Which market will blow up next? : Jubak's analysis

CNBC's Jim Jubak's analysis
In simple words the risks are fourfold

Political risk
Interest rates going higher
Unabated inflation
Lack of foreign liquidity

Which market will blow up next?

It's only logical to wonder after the 9% plunge in China's Shanghai stock market led to a global sell-off on Feb. 27. That ended with the Dow Jones Industrial Average ($INDU) down 416 points on the day.

There are the usual suspects, of course:

* The U.S. markets, if the crisis in the submortgage market spreads to the rest of the debt market.
* Japan, if investors panic at signs that the economy might be slipping back toward recession after the latest interest rate increase.
* Russia, if investors decide that the country's booming stock market -- up 51% in 2006 -- and state-controlled economy too closely resemble the Chinese market that just blew up.
* The $345 trillion derivative market, if some of the math whizzes that carve up risk sent too much risk to the wrong investors.

But I've got another candidate: India.

It's as big as China. It's growing just about as fast. Its economy is in more danger of overheating. And it's more dependent on speculative hot money. The Indian stock market suffered through a 30% drop in May and June of 2006, so similar volatility in the days ahead is certainly a possibility. And the country looks like it's on the road to a genuine economic and political crisis.

And, of course, with the global financial markets as spooked as they are after the Feb. 27 meltdown in Shanghai and the subsequent global sell-off, any short-term blip in a major developing market such as India could set off big ripples across the globe.

In the long term, however, I think India might be the most attractive of all global stock markets: Its population is younger than China, its educational system is expanding and improving, and its companies are more focused on creating wealth for shareholders.

Do the long-term rewards outweigh the short-term risks? Should you buy in now, determined to weather any storm, or wait for the rain to fall and the clouds to clear? Let me lay out the short-term risks and the long-term potential.
First, the short-term risks

* Asset prices are high, so high that they show all the signs of a classic asset bubble. The market valuation of the main Indian stock market in Mumbai, despite that 30% downturn in 2006, had climbed to $836 billion in mid-February from $121 billion in April 2003, an increase of 591%. Property values have soared, with the value of prime office space in Mumbai up 70% in the last year.
* Those high asset prices depend on a flood of easily withdrawn overseas hot money. Flows of capital into the Indian stock market climbed to $12.5 billion in fiscal 2006, up from $2 billion in fiscal 2002.
* India is very dependent on global cash flows. Unlike China, India runs a trade deficit and only showed a total capital account surplus in fiscal 2006 because of that $12.5 billion from overseas investors in stocks, foreign direct investment of $6 billion in 2006 and rising corporate borrowing on international capital markets (about $6 billion in fiscal 2005). India was relatively untouched by the Asian financial crisis of 1997, but it is much more vulnerable to changes in external cash flows today.
* Bank lending is out of control. Over the past three and a half years, bank credit outstanding has jumped by 76%, according to Morgan Stanley.
* Inflation is out of control. Nationally, inflation recently hit a two-year high of 6.7% and is running even higher -- about 9% -- in the rural areas where two-thirds of Indians live. Inflation at the wholesale level has increased to 6% from 4% last spring.
* The Reserve Bank of India, the country's central bank, raised its benchmark interest rate to 7.5% at the end of January without noticeably slowing either inflation or the lending boom. Finance Minister Palaniappan Chidambaram has thoroughly undercut the central banks efforts by urging banks not to pass on interest rate increases to lenders.

My short-term prognosis: A big domestic credit crunch -- caused when lenders stop lending and borrowers can't get the cash they need to run their businesses -- causes India to fall far short of current forecasts of 9% to 10% annual growth. Foreign investors begin to withdraw money from the Mumbai stock exchange, producing another 30% "correction." The current Congress Party government loses power. After stumbling with politically motivated attempts to reduce food and fuel prices in rural areas, a new government bites the bullet, raises interest rates and cuts bank lending enough to slow inflation and the economy. Overseas cash begins to return.

Shanghai stock market plunge on Feb. 27, 2007, was due in part to fears that an upcoming election could bring changes to the way citizens invest in China's stock market, says MSN Money's Jim Jubak. He notes that U.S. investors should now keep an eye on India, where the effect of election-year politics could also cause a sharp decline in the economy.

It won't play out exactly like that, of course. I don't know how deep any credit crunch might be or how much the Reserve Bank of India might have to slow the economy to reduce inflation to its 5% to 5.5% comfort zone. I don't know how long the Congress Party government might be able to cling to power. I don't know how other global markets would react to a big drop in Indian stocks.

Most of all, I don't know when all of this might happen. This mess took a while to create, and my suspicion is that it will take a while to correct. The core of the problem -- the imbalance between urban areas quickly growing wealthy (in Indian terms) and rural areas left behind in the boom -- isn't unique to India, and it won't be solved by just one crisis. And subduing inflation in India will require big increases in supply, since Indian companies are now operating at full capacity, and improvements in infrastructure that reduce the costs of moving food and fuel. A recent study by the Reserve Bank of India says that it will take 18 months to two years to add significant supply. I think it's reasonable to look for an Indian crisis within that 18- to 24-month parameter.
Second, the case for long-term rewards

* There's no going back to the highly regulated economy of the past. Even the Congress Party, no friend of an open economy, wasn't able to resist the momentum. And with Indian companies increasingly making big bucks from the global economy, there's no reason to put the genie back in the bottle. That means future growth should be in the range of 7% to 10%, not the anemic rates of the 1980s, when growth was just a third of that.
* The Indian middle class numbers 200 to 300 million, enough to make them the driver of a domestic consumer economy. With Indian per capita GDP of $3,460 in 2005 (adjusted for purchasing-power parity because money goes further in a poorer country), India is still poorer than China at $6,660 per capita in 2005, but the country has crossed the economic threshold where growth in consumption takes off. Only 10% of Indians have life insurance now, only 2% have credit cards and less than 15% have refrigerators.
* Even some of India's problems have major economic upside. India's investment in infrastructure has lagged China's. In 2002, for example, the country spent only $31 billion, or 6% of GDP, on building the roads, ports, railroads and airports necessary for competing as a global economy. China in that year spent $210 billion, or 20% of GDP. But the Indian government recognizes its need to catch up.
* Education is getting the attention -- and rupees -- it needs. Indian society has been soundly shaken over the last two years by studies that show that the country spends too little (just 3.8% of GDP), educates too few (only 8% of 18- to 24-year-olds go on to higher education, about half the Asian average), and teaches too poorly (although 95% of 5- to 10-year-olds go to school, 40% drop out by age 10). The government's next budget, though, is expected to show an increase in education spending to 6% of GDP.
* Demographics work in India's favor. Half of India's 1.1 billion people are under 25 today, and the country is among the least rapidly aging in the world. In 2002, according to the United Nations, in the developed world 20% of the population was 60 or over. In China, the figure was just 10%, and in India, 8%. By 2050, according to projections, the percentage will have climbed to 33% in the developed world and to 30% in China, but to just 21% in India. That means that India has time to fix its problems before the needs of a huge cohort aged 60 and older begin to dip into national savings. India can take comfort in research that shows younger economies grow faster, too.
* India's companies have a culture of creating value for shareholders. I know this is subjective, but it is important. If you're going to be a passive shareholder in a company, you'd better hope that the goal of the company is growing the value of all shareholders' stakes. Many Indian companies -- and some of the biggest -- have that culture, maybe because so many started life as businesses run by extended families. I think that culture takes much better care of shareholders than that of corporate China, where companies are often run to enrich local officials, managers and party elites.
* India's companies show above-average profitability. Here's something much more concrete: The average return on equity for Indian companies on the Mumbai stock exchange is 21%. That's significantly above the 18.7% average return on equity for the U.S. members of the Standard & Poor's 500 Index ($INX).
* In addition, Indian companies are comparatively underleveraged, with an average debt-to-equity ratio of just 70% compared with a ratio of 123% for the S&P 500 companies. That means they're got plenty of room to add debt, which will in turn increase leverage, return on equity and profitability for investors.

