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.
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.
43 comments:
I think a lot of CEOs of Western companies who have been operating like Walmart to get everything from outside US are coming to senses.
Outsourcing for US has been like a DISEASE and US is trying to get rid of the disease.
Vik
Just a comment from a mute reader, congrats on this fantastic blog. Keep up the good work in 2009
Okay, I'm finally choosing a name after all my posts. They will be signed as :Housing Bear:
As far as outsourcing goes, it will reduce considerably after June2009 when a lot of places enter their new financial year in July. A lot of contracts will be terminated.
As mentioned in the first post, it is definitely a disease that has crippled America. A second disease corporate America has is Globalization. Obama is coming up with a remedy to cure this disease and make America healthy again.
Once US is healthy again, emerging economies will start seeing some low level jobs flowing to the developing nations.
Housing Bear (HB)
Guys let it fall..
Minimum 90 % fall guranteed...
Pick up when it falls 95 - 99 %...
US Govt. is going to print dollars worth 1 Trillion as a part of Obama's stimulus plan. Could someone tell if that would take the value of dollar down or would it still be in demand worldwide?
How much would be Rupee exchange rate at that point?
Housing Bear (HB)
During lunch at my work, me and my collegues were having discussion about inflation in US. I did some analysis which I'm copying here.
Salaries:
http://www.census.gov/hhes/www/income/histinc/p07AR.html
Home prices:
http://mysite.verizon.net/vodkajim/housingbubble/
From the first chart in salaries, you can see how the nominal median salary has increased from $5,335 to $26,625 since 1974. That is almost five times in 33 years. In current dollars the salaries have remained in the same range.
In 1975, the average home price was $25K. Today the average is 200K which should adjust to $150K once the bubble deflates. If the avg, becomes $150K, then it would have increased 6 times in 32 years.
If this is not inflation, then what is?
If you belive these numbers, then it is easy to predict what's going to happen in the future.
After 33 years, todays nominal mean salary would be 5 times the current, which means it will become $133K. If a software engineer earns 100K today it will be 500K after 33 years.
Similarly with house prices, the average home which is 150K today will become 6 times, which is 900K after 32 years.
Even if we discount these multiples to half, they are huge and illustrate the effect of the printing of the money that the US government has been indulging in. And without doubt they will continue to do so. And I think, same goes for the Indian goverment. So it is critical that the average citizen must account for this stealing of their savings that the governments are doing.
Of course, this in no way means that anybody should buy a house at artificial prices which in the case of Indian markets is inflated 2-3 times. As echoed by many here, I too believe that the prices in India have to reduce 2-3 folds, essentially going to a historical mean. Once that happens, you can begin your investing. Cheers.
Company (US based Software firm) where I work, recently laid off 50% off total strength. Though ours is small company. We were 60 before that and now less than 30. All the senior management including VP, GM, CFO and total QA were asked to go. Its pretty dull business.
reg,
Jayaram
which city is this ?
Guys let it fall..
Minimum 90 % fall guranteed...
Pick up when it falls 95 %...
Who is this stupid talking about 95% fall? Have some sense.
- Abdullah
this is a mute spectator ... I too wondered how the real estate prices continue to go up ... now I know for sure ... thanks Vik ... keep up the good work ... we need independent voices like yours to be sane ...
People can keep track of Layoffs happening daily at layoff daily
regards,
Jayaram
Oracle Financial slashes salaries of prime sourcing dept by half
"The prime sourcing department has 1,000 employees each at Oracle Financial’s Mumbai and Bangalore offices. So far, 300 junior and middle level employees in Mumbai have had to take salary cuts from January onwards. They have also been asked to work part-time, with the number of work days halved to 15 in a month."
“Bangalore office is going to face the same situation according to office grapevine,” the source said.
"If a team within the department completes a project successfully and then sits idle without any in hand, they could be ‘benched’ after a period of time and ultimately lead to permanent lay offs"
Home buying: Pitfalls to avoid
From freebies, things have now moved to price cuts, which are now seen in the home property market. Developers are offering a 10% price cut for a few days. The catchphrase, though, is that the price cuts are mainly only for ‘to be developed’ properties and cuts for developed structures are few. Several builders have announced good bookings through these cuts.
One more thing that needs to be watched out is: the Maharashtra Housing Policy states that sales purchase transactions should be in terms of carpet area — the policy was implemented in mid 2007. However, all flats sold by builders are done on super built-up areas. The carpet area is about 60-65% of the super built-up area. This makes flats 60% expensive than what is offered and the per-square-foot rate on carpet area is 60% expensive that what is advertised — you will be paying about Rs 4,600 per square foot (psf) instead of Rs 3,000 psf.
