terms, you should wean yourself of those drugs as well. NOTHING goes down when measured in Rupees over the long term, not even depreciating assets like motor vehicles. I always relate the example of my father who purchased a motor vehicle in the mid 70's which he sold in 2000 for an INR profit.
Indian RE may collapse when measured in CHF (now EUR) or SGD but never when measured in INR. Indeed, this is the reason why Indians prefer holding their savings in RE rather than INR.
I hope this helps.
Anon @ 9.31.
Whats your point. The only way RE will go up even in terms of rupee is if salaries go up significantly higher or if there is massive devaluation in rupee. I dont see both these scenario's happening. What I see happening is huge financial crisis about to happen very soon and the bubble for everything being let out soon. You may be able to sell your 1 cr flat in 20 years for a small profit, but relative to what. The events of the last 10-years in India does not co-relate to what happened to the cost of the vmotor vehicle between 1970 and 2000
Lol.
Never pay these greedy indians. else they start dreaming.
US wanted cheap labor. so they hired indians. now indians think they can beat the US and earn more. LOL to that.
When indians started earning more they became greedy. thats y u see everything is increasing. every thing is india is appreciating in the false hope that india will shine forever.
frm here on its just FLAT or downward. ONLY A FOOL will assume that ALL GOOD THINGS LAST FOREVER.
Here's an interesting exercise for our posters: Are there any developing countries in the World right now without a property bubble in major urban centres (i.e. house prices are actually affordable)? If so, which countries?
None, and they are all going the down the drain next including Australia and Canada. The Govts. and central banks have kept their RE bubbles propped up with low rates and printing of money. Now when they cannot print more and cannot take debt from international banks, they are all screwed at the same time.
I wouldn't be surprised if Dow goes back to 3k and Sensex to 2k.
Shame on a lot of these high profile MBAs who don't deserve what they have by looting masses in collaboration with central banks and Govts.
"MBAs who don't deserve what they have by looting masses"
To be fair, home owners got greedy as well, esp in the US with people using their home loan equity to take out more loans and use it for flat screen TVs, cars, vacations abroad.
Yes, many were mis-sold loans with complicated paperwork by greedy bankers. But equally many other owners knew what they were doing and deserve no sympathies for the pain that they are undergoing now.
Belgian bank Dexia to be nationalized
http://online.wsj.com/article/SB10001424052970203633104576620720705508498.html
I think some sort of a severe financial crisis worse than 2008 is pretty much baked in at this point.
The question with regards to RE that you should be asking yourself is whether this will be deflationary collapse or a hyper-inflationary. With the former cash would be king, while with the latter cash would be the worst thing to hold on to.
anon 8:3 pm,
There is pretty much no country left untouched ( there might be couple of exceptions if you look hard) untouched by the bubble. Even rangoon went up by 5 times from 2008.
Original credit bubble money chased assets in emerging market around 2004 and continued the chase with QE1 and QE2.
Drove around some properties in North Bangalore around 9 PM this weekend. 3BHKs around 75L, 2 BHK around 65L.
Unless the residents are trying to save on electricity bills, I saw something very disturbing - only seven lights in an apartment complex of 200!!! Are we looking at ghost complexes here? Similar observations in 3 other societies.
Ram
@ NRI hand to mouth -
In many places in US you can live comfortably for 1500$ a month 600- rent 200 car and 200 groceries and 5oo for fun - I have a BMW and my own apartment in that much money - the rest is invested. However this is not true if you are married and have kids.
Some of my married friends who dont have kids can invest entire spouse's equal income
Anon at 12.15.
You must be a single guy living in a studio apartment with someone else and sharing a used BMW and living of someone else's food. Can you please provide a complete breakdown of your expenses including utilty bills, insurance costs, gas, mechanic, taxes, telephone/cable, etc etc.
For a family of four to live decently in a reasonable good neigborhood with reasonable good schools you need an income of $120K even in places like suburban Detroit where the economy is not all that great. Cant imagine living off this amount in NY, Boston or SFO.
@ Last question
Yes I am single and plan to stay so
I live in Phoenix Metro area - which is a bit expensive - If I was in Texas or Midwest, couldve saved even more
Breakdown
Rent+utilities 650-700 for 600sqft apt
Car payment + insurance 350
Gas + groceries- 200-250
TV+internet+Cell - 150
Still spending only ~$1500 pm
technically you can be saving 50-60% of monthly after tax income - based on Rupee value this saving automatically gains/loses 10-15%
If you share apartment groceries utilities and live like graduate student you can save even more and live off 600-700$ pm
Do the math (check links of rent prices to verify if what I said is correct)
& You are welcome to move here if you wish
@2.50
Thank you. I bet you dont drive that much either for work or for pleasure. Good for you that you are saving at the right time. Once you are married and have kids and especially with school/college costs, it will be hard to save.
Cheers.
I really enjoying reading your post,thanks for sharing.
the Chinese bubble is collapsing
http://www.telegraph.co.uk/finance/china-business/8821094/Chinas-debt-spree-returns-to-haunt.html
Indian real estate ism facing cash crisis. You can read the post to know more
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