My long-term prognosis: India is the most attractive stock market in the world for the long haul. By that I mean over the next decade or so.

The Shanghai stock market plunge on Feb. 27, 2007, was due in part to fears that an upcoming election could bring changes to the way citizens invest in China's stock market, says MSN Money's Jim Jubak. He notes that U.S. investors should now keep an eye on India, where the effect of election-year politics could also cause a sharp decline in the economy.

Adding it all up: After weighing the long-term pluses and short-term minuses, I'd wait for another 30% correction in the Indian stock market. The risks in the Indian economy and the global financial markets are just too great in the short run at current prices in Mumbai. And as the panic on global markets that followed the 9% drop on the Shanghai stock market on Feb. 27 indicates, there are just too many hot-money investors around the world, all hoping to be the first out the door at any sign of trouble.

Rising rates and unspoken fears

A jittery stock market is one of many indicators of a wider sense of disquiet

SUCHETA DALAL in the express

The government has obviously hit the panic button over inflation rising to 6.73%, despite its many efforts. Last week, the government set up a special price monitoring cell in the cabinet secretariat and the Prime Minister wrote to all Chief Ministers seeking their help to keep prices in check. That these moves have been widely reported around the world indicates how closely India’s economy, as well as its capital and commodity markets are being watched. Any drastic decision to hike interest rates and slow down the economy in the hope of curbing inflation is bound to impact portfolio flows to India, which would affect several sectors of the economy. Since India is one of the world’s largest producers and consumers/importers of a wide swathe of commodities, our domestic prices and demand-supply factors have an impact on international price trends.

A few weeks ago, the Prime Minister personally threw open the inflation issue to public discussion, making it clear that he wanted views and feedback from all constituencies. It triggered a massive media debate over controlling inflation at the cost of economic growth. There were equally strong arguments on both sides. However, two crucial stakeholders stayed out of the debate—industrialists and bankers.

Industry is probably feeling complacent about the liquidity situation. Globally, liquidity is not a problem. There is plenty of money waiting and willing to be lent to Indian companies at excellent rates today. The capital market has, however, turned distinctly jittery, but since this is just a one-week phenomenon, it is probably too early to signify an important turning point.

But bankers are not so sanguine. They are seriously worried that any further increase in interest rates will cause a severe economic setback and that the implications of such an action are not fully understood by policymakers. There are already indications of the speed with which interest rates could rise in the bidding for short-term deposits. Last week, a 100-day fixed deposit by Gas Authority of India Ltd received seven bids from banks, all willing to pay over 10% — they included State Bank of Patiala, which offered 10.51%, Bank of Baroda (10.26%), Union Bank (10.20%), State Bank of Hyderabad (10.03%) and IDBI Bank, Allahabad Bank and ICICI Bank offering 10% while Punjab National Bank offered 9.95% and HDFC Bank offered 9.4%. ICICI Bank reportedly offered 10.10% for a 30-day deposit of Rs 150 crore to Unitech and there is talk of a Rs 1,000 crore deposit having been snapped up for 11%. If this is the situation today, then another hike will cause interest rates to go haywire.

The Indian economy is bubbling along based on increased consumption, thanks to higher earnings as well as the availability of easy personal loans and finance for everything from white goods to family holidays. That will change. High interest rates will slow down fresh borrowing, while delinquencies on existing personal loans could increase if money has gone into the stock market, which was exceedingly nervous last week. On the mortgage front, borrowers are already sore at the repeated increase in interest rates. So far, there were a few mitigating factors such as rising realty prices and increased household incomes. Lenders also had some cushion to avoid hiking equated monthly instalments (EMI) across-the-board, because the average borrowing age has dropped sharply from 40-plus to the late 20s. Another interest rate hike could force banks to hike EMIs as well.

Rates could rise. There are already indications of the speed with which interest rates could rise in the bidding for short-term deposits. Last week, a 100-day fixed deposit by GAIL received seven bids from banks, all willing to pay over 10%
The trend in realty company shares, which have dropped anywhere between 20-35% in the last three weeks, suggests that this bubble is starting to lose air. A sure sign of rising panic is the fact that bankers were suddenly talking about the downgrade of a personal loan pool of a private bank by Crisil. This had happened over a month ago, and the rating agency insists that it does not signal a trend so far.

If the realty bubble bursts and the capital market goes into a deep correction, the impact is bound to slow down the growth of a wide cross-section of manufacturing companies. This, in turn, will have a domino effect on foreign portfolio inflows. While all this pain may indeed curb inflation, will it cool public anger over the rise in prices of staples such as rice, dal, wheat, milk, onions and potatoes? Their prices have risen anywhere between 30% to 200%, so the drop of a couple of percentage points in the overall inflation rate is hardly likely to reduce these prices substantially. Since the government’s panic about rising prices is heightened by forthcoming state elections, it would make far better sense to figure out ways of supplying these food essentials at controlled prices to lower income groups. While economists may sneer at such an inelegant solution, it is perhaps better than the alternative scenario projected by worried bankers, traders and select industrialists on condition of anonymity. Ironically, nobody wants to speak publicly about this scary picture for fear of offending either the central bank or the finance ministry.

Instead, they prefer to start preparing for tougher times and even a possible repeat of the debilitating slow down of the latter 1990s.

At a time when India’s confidence level is riding higher, does it make sense to force the country into a period of needless pain—especially when the surge in agricultural commodity prices, particularly in oilseeds and grain, is a global phenomenon?

Greenspan Warns of Likely U.S. Recession

When the U.S sneezes the world catches a cold. Will this adage come true this flu season ?

Yahoo reports..

HONG KONG (AP) -- Former U.S. Federal Reserve Chairman Alan Greenspan warned Monday that the American economy might slip into recession by year's end.
He said the U.S. economy has been expanding since 2001 and that there are signs the current economic cycle is coming to an end.

