From the article below it looks like the financiers who have loaned money to the builders against pledged shares have been subprimed due to the rapid fall in real estate stock valuations. This is looks like a case of mini Fannie and Freedie who were forced into nationalization since the valiue of the their underlying assets were indeterminate. The ponzi scheme of builder bidding against each other using loaned money has collapsed under its own weight.
As a reminder in this article we are not taking about the availablity of land, the demand/supply situation, the GDP growth of 8% or the exploding population in cities.
Everything which can go wrong in financing has gone wrong with the construction industy and the relentless greed to acquire land has landed these folks into the a death spiral. DNAIndia has this report
Realtor debt to be twice revenues:-
Pooja Sarkar
Tuesday, February 3, 2009 2:48 IST
Mumbai: Ah ! well a-day ! what evil looks Had I from old and young ! Instead of the cross, the Albatross About my neck was hung.
-- Samuel Taylor Coleridge, in The Rime of the Ancient Mariner
Hung it is, around the neck of realtors. For their debt repayments are likely to be twice their revenues over the next 12 months, analysts assess.
That's the new concern for realty players after their worst quarterly results. All major players except Anant Raj Industries and Indiabulls Real Estate -- including DLF, Unitech, Puravankara and Sobha -- are in the line of fire.
"In most cases, we expect debt repayments to be more than twice revenues over the next 12 months," said Bhaskar Chakraborty and Param Desai of institutional brokerage IIFL.
DLF, India's largest realty player according to market capitalisation, reported a 62% drop in its revenues in the December quarter to Rs 1,367 crore as against last year's Rs 3,598 crore. DLF has to repay Rs 4,300 crore of debt in the next six months.
Rajiv Singh, vice-chairman of the company, said funds to the tune of around Rs 3,000 crore have already been tied up for this.
At an analyst call on Monday, Singh said receivables from DLF Assets Ltd (DAL) are approximately Rs 5,000 crore with no money during this financial year.
"Receivables as at end of current fiscal are likely to outstriprevenues if DAL is unable to raise funds in the current fourth quarter. We feel this could be one of the reasons why sales to DAL have been stopped," Chakraborty and Desai said in a note on Monday.
Ergo, DLF has had to fund the receivables via incremental borrowings.
Singh said the company's target of developing 50 million square feet this year is in doldrums.
"God knows when it can be completed," Singh said. Chakraborty and Desai expect Unitech, India's No.2 realtor, to have revenues of Rs 1,200 crore and debt repayments of more than Rs 3,000 crore next fiscal.
To top it, the company has to repay Rs 2,500 crore by the end of this financial year.
Similarly Bangalore-based Puravankara Projects had raised debt worth Rs 830 crore of which loans maturing within next twelve months