One also has to pay the add-ons that sum up to 15-20% of the basic rate. These include floor rise, infrastructure costs, upfront maintenance costs, compulsory parking costs, legal and conveyance charges.
The conclusion: many builders are facing liquidity concerns; do your home work well. Several ‘to be developed’ structures do not have proper documents and/or clearance. Developers providing fancy timelines to lure the buyer. Watch out for it — townships don’t develop in two-three years; they take five to eight years. Ask for the penalty clause in case of delays and also for the cancellation policy.
Vik,
Thanks for the extraordinary post... Many developers are feeling the pressure this blog creates to millions of people around the world...
ref # Who is this stupid talking about 95% fall? Have some sense. - Abdullah
Mr Abdulla, I understand your frustration and pain but who started this non sense? buyers? and no wonder then buyers wants to continue this..take my advice..have some patience. the fun is just started in India my boy..
I am sure a 50% fall overall is certain. But 95% is overdoing it. It also means that not only we are in a recession, we are perhaps in a state worst than depression and all food has run out and there is literally blood on the streets due to rioting. Lets me sensible....a new bottom is being created and it will not fall below 2002. I hate to say this but mathematically Real Estate will never go down 95% from peak.
In addition in the next 2 to 3 years the 50% drop will suddenly look like perhaps like a 10% drop as a lot of inflation will come in imported or otherwise from all the money printing which is in progress at the Central Banks World wide especially the FED. this will make people feel more poor even if prices dont correct. Because someone or the other will have money to spend. But in between 2009 end and 2012 - would be the best time to buy property. This is my very unscientific explaination.
Just today, I checked with various agents in malad(w) and visited some builders too, but every one is quoting a price around 7000/ sq.ft for built up area. This is way too more than I can afford. I spoke to several watchmen who told me that the occupancy in these building is just 20%. The owners just park their cars in the parking lot but dont live there. This is baffling.
3 years back the rates were 50% than today and these flats will not be sold unless they cut the prices by 50% or more.
Can some real estate professional shed some light on what is happening.
The market is Mumbai appears to be frozen like the Tundra even though we are in the lower tropics. There could be many buyers in these complexes who bought in at 50% of the price. For them selling out doesn't make sense unless they are unable to pay off the loan, or they see the overall situation worseing. I had met a similar person who had an inside deal with Godrej and got in at 3500 in Mahalaxmi, I think in early 2004. For these folks selling out doesn't make sense. I think the builders of under construction properties have pushed themselves into a corner where they cannot attact buyers at these high prices and they cannot lower prices because if they do, existing buyers will sell and depress the market. They are hoping that lowering the RBI rate will attract buyers in droves, however with banks more worried of lending in a weak job market, they have little choice but to cut rates or bleed.
If there are any buyers we will see news saying that 20% sold etc.Lack of such news makes me confident that the builders have gone into hibernation
Anand and others,
Its time to shed your mute spectator handle and post occasionally. Soon we can establish a buyers club and negotiate hard with the builders. The day is not far.
Why 95 % fall is not possible? Even there is a chance to have 100 % fall...
By giving 100 % fall the owner need not have to pay maintenance fee, property tax etc and he can get a 105 % discount from somebody!! Use the extra 5 % as sinking fund for the next property... Sounds logical??
This stupis is out of mind...Vik why don't you block this 95% spammer...
- Abdullah
Anon at 11:36 AM (can you adopt an name please?):
I don't think we will see any practical inflation in the next 3-5 years. In fact there will be deflation - that means prices will decrease for the day to day stuff, inflated salaries will go down, etc. House prices will crash (I won't call that deflation, but an outright crash). Yes, eventually over 30 years as I outlined earlier, we will have inflation which will increase salaries, house prices and the prices of everything else 5-6 fold. Again, I emphasize for the next 3-5 years we will see defaltion and not inflation.
As far as the property prices are concerned they will correct to some mean level (let's say inflation adjusted level of the 2000-2002 period). Again, when adjusting for inflation, we need to be careful because the inflation in the last few years has been artificial and there will be a deflation to counter that. I would consider an adjusted inflation rate of no more than 3-4%. That means some properties will go down by upto 50-70% (e.g. for those properties which have doubled, tripled or quadrupled.
Prashant,
You said it all what I've been saying all along.
Deflation is what is coming. No consumers.