"When you get this far away from a recession invariably forces build up for the next recession, and indeed we are beginning to see that sign," Greenspan said via satellite link to a business conference in Hong Kong. "For example in the U.S., profit margins ... have begun to stabilize, which is an early sign we are in the later stages of a cycle."
"While, yes, it is possible we can get a recession in the latter months of 2007, most forecasters are not making that judgment and indeed are projecting forward into 2008 ... with some slowdown," he said.
Greenspan said that while it would be "very precarious" to try to forecast that far into the future, he could not rule out the possibility of a recession late this year.
The U.S. economy grew at a surprisingly strong 3.5 percent rate in the fourth quarter of 2006, up from a 2 percent rate in the third quarter. A survey released Monday by the National Association for Business Economics showed that experts predict economic growth of 2.7 percent this year, the slowest rate since a 1.6 percent rise in 2002.
Greenspan also warned that the U.S. budget deficit, which for 2006 fell to $247.7 billion, the lowest in four years, remains a concern.
"The American budget deficit is clearly a very significant concern for all of us that are trying to evaluate both the American economy's immediate future and that of the rest of the world," he said via satellite at the VeryGC Global Business Insights 2007 Conference.
Greenspan also said he has seen no economic spillover effects from the slowdown in the U.S. housing market.
"We are now well into the contraction period and so far we have not had any major, significant spillover effects on the American economy from the contraction in housing," he said.

Top 7 days losers on the NSE

Massive losses in majorr scrips over the last 7 days. A group shares down -10%, B group shares are down -20%. This is not a correction, Its a major trend reversal. Due to the high weightage of Reliance and other large caps in the BSE sensex which have corrected 5%, the decline in the Sensex hasn't revealed the true nature of the bearish trend over the past few months

NSE (NIFTY) 7 Days Losers 23-Feb-2007 Company Latest Close Compared To Absolute Change % Change GRASIM IND 2270.25 2653.90 -383.65 -14.46 JET AIRWAYS 639.50 724.90 -85.40 -11.78 ORIENTAL BANK 199.45 222.60 -23.15 -10.40 A C C 914.45 1017.65 -103.20 -10.14 GUJ AMB CEME 123.20 136.75 -13.55 -9.91 RANBAXY LAB. 356.55 393.35 -36.80 -9.36 HIND LEVER 188.15 205.95 -17.80 -8.64 MTNL 138.75 151.80 -13.05 -8.60 O N G C 830.00 906.25 -76.25 -8.41 VIDESH SANCH 393.80 428.20 -34.40 -8.03

NSE (OTHERS) 7 Days Losers 23-Feb-2007 Company Latest Close Compared To Absolute Change % Change MARICO IND 57.80 584.75 -526.95 -90.12 GOLDSTONE TECH 72.20 94.45 -22.25 -23.56 TOUBRO INFO 19.60 25.05 -5.45 -21.76 RUCHI INFRA. 33.80 43.10 -9.30 -21.58 PARAMOUNT COMM 39.10 49.50 -10.40 -21.01 PRAJAY ENGRS 216.35 269.70 -53.35 -19.78 G M R TECHNO 189.60 234.20 -44.60 -19.04 MOT&GEN FIN 49.30 60.80 -11.50 -18.91 WALCHANDNGR 1529.05 1872.95 -343.90 -18.36 STANDARD IND 43.40 53.00 -9.60 -18.11

BSE (SENSEX) 7 Days Losers 23-Feb-2007 Company Latest Close Compared To Absolute Change % Change GRASIM IND 2271.10 2653.65 -382.55 -14.42 A C C 915.65 1017.55 -101.90 -10.01 GUJ AMB CEME 122.85 136.50 -13.65 -10.00 RANBAXY LAB. 356.45 393.50 -37.05 -9.42 HIND LEVER 187.45 205.75 -18.30 -8.89 O N G C 830.25 905.40 -75.15 -8.30 H D F C BANK 957.45 1041.85 -84.40 -8.10 WIPRO 623.25 676.00 -52.75 -7.80 SATYAM COMPU 448.75 485.45 -36.70 -7.56 REL COM 432.35 466.50 -34.15 -7.32

BSE (AGROUP) 7 Days Losers 23-Feb-2007 Company Latest Close Compared To Absolute Change % Change GRASIM IND 2271.10 2653.65 -382.55 -14.42 CUMMINS 257.95 292.60 -34.65 -11.84 ARVIND MILLS 50.50 57.10 -6.60 -11.56 IDBI 86.65 97.95 -11.30 -11.54 TITAN INDUST 889.80 1005.15 -115.35 -11.48 CENTURY TEXT 551.35 621.60 -70.25 -11.30 BANK OF INDIA 157.60 177.55 -19.95 -11.24 MPHASIS BFL 274.95 306.70 -31.75 -10.35 BHARAT ELECTRONIC 1556.70 1734.05 -177.35 -10.23 ORIENTAL BANK 200.00 222.70 -22.70 -10.19

BSE (B1GROUP) 7 Days Losers 23-Feb-2007 Company Latest Close Compared To Absolute Change % Change MADHAV MARBLE 100.15 134.10 -33.95 -25.32 JUPITER BIOS 157.65 204.40 -46.75 -22.87 GOLDSTONE TECH 72.20 93.20 -21.00 -22.53 MODIPON 108.15 139.55 -31.40 -22.50 HATHWAY BHAW 23.40 30.10 -6.70 -22.26 PARAMOUNT COMM 38.85 49.25 -10.40 -21.12 G M R TECHNO 188.30 235.00 -46.70 -19.87 ENCORE SOFT 34.25 41.95 -7.70 -18.36 HINDOO SPG 44.45 54.15 -9.70 -17.91 STANDARD IND 43.65 52.90 -9.25 -17.49

BSE (B2GROUP) 7 Days Losers 23-Feb-2007 Company Latest Close Compared To Absolute Change % Change CONART ENG 32.85 43.20 -10.35 -23.96 OSCAR INV 413.50 534.30 -120.80 -22.61 WALCHAND CAP 1077.45 1392.30 -314.85 -22.61 MEFCOM AGRO 109.40 141.30 -31.90 -22.58 B C C FUBA 27.20 35.05 -7.85 -22.40 TOUBRO INFO 19.40 25.00 -5.60 -22.40 CENTRAL PROV RLY 55.00 70.80 -15.80 -22.32 RIGA SUGAR 34.65 44.25 -9.60 -21.69 CAPITAL HOTELS 16.00 20.35 -4.35 -21.38 RUCHI INFRA. 33.80 42.90 -9.10 -21.21

BSE (ZGROUP) 7 Days Losers 23-Feb-2007 Company Latest Close Compared To Absolute Change % Change INTELLVISIONS SOFT 156.75 202.40 -45.65 -22.55 RITESH INDUS 61.15 78.85 -17.70 -22.45 ASIA FAB 16.70 21.45 -4.75 -22.14 MAZDA 120.00 154.10 -34.10 -22.13 TRIPEX OVERS 142.65 182.25 -39.60 -21.73 SHREE RAM 371.85 470.80 -98.95 -21.02 KAMANWALA IND 184.85 232.80 -47.95 -20.60 ROYALE MANOR 23.40 29.40 -6.00 -20.41 BRAKES AUTO 16.75 21.00 -4.25 -20.24 B C C FINANCE 17.60 21.95 -4.35 -19.82

Mukesh, Anil eye Bangalore IT project - Bidadi

Forget Devanhalli, and other places in Bangalore.. This will soon be the hottest place for the next few years.

Ambani brothers -- Mukesh and Anil -- are the only two Indians of the 24 bidders shortlisted for the Rs 50,000 crore, 10,000 acre Knowledge City being developed specifically to meet the requirements of the IT industry's growth in Karnataka.

The other developers are from across the globe, including players from Dubai, Europe and Asia.

The project is being developed in Bidadi, around 25 km from the city limits of Bangalore. When completed, the township will meet the space requirements of the IT industry in Karnataka for 10 years, growing at 30 per cent a year and will have the capacity to house 7.5 lakh employees.

M N Vidhyashankar, secretary -- IT, biotechnology and science & technology, Karnataka government, on Thursday said this project would be an integrated township, which would have office space, residential colonies, hospitals, shopping malls, schools and all the required amenities. He was speaking at an interactive session with the Bangalore Chamber of Industry and Commerce.

"We expect to hand over the land to the developer by April this year and work on the first phase is expected to kick off during the second half of the year. Then it will take around 18 months for the initial phase to be commissioned," he said.

The first phase will involve work over 2,500 acres.

The Knowledge City will be connected to the upcoming Bangalore International Airport by an eight-lane highway, which when completed will connect the airport and the Knowledge City in a 30-minute drive.

"One of the criteria for companies setting up shops in this campus is that employees must reside in the complex, which will result in less congestion in Bangalore city," Vidhyashankar said.

The state government is also moving fast to set up the country's first IT finishing school for graduates tailored for the requirements of the industry. "Three Indian IT companies are setting up this school in Mysore with affiliation of the Mysore University. This school, which will offer a 12-month diploma course, will churn out 5,000 students in the first year and is, subsequently, expected to scale up this to 20,000 students in the coming years," he said.

In addition to the knowledge city for the IT sector, the Karnataka government has also awarded the biotech park contract to US-based Alexandria Real Estate Equities Inc.

"Nearly 90 per cent of the biotech parks in the US have been developed by this company and this is the first time it is venturing into Asia," Vidhyashankar said.

The project will be developed across 106 acres in the Electronic City at an investment of Rs 550 crore.

Realty investors start taking exit route

Source: Expressindia.com

Amrish Shah (name changed) is a “family man” and heavily into investments, real estate taking 50 per cent of his decision space. The year 2004, for Shah, 46, was what he called “the real Diwali” as he explains: “The home loans were at the lowest at 7.25 per cent, while the rental yields across the city had just begun their climb.” It made perfect sense for investors like Shah to join the realty bandwagon, and as the Mumbai skyline changed, so did Shah’s kitty.

Shah made 10 realty purchases, starting from Navi Mumbai to Kandivli and finally touched the central suburbs by early 2006. All these purchases were backed by home loans and tax benefits. This month, Shah has finally started exiting from his realty investments. Reason? As financial planner Amar Pandit from My Financial Planner says, “The fingers have started burning. The gulf between the rental yield and the soaring EMI has widened to an extent that it does not make sense.”

It is investors—or speculators who buy houses and later sell them to make a profit—like Shah who make for the 15 per cent of this realty market; and now they have started taking an exit route from the real estate market, “thanks to the phenomenon called rising interest rates”, says Pandit. In short, rentals have failed to keep pace with EMIs.

The rising interest rates are changing the calculations of home buyers, especially investors like Shah. Since the recent interest hike to 10.5 per cent, Pandit has been getting calls from investors like Shah, who, he says “were the people who are partly responsible in bringing the rates to these levels.”

Of course, like Pandit reveals, Shah who is now his client has locked interest rates for loans for five of his properties towards the end of 2006, before it escalated to current levels.

While not necessarily all of them availed loans to bite into the reality crust, the ones who did now have to move out due to the “less than viable option” in hand. Of course, the growth in interest rate, as banking firms put it, is due to other factors like the rising “cost of funds” following measures by the Reserve Bank of India and the government against inflation.

So who is the real gainer in a property market, where on the one hand property prices are escalating, along with rate of interest resting somewhere between 9.5 per cent and 10.5 per cent for floating loans, and in some cases at 11 per cent for fixed loans? Not the genuine buyer, for sure. Chartered accountant Deepak Tikekar from central Mumbai has been getting calls from his clients who he calls “the much-troubled middle class”.

Their concern, explains Tikekar, “stems from the not so recent phenomena of rate of interest in home loans which has only increased their outflows.” Very few banks offer the option of fixed rates, as they explain that “the pressure is too high” especially since the “fear of risk is phenomenal”. With the mutual funds and stocks giving anywhere between six per cent to 65 per cent rate of returns, says Nilesh Shah, chief investment officer of Prudential ICICI, buying a house in the long term as an investment option only makes sense if the rental yield from an appreciating capital is on the upward trend.

That is a different story, that Tikekar’s clients have started looking at Pune as a place to have a nameplate, since their earnings only permit those levels. He feels that with the market cooling off, the interest rates should also see some decline.

HDFC chairman Deepak Parekh says, globally, real estate prices rise and fall whereas here they have gone up but not come down. “In Japan, real estate remained depressed for 15 years and in the US, there has been a slowdown in recent months,” Parekh says, adding, “high prices cannot sustain for a long time.”

According to a spokesperson for HDFC, they have seen a growth rate between 25 and 30 per cent consistently, as most of their loan purchasers are the genuine home buyers for self occupation. “We do not see any slowing down in the rate, as the tax benefits that one gets of the loan have also improved over the years.”

So who benefits the most in the present scene? “The developer,” replies Pandit. But, not for long as prices will soon see a cooling. Parekh says high prices in the real estate sector and rising interest rates will see some investors exit the market. The dip is already visible in markets in Delhi and Bangalore, and Mumbai can’t be far behind.

Rising EMI

Two years ago at a floating rate of 7.25 per cent, a person availing a home loan for Rs 15 lakh for 20 years would have shelled an equated monthly installment (EMI) of Rs 11,856. Today, the same loan amount will pinch him more-as the EMI will work up to Rs 14,976 now. So how do you explain a jump of 26 per cent in EMI settlement in two years?

HDFC, the leading mortgage financer in the country says that "the cost of credit has gone up."

However, for middle class Mumbai with dreams of better housing this could mean a big jolt, considering eighty per cent of cost of a house is covered by housing loan in most of the cases. Also, the average loan amount is normally above Rs 15 lakh, as the houses no longer come cheap.

Rents Have Dropped By Over 30% In The Last Year

The Economic Times

Firmly established as a global technology hub, Bangalore’s IT suburb Whitefield has seen property prices soar consistently over the past five years, until now. In a marked shift, commercial property rents have seen a drop of over 30% in the last one year. A correction has taken place in the IT neighbourhood. The key reason, apart from connectivity-related problems, is oversupply.