RE to go down eventually by 50-70% over a 2-3 year period.
Housing Bear (HB)
In the absence of any more exotic instruments, bubbles or means of making quick money, my opinion is that prices will crash based on segments of lifestyle with a floor of 3000 per sq/ft for most mid sized apts. I think the 95% fall is bit overstretched but then Anon has a point. if bulls can point to 300% rise in Sensex, he has a right to 95% fall as bear, however far fetched it might be.
Vik,
With the slowdown market can overcorrect. Detroit has houses selling for $1. Was there no cost to build them and the land cost. When there is massive liquidation, prices go below imagination.
Btw, does anyone know if USD is going to become toilet paper after Obama's 1trillion worth of money printed or it would adjust as all the world would be lowering rates and printing money. Maybe there will be long term inflation that we'll see after 2-3 years and what happens to rupee? Does it go to Rs.60/1USD?
Housing Bear (HB)
I think India will lose more jobs than the US. The Indian economy thrives on exports to the US and Europe, be it software, warm bodies, textiles etc.
Almost all newly made rich people fall under the export umbrella and if this industry emplyoys close to 2.5 crore people at all levels, we could easily see a loss of 40% of these jobs. The reason being there will be very less to zero demand from US and Europe at least till 2010 for software, people, clothes etc.
This will further accelerate the RE declines in India.
Housing Bear (HB)
Vik,
publish number of views for your aticle... will be interesting to see how many 1000s follow this blog
Housing Bear,
There is no other currency that can replace USdollar. If it goes down, so are other currencies of he world. Moreover you can't trade with tomatoes.
USD will always be strong. RUpee should be close to Rs. 53-55 per USD in 2009.
HB,
I think the Detroit house which sold for 1$ was probably in the neighborhood where you will dread going during the day, forget the night. But the economy there is definitely very weak as witnessed in the housing prices.
Anon: Approx 500 page views a day. I don't track it too closely for I don't see the need for it as of now.
I find very strange about people talking in general about fall/correction ranging from 95% to 50%.
Correction has already happened and has corrected depending upon the location & supply.
I still feel Mumbai will correct the least, having said that area like Dadar, Prabhadevi which was at 4500 and 6000 (2004)and which had gone around 25,000 to 30,000 is bound to correct more but areas like Malad which was around 2500 and currently at 7500 will correct very minimal.
Builders can see light in the tunnel with interest rates coming down. Infact by June I am expecting interest rates to come around 8%.
I personally feel buying will start by end of March 08 in Mumbai. We all have to understand the dynamics of Mumbai market is totally different from other metros. Mumbai especially the demand is huge and more interesting is that more then 80% builders are not buying land but going for re-development. We all know that in redevelopment builders do not buy land. These builders have stalled their projects and waiting for the markets to improve. Currently these builders are purely focusing on completing their existing projects in hand and not even looking at new projects. Construction and TDR cost have fallen and thus giving them much wanted relief. TDR which was around 3500 psf is currently 1100 psf.
Some builders are caught but a small % and won’t affect the overall Mumbai market.
I still believe that because of huge demand and scarcity of land and add to it the builders are confident that interest rates will come down, I feel there won’t be any major correction. I am no one to predict, anything can happen. In life i have always taken a contra view only with my logic and i have got into property investment in 2003 because of this logic.
Friends our political system is in such a mess otherwise property(2BHK) in Mumbai should not be more then our 10 times our annual income. Politician have huge interest to keep the prices artificially inflated otherwise these guys should have improved the infrastructure and increased the FSI from existing 1.33 to 5.
Any market will react only to demand and supply and not media and other vested elements. Here in Mumbai demand is huge about supply is limited thanks to our so called leaders.
Oil despite controls have seen going from 147 to 36. The same can happen to RE the question is affordability. Even as I am writing typically a middle class family in Mumbai unlike other cities lives in 1BHK and the price for the same in most of the suburb is around 6 to 10 times his annual income and if his spouse is working it is almost half, which I still feel affordable.
Let us wait and watch, time will only tell us how many people have lost the Jobs in India thus affecting the demand.
All the best to all you guys. I am personally looking at value buy especially from scared investors where properties are ready or 70% complete.
Bindas Bhai
Bindas Bhai,
There are a lot of myths that you have fallen prey to:
Myth: Politians and govt. won't let the prices fall.
Fact: The market forces are too great for anyone to control. If someone could do anything, the US govt. could. If you follow the US news, you can see how helpless they are.
Myth: Mumbai has lot of demand
Fact: When we are in a housing bubble, there is massive over-building. It will take years for the supply to be absorbed. This phenomenon is seen in all real estate bubbles. Nothing new in the case of Mumbai or India. Please do some research on historical bubbles.
Myth: There is no more land in Mumbai so prices will go up.
Fact: Everyone in Mumbai is living somewhere or the other. No one is on the streets (at least someone who is aspiring to buy a home). In addition, there was massive over-building as I mentioned above, so there is no need of building anything new until the supply is absorbed, which should take a few years. Additionally, population trends do not change overnight to increase demand.
Myth: The builders can't sell for less that the cost.
Fact: This is too simplistic a thought. If the lenders of the builder demand the money, the builders will have to sell, even if it's at a loss. And when the lenders sense trouble they become very impatient. Fear takes over. Just like in a bull phase, greed takes over, during a bear phase fear takes over. So the lenders will over-react for the fear of losing their investment.
I can go on and one. I'm no perma-bear or perma-bull. I believe any investor has to accept the reality and play along. Don't fight the trend. When the trend is up, go with it, when its down go with that.
Hi,
We were looking for corporate apartments in Singapore. 1 Bed in singapore costs US $ 4000 per month. I am going crazy seeing such numbers... The hotel room rates in singapore are 300 $ per room... Any reasons for such high rates?
One more myth: Buying will resume when the interest rates will go down to 7-8%
Fact: During the bull phase, rather than the actual demand people buy because they think its going to go up in price. No joke here. Let me emphasize, the buying is not because of demand, its because of speculation that the prices will go up. Some were pure speculators. Even those who bought to live, partly did because everyone was raving how much money you can make owing a home. Many of those in normal times would have been perfectly happy to rent. Similarly during a bear phase, if people don't think it will go up, they will not buy. Speculators will not buy because they don't see the prices increasing. Those who want to live in the houses won't buy because they won't feel confident of their job, or they will wait for prices to become affordable.
Vik and others dont jump on this news and say that RE will come down... Be sensitive to the talented people and families of the employees and observe restraint.. My humble request..
Raju (Satyam CEO) admits fraud; Satyam books inflated of Rs 5040cr -
http://www.moneycontrol.com/news_html_files/news_attachment/2009/Satyam_Computer_Services_Ltd_070109.pdf
i agree this is like disease.
The Satyam event is unfolding so its best to comment when the dust settles. But all said this is truly unsettling and its a sad day for India's Image in the Global Corporate world.
Dear Prashant,
I am hearing similar logic since early 2007 and will continue to hear.
I would personally advise people to buy now only:
a) For selfuse
b) If you are comfortable paying EMI
c) Long term view
satyam a fraud operation. Just like Buffet says it is only when tide goes out, one finds out who is swimming naked. This creates huge questions about other body shoppers like TCS/INFY/WIPRO. FIIs/NRIs should steer clear of these organisations.
Banya Ambani is known to engage in all kinds of nefarious activities, showers huge bribes on South Block (delhi)..
it is a disgrace for a very poor country like india. These chimps are living off of poor people.
The yuppi mungerilals of india were in delusions in the last 5 yrs of orgy. The yuppy will be dienchanted soon stripped bare of his inflated assets.
Welcome to india of yore. A GDP growth in the next decade will be 2-4% & mungerilals shoule wake up from trance.
The Satyam incident shows the amount of greed in India, just like the Enron incident 5-6 years back in US and also of the same size.
All involved in fraud should definitely be put in Jail. And the regulators should also check TCS, Wipro and Infosys balance sheets.
bears,
Please respond to my question on singapore corporate apartment...
Singapore dude, can you choose an ID? I just happened to be talking to my cousin who is going to Singapore on a Business trip on January 29-31 this month. He booked a room at the Singapore Hilton, a 5 star hotel, for approximately US $172/night. He did it online, just go to www.expedia.com and then click on the Hotel tab, select Singapore as the city, and then enter the desired dates. That is it.
Looks like some travel agent might be cheating you. And by the way, you need to do your own research instead of posting here, since this is not a hotel booking site.
By the way, a room at the Marriott hotel (another 5 star hotel) in Mumbai is $300/night.
Anon above:
The hotel industry is also in a big bubble. As the demand slows, these will be at least 50% drops in hotel industry.
You may want to look for an apartment in some Singapore suburb. All prime areas are expensive everywhere. Like Manhattan, NY may have 1 bedroom for $5K, prime locations all over DC area are expensive.
Housing Bear (HB)
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