Commercial absorption in Whitefield stood at a little over 2 million sqft in 2006. This year, the demand-supply disconnect is to widen. The supply situation is pegged at over 6 million sqft, while demand continues to hover at around 2 million sqft — an oversupply of roughly 4 million sqft. “The challenge in a micro-market like Whitefield is not the lack of demand, but a situation of oversupply, a common problem among metros in India. Also, infrastructure development has failed to keep pace with the real estate growth story. With newer IT centres emerging away from the two main IT clusters, Electronic City & Whitefield, campus developments are being forced to lower rentals in Whitefield in order to attract IT firms,” says Ankur Srivastava, MD, DTZ Debenham Tie Leung. The shift is towards campus developments coming up in close proximity to the city’s Outer Ring Road. The other emerging IT centres are Sarjapur Road and Old Madras Road, where accessibility is better than it is in Whitefield.

As a result, the going rate in the case of commercial rentals in Whitefield, which stood at around Rs 30 per sqft a year ago for an ‘A’ grade property, has come down to Rs 20 per sqft today. Rentals for ‘B’ grade properties are even lower, quoted at around Rs 17 per sqft. ITPL too has witnessed a slight fall in rentals. “While peak-time rentals were at Rs 50 per sqft, the same today is at Rs 44. With the situation getting worse by the day, ITPL rentals could end up in the Rs 35-40 bracket in a year’s time,” said an industry analyst.

“The interest in Whitefield is lower these days. Connectivity is a major issue for those who have to commute to and from Whitefield and surrounding areas. A number of software companies are prepared to pay a premium to move to a location with easy accessibility,” says Manisha Grover, national director, Jones Lang LaSalle India.

Source: Economic Times

Real Estate Doom

Many of us instinctively feel that buying property is always a good, safe and sound investment. One that will eventually turn out right no matter what the future brings. Consequently, many of us are getting into serious financial trouble because of this delusion. I'm sorry to put this in such an alarmist fashion but that's exactly what my intention is.

Rising interest rates and stagnating real estate prices may be just an inconvenience for the cautious home owner but it could spell disaster for a new class of real estate investors that have come up in our cities in recent years.

The huge real estate boom that's been on for about four years now has given rise to some distinct types of buyers. At the bottom are those who have bought a house or an apartment for their own use. Depending on how much of their income goes into the EMIs of their home loan, these people will get uncomfortable (either a little or a lot) but it will work out for them in the end. At the other end are the big developers whose fate depends on their finances and their risk control.

In any case, each is a different story altogether. In the middle are the category of people who are most at risk. They have other professions and businesses but have been lured into channelising a large proportion of their money into real estate.

Unfortunately, the standard mode of 'investing' in real estate is not investing but is closer to what is called margin trading in other kinds of investing like stocks. For those unfamiliar with this activity, I'll quickly explain. Conceptually, margin trading means buying an investment on borrowed money for which the investment itself is the guarantee.

Normal (non-margin) trading works like this. If you have Rs 1 lakh and you buy shares share worth that much, you pay the broker Rs 1 lakh. If the shares go up to Rs 1.1 lakh, you've made Rs 10,000 on an investment of a lakh which is a gain of 10%. In margin trading, you would give your broker the one lakh and he would let you buy, say, Rs 10 lakh worth of shares. Basically, you would be borrowing Rs 9 lakh on the strength of the one lakh that you've put down.

You would, of course, have to pay interest and the shares would not actually be transferred to your name.

Now when the stock price rises 10%, your effective gain would be Rs one lakh on an investment of Rs 1 lakh (minus interest), a far more handsome return. But the catch is obvious. A 10% gain could double your money but a 10% loss could wipe out all your money. Margin trading is clearly a high risk-high gain activity.

Most real estate investing nowadays is actually margin trading of a kind that is even more dangerous than that in the stock markets. When real estate investors buy a property by putting down 10% or 20% of its value and borrowing the rest, then they are actually not buying anything, they are just speculating on something that the bank owns. So far, they have all been ahead of the game because prices have risen relentlessly. You put down Rs 10 lakh and buy something for a crore. A year later, the property is worth Rs 2 crore and you feel that you've made Rs 1 crore on an investment of Rs 10 lakh.

The problem is interest rates and liquidity. You've actually made a 15 or 20 year commitment which is looking increasingly dangerous the way interest rates are rising. But the bigger problem is liquidity.

In mutual funds or stocks (the bigger stocks), you can at least cut your losses at any point.

Real estate markets, however, tend not to offer liquidity in bad times. Either the prices are rising, or there are just no buyers except at distress prices. My hunch is that at least in residential property, we will enter a phase in which highly-indebted middle level amateur 'investors' will make lots of distress sales, perhaps to the benefit of the individual house owners as well as the deep-pocketed long-term developer

RIL offers hefty price for farmland

Rediff.com reports
Reliance Industries, India's biggest company by market value, is offering Rs 37.5 lakh a hectare, over 10 times the ready-reckoner price, to acquire 10,000 hectares of land from farmers for its special economic zone on the outskirts of Mumbai.

By a rough estimate, the company will have to pay Rs 3,750 crore for land acquisition.

The company is offering Rs 25 lakh a hectare for land under paddy cultivation.

On top of this, the firm is offering Rs 12.5 lakh per hectare if a farmer does not opt for the land offered by the company at an adjacent site. Reliance has earmarked 12.5 per cent (1,250 hectare) of the total land to be acquired for farmers.

The company will also offer free vocational and technical education to a member of each of the 17,000 families whose land is acquired.

During the training period, the minimum agricultural wage of Rs 60 a day will be paid as stipend. If a landowner does not want the training, he is entitled to Rs 3 lakh as one-time compensation.

The ready-reckoner rate is the one taken to compute stamp duty in real estate transactions. Builders complain that it is often higher than the rate at which transactions are struck.

"We have submitted our compensation package to the state government. But if it asks us to give even higher compensation to farmers, we will be bound by that," said Dilip Chaware, the spokesperson for the company.

Unveiling its plans on Monday, Reliance Industries said it would invest Rs 31,000 crore over 10-15 years in its SEZ project, which would come up as two adjacent zones on more than 14,000 hectares. The company would spend Rs 16,000 crore in the development of infrastructure.

"Although we call it a special economic zone, it is going to be a city," Chaware told reporters. The entire project combines two adjacent zones in Mumbai and Navi Mumbai. "The project will be floated by companies that are a part of the Reliance Group."

The group, which is setting up another SEZ at Navi Mumbai, has already been sanctioned 1,600 hectares of the 4,000 hectares needed.

SBI PLR up by 75 basis points

Existing housing, educational loans will be excluded

MUMBAI: State Bank of India on Monday raised its benchmark prime lending rate (BPLR) by 0.75 percentage point to 12.25 per cent from Tuesday, an SBI release said.

However, all the existing housing and educational loans will be excluded from the BPLR change as will new educational loans up to Rs. 4 lakh. Similarly, all the existing and future agriculture production loans less than Rs. 3 lakh will be excluded from its impact.

SBI also increased the rates offered on its super-saver term deposits scheme by modifying its terms.

For a tenure of four years but less than five years, interest rates will be 9.50 per cent, while for senior citizens it will be 9.75 per cent.

For SBI staff, including pensioners of 60 years and above, the rate will be 9.75 per cent.

For a tenure of five years and up to ten years, interest rates will be 8.25 per cent, while for senior citizens, the rate applicable will be 8.75 per cent. SBI staff, including pensioners of 60 years and above, will get 25 basis points more interest at 9 per cent. — PTI

Govt mulls taking away builders’ I-T sops

DNAindia reports

Real-estate developers may be in for some bad news. The Central government is debating on whether or not to extend the income tax benefits under Section 80-IB of the Income Tax (IT) Act beyond March 31, 2007. Under this section, developers constructing residences up to 1,000 sq-ft in Mumbai and Delhi and 1,500 sq-ft in other cities could avail 100 per cent income tax exemption on their profits.

Introduced in the 1998 budget, the tax bonzanza for builders was aimed to promote mass housing. While that (mass housing) has not happened, purchasing a home has become a distant dream for prospective flat buyers. According to senior tax and real estate consultants, the government believes that with investments firming up in the realty sector, the sector does not need incentives.

“Officials also believe that with the market forces determining property pricing, a correction is inevitable,” said the consultant.

“Anway, it is an open secret that unlike in other sectors, developers have not passed on the benefits of the tax rebate to end-users. If one looks at property prices over the past eight-nine years, it has only been rising steadily.”

Realty experts say there is another reason why the act should be scrapped. Developers are known to have the local planning authority approve building plans showing flats less than 1,000 sq-ft in order to avail of the tax concession.

“But to the end-user, he shows a plan having a much bigger area (two flats are combined into one) and which he sells at a hefty premium. And with end users not knowing of this rule, the developer gets away without paying taxes,’’ a planner said, adding that developers in the city make a cool 100 to 200 per cent profit on the sale of each flat.

Though the land prices have increased only in the past few months, developers have been making a cool 100 to 150 per cent profit on each sale. According to National Housing Bank data, in the past, the government has not been able to meet its target of housing for low income groups, in 1999-2000, against a target of 44,000 LIG units, only 27,000 were constructed while in the economically-weaker section (EWS) category, against a target of 96,571 units, only 28,541 were built.

A section of real-estate experts though believe that the Act should be granted extension despite its unsuccessful tenure. Says Ambar Maheshwari, head (Investment Advisory) with global real estate advisors DTZ said: “All this while, developers were not making flats of 1,000 sq-ft, such projects are not lucrative as when compared to large luxury apartments.

With high interest rates and reduced supply of luxury apartments affecting sales, the overheated property market is showing signs of sluggishness. This will make a lot many developers turn their focus to constructing low-cost houses.’’

Banks to hike home loan rates further

Rediff.com writes
A key player in the home loan market, HDFC on Thursday said it would hike housing loan rates by another 0.50 per cent this month-end or early March.

"After the CRR hike, our margins, presently at around two per cent, are under pressure and we will raise the interest rate to maintain that spread," HDFC chairman Deepak Parekh said.

A HDFC press note announced that interest rates will be reviewed next week. HDFC's current interest rates are 11 per cent (fixed) and 9.50 to 9.75 per cent on floating loans.

This would be the second time within a month that HDFC would be raising home loan rates. Earlier this month, it raised the rates by 0.5 per cent after RBI announced a 0.25 per cent hike in overnight lending rate, repo, in its monetary review. ICICI Bank had also raised home and car loans by one per cent then.

The government-owned Punjab National Bank, Bank of Baroda and Bank of India will hike interest rates across-the-board from February 16.

Bank of Baroda and Punjab National Bank have hiked prime lending rates by 50 basis points each to 12.50 per cent p.a. and 12.25 per cent p.a., respectively.

The rate hikes follow a 50 basis points hike in cash reserve ratio by the Reserve Bank of India effective in equal phases from February 17 and March 3, which would suck out Rs 14,000 crore (Rs 140 billion) out of the banking system.

Banks are raising the lending rates to make up for the increase in cost of funds, loss on account of zero-interest CRR balances and depreciation in marked-to-market investments as yields harden.

However, ICICI Bank has decided to hold interest rates charged to existing home loan borrowers.

"The bank may increase interest rates incrementally across all segments of customers including lending for automobile purchase. For housing loans, we are choosing not to increase rates for existing floating rate borrowers," ICICI Bank's executive director V Vaidyanathan said.

ICICI readies Rs 1000 cr, 44-floor Hyderabad hub

DNAIndia reports

HYDERABAD: If it is real estate in Hyderabad, then it has to be high rise. Latest to catch skyscraper syndrome is none other than ICICI Bank, India’s largest private sector bank, which is setting up a swank new office in the city - all of 44-stories and costing a whopping Rs 1,000 crore.

The building will come up over eight acres of prime real estate in the upcoming Financial District close to Hi-Tech City technopolis.

It will have other major financial institutions such as UBS and Franklin Templeton for neighbours.

The campus will house 25,000 employees who will among other things provide back office support to all other ICICI operations across the world.

“This will be the biggest ICICI office in the country,” said B P Acharya, vice chairman and managing director, of the AP Infrastructure Corporation (APIIC), talking about the project.

The bhoomi pujan for the project was conducted two weeks ago. K V Kamath, the bank’s managing director and CEO, could not make it for the event as he in Davos attending the World Economic Forum conclave.

100-storey towers coming up!

Interestingly, even though ICICI Bank’s will be one of the tallest offices in the country, it could nevertheless be dwarfed in Hyderabad.

The AP Infrastructure Corporation itself planning to build a 100-storied structure of its own in the planned Business District right next to the Financial District. The bids for the Business District are to be awarded soon with six companies in the race to bag the contract.

But that’s not all. Lanco Infrastructure is yet another company that is planning to build a 110-storied apartment and commercial complex, apart from 24 other high rises of 24-stories each at an information technology SEZ that is constructing a stone’s throw from the Hi-Tech city area.

Realty scrips hit 3-mth low

Business Standard reportd
Realty and construction stocks fell to three-month lows on the BSE, with investors offloading the scrips in the last few trading days.

Public sector banks' proposed move to raise prime lending rates and the RBI's hike in cash reserve ratio (CRR) led to a steep fall in realty and construction shares, many of which fell over 30 per cent from their all-time highs.

The weak sentiment saw Sobha Developers (Rs 754), Akruti Nirman (Rs 415), Parsvnath Developers (Rs 276), Lok Housing (Rs 236.55), DS Kulkarni Developers (Rs 239), Ansal Buildwell (Rs 109.45), Unitech (Rs 373), HCC (Rs 110.15) and BL Kashyap (Rs 1,215.60) etc hit their three-month lows on the bourses today.

Rahul Rege of Brics Securities said it was a case of exuberance becoming rational now. Rise in share prices on the basis on land bank was justified only up to a point. If an investor had bought a realty stock influenced by the momentum, he was in trouble. But, if the decision was based on fundamentals, they could still stay investments, he added.

He said the squeeze in bank credit to realty sector might also have contributed to the sudden dip in valuations. "I think there was too much excitement over realty stocks based on their future earnings," he said.

Ansal Buildwell, Lok Housing, Tantia Constructions and Peninsula Land fell over 50 per cent each, while prices of PBA Infrastructure, DS Kulkarni, HCC, Patel Engineering, Ansal Infrastructure, Sobha Developers and Unitech fell in the range of 30 per cent to 50 per cent from their all-time highs.

The stocks of the newly listed realty and construction firms such as Parsvnath Developers, Akruti Nirman, Lanco Infrastructure and Unity Infraprojects fell below their offer price.

Akruti Nirman was trading at Rs 420.25, 22 per cent lower than its issue price of Rs 540 on the BSE. Unity Infraprojects traded at Rs 562.20, 17 per cent below its offer price of Rs 675, Lanco Infrastructure was down 16 per cent at Rs 202.05 against its issue price of Rs 240. Parsvnath was trading just above its issue price of Rs 300.

Real estate chat

From rediff.com

Want to invest in realty? Wait for govt guidelines'

Questions poured in from every corner as Kekoo Colah, executive director, Knight Frank (India) Pvt Ltd, came online for a chat on real estate on Wednesday. Colah took his time studying each question thoroughly before coming up with well thought out answers.

Here is the transcript of the scintillating chat:

Kekoo Colah says, Hi, this is Kekoo here; let me attempt some of the questions received.
Ambrish asked, Is the real estate boom going to continue, given the fact that home loan interest rates are increasing and also there are talks about removing the tax exemptions on home loans....
Kekoo Colah answers, at 2007-02-14 15:08:05Demand factors remain very strong across real estate sectors. Please understand that home loan interest rate increase will affect, to some extent, only the residential sector. Even here there is significant pent up demand which will not be very affected by the interest rate increases, but those looking at 2nd and 3rd home purchases for investment will reconsider.

rana asked, will the government succeed in breaking the builders lobby to contain the flaring realestate price??
Kekoo Colah answers, We tend to blame the govt and hold them responsible for everything. Real estate prices have gone up substantially over the past 3 years, but very sharply over the last 1 year, because of huge increase in demand and inadequate supply meeting that demand. With economic growth at record levels, sentiment so positive, consumer led growth, easy availability of finance and interest rates having gone down (compared to 16-17% a decade back) the demand for houses, offices, shops, etc has hugely increased. To bring real estate product to the market requires some minimum lead times and this is also one reason why prices have gone up to such an extent. The best approach for the govt is not to curb demand but debottleneck any supply constraints (transparency of rules, consistency, simplification, etc.)and let the market forces do the rest.

pmp-kannan asked, hi, if my main aim is liquidity then is real estate the real destination for investment? i stay in bangalore. so is it advisable to buy real estate in Bangalore or say 50 kms outside bangalore? which will be more beneficial? thanks in advance
Kekoo Colah answers, No,real estate is a fairly ill liquid asset class to invest in. Govt has several months ago announced that real estate mutual funds will be permitted, but detailed guidelines are still awaited. Once these are permitted, the general public would be able to invest in the real estate sector and have the required liquidity; please wait until then.

rakesh asked, up to what time this realestate boom continues??
Kekoo Colah answers, I wish I were a fortune teller but, unfortunately, I am only a real estate professional unable to give you a precise answer.

saurabh asked, With the property rates + interest rates going up and up, the way it is, soon market would not be able to sustain itself. If so, when do you see that happening and how should a buyer insulate himself from this?
Kekoo Colah answers, Individual investors (as opposed to funds and institutional investors who have a good knowledge base and perspective of the market) should assess the quality and reputation of the developer, their track record and product being sold before taking any investment decision. Good titles to the property are an absolute must as this is a problem area in India and, because of the time delays involved, any litigation can be expensive and lengthy.

dev asked, what do you foresee as he trend in the next 1 yr for commercial property in gurgaon
Kekoo Colah answers, Positive, as there is significant demand for commercial property from corporates and the IT / ITES sectors to be located in the Gurgaon area.

Vivek asked, Hi Colah!! As inflation is going high do you think within 2 years real estate will come down?
Kekoo Colah answers, Minor corrections in micro markets across the country are bound to take place periodically, but the general trend would continue to be upwards unless there are some serious untoward economic or political developments which affect growth and sentiment.

Click asked, Looking to buy a flat in Mumbai. Should or wait.
Kekoo Colah answers, I do not know if you are purchasing this to live in or as an investment. In either case, I have addressed the issues you need to be aware of in some of the earlier answers.

nikhil123 asked, Dear Sir, In Delhi/NCR, real estate prices have gone up by 2-3 times in last 2 years. Do you feel that it will come down from this level? Or would it settle down near this level??
Kekoo Colah answers, What you say is, in fact, correct for many other locations as well. I think we have witnessed a fundamental and structural shift in the market and it is quite unlikely that prices, if and when they do correct, come down to the levels we used to see 2-3 years back.

Karthik asked, Has an spurt in the number SEZs created a new benchmark in real-estate, in metros - i.e. is the real-estate boom here to stay.
Kekoo Colah answers, So far we have only heard a lot of news about people wanting to set up SEZs. Even after there is full clarity and consensus on the SEZ policy, it will take several years before significant amount of product comes into the market. What we will see happening before that are a no. of township developments across the country and these will help to stabilise price increases in the metros and other cities as there will be good quality options available.

arvindagarwal asked, If the FDI limit increases in near future what will the effect
Kekoo Colah answers, FDI limit for what? minimum area requirement, minimum investment? FDI norms were revised and made less stringent in March 2005, post which India began to see serious investors and developers considering real estate projects in the country. Given the opportunities that the Indian market offers, foreign interest can only go up.

RBI ends the party, loan rates will go up

DNA India reports
MUMBAI: If you have been partying hard on rising salary levels and big gains from a bull market, here’s a sobering message: slow down, or else…

The Reserve Bank of India (RBI), worried about a runaway price spiral — wholesale inflation is rising at 6.6 per cent annually — has fired yet another warning shot.
In a move aimed at choking consumer lending, the central bank impounded Rs14,000 crore of bank funds through a device called the cash reserve ratio (CRR). The CRR is being raised in two stages by 0.5 per cent to 6 per cent by March 3, which is the highest level since November 2001.

The impending cash crunch will force banks to raise everything from home and car loan rates to corporate lending rates, perhaps by another 0.5-1 per cent. The finance minister’s recent call to public-sector banks to hold the line on home loan rates is thus a dead letter. State Bank of India managing director TS Bhattacharya has gone on record to say that both lending and deposit rates may need to be raised again.

“The moment you impound funds, there will be a shortage of deposits and banks will get desperate to get more deposits in the market. The shortage of funds will affect all segments,” Bhattacharya told Bloomberg.

A spokesman for housing finance company HDFC, Mahesh Shah, concurred: “Interest rates will move up on all consumer loans.

The question now is by how much.”

The stock markets are widely expected to react adversely today, since banking, real estate, and infrastructure stocks could face the heat. “The RBI move has taken everyone by surprise. The markets will open with a downward gap on Wednesday and I see the Sensex closing at least 200 points down from Tuesday’s close,” said SP Jain, managing director, Networth Stock Broking.

The good news for new buyers is that prices may start to descend from stratospheric levels. Manoj Motta, general manager of K Raheja Corp, said: “This move of the central bank could trigger a cycle whereby housing finance companies may slow down their disbursements and hike interest rates. Since property prices are already very high, this may hit the buyer’s purchasing power in a way that will send prices rolling down.”

The central bank has been forced to act because high growth — the economy grew 9 per cent last fiscal and could grow 9.2 per cent this fiscal — has boosted inflation. It will get government support for the move since elections are due in Uttar Pradesh this summer, and are already underway in Punjab and Uttaranchal. No politician can hope to win elections with prices of essential commodities soaring.

How the CRR hike affects you

* Home loan rates will rise by 0.25-0.5%
* Auto, personal loan rates will also rise
* The stock markets are likely to crash
* Equity and income funds will do less well
* New issues won’t yield instant gains
* How companies will be affected
* Interest costs will rise for most firms
* Corporate profits will start falling
* Raising money from markets will become tougher
* Borrowing abroad will become cheaper
* Convertible bonds will be harder to sell
* How government will be affected
* The economy may start slowing down
* Govt will have to borrow at higher rates
* Tax revenues could start tapering off
* Room for manoeuvre in budget narrows
* High interest rates will strengthen the rupee

How tighter money will benefit you

* Bank deposit rates will now fetch you more
* House buyers will find prices moderating
* You can pick up stocks cheaper now
* Short-term stock losses can act as tax shield
* Inflation could start falling after a time lag

WHAT TO DO NOW

* Rework asset allocations from equity to debt
* Pre-pay home loans as soon as possible
* Avoid expanding credit card outstandings
* Stay liquid to buy stocks that fall sharply
* Save more of income as opposed to spending

Is the realty bubble about to burst?

DNA India reports

	Timestamp	03-JAN-2007	12-FEB-2007	%drop
Symbol
ANSALINFRA		944.15	744.60	21.14
GESCOCORP		877.75	616.50	29.76
PARSVNATH		468.45	301.55	35.63
SOBHA		1001.80	825.70	17.58
UNITECH		485.50	421.85	13.11

Real-estate stocks, which were a hot favourite with investors only some time ago, are suddenly being shunned.

Why have these scrips lost lustre? Does it have anything to do with a property price correction? Leading developer and Mantri Group chairman and managing director Sunil Mantri thinks so.

"The current real-estate market is overheated and there could be a small correction," he said. "In some places, it is already happening. Over the past few months, property transactions in Mumbai have gone down by 20%. High prices and rising home loan interest rates have affected the buying power of people and so they have adopted the policy of wait and watch."

Property prices across Mumbai range from Rs 4,000 to Rs 50,000 per sq ft. This, Mantri believes, could be the peak from where prices go downhill.

Consultant Ashok Narang of L Lachmandas & Co sees the meltdown in real-estate shares as a conspiracy of builders to keep DLF Developers, which will soon be launching its Rs 10,000 crore IPO, out of the market.

"DLF has paid deposit on plots across India and would be acquiring them after it raises money from the IPO," he said. "Many other real-estate firms are also eyeing those plots. These firms are pulling down real-estate stocks so that DLF is not able to get a good issue price."

Narang does not agree that soaring prices have taken properties beyond the common man's reach. "If property prices have risen, then salaries have also gone up," he said.

• Biggest acquisition! : View Special

For Anuj Puri, managing director, Trammell Crow Meghraj, the slump in real-estate stocks is a reflection of a speculator's mood and not a consumer's. "At these prices, property is no longer attractive to a speculator, but demand from a real buyer is still there," he said. "However, he will now shift from central Mumbai to the suburbs.

As long as the supply doesn't meet demand, prices will continue to move up. Though, in some pockets like Nariman Point and Andheri, which have overstretched themselves, one could see a correction."

But people associated with the property market say demand has slowed in the last two or three months, and volumes are lower, especially in markets like Mumbai, Chandigarh, Delhi, Bangalore, and Pune.

But they also add that "though supply has increased, there is no major worry visible among builders as their resistance to hold on to their stocks has increased."

While there are no indications of a drastic slowdown in demand, it may weaken in a few months.

"By June-July, there should be some correction as more supply is coming to the market, interest rates are going up, and demand is not strong," said a consultant.

"Weaker builders who don't have holding power may trigger a correction." Lastly, the budget is also being keenly awaited by the industry.

CNBC TV18 interview on interest rates

Ajit Dayal of Quantum Advisors
Q: What are your thoughts on this whole interest rate inflation cycle and particularly on the financials, how are you translating that view?

A: Our view again is that interest rates will increase, we believe that the government ten year bond will be probably closer to 8.5-9%, inflation will be a lot worse than people expect and the government and the central bank will have to keep on raising interest rates.

The effect of that in our view will really be a lot on property prices, we have seen over the last two-three years a huge ramp up in property prices across the country. I can tell you what I am reading about floor or the property over the last couple of weeks is that there has been a 50% decline in property prices over the last one year in terms of bare land and suddenly people who were really confident that they are going to make tonnes of money on property development. Some of the largest developers in America like Toll Brothers are leaving money on the table, they have bought land, they have paid deposits but because there is no demand in the US, it is just walking away from it and they are letting their deposits go.

In a similar way, you could see with the interest rates increasing particularly home loan rates increasing. If prices go up and the cost of money goes up at the same time, you could see a slowing down in demand for residential property, for commercial property at a time when supply is increasing many folds.

Some of the numbers that we have heard in the month of December and January for forecast about what is going to happen, there was one number that I think Gaurav Dalmia gave me where he said that in Kolkata the new supply of property is something close to 12 million sq ft over the next two years. The actual demand in Kolkata in 2006 was about the one millions sq ft, so you have got 12 million of new supply and 1 million of actual usage over a last one year. That is a huge growth that is required on the demand side to absorb all that new capacity and he gave me such other numbers for the host of other places across India.

So with the cost of borrowing increasing, with prices of real estate finished products and on land increasing we believe that the demand side may slow down and there could be a very sharp decline actually in property, which will affect to some extent everything else, the guys who sell the air conditioners, the guys who sell the refrigerators and everyone was planning to sell things around all of that. But barring that one sector in the economy, they are very optimistic on India.

We believe that India can grow by 6.5% per annum for next five-seven years without a problem; we are not yet believers on the 8-10% at all because we believe that there is no infrastructure to support that kind of growth on a sustainable level. So we have been skeptical of that number of 8-10% but 6.5% number for India for India for the next five years twice the global average, fabulous managements, very good companies buy India, that is our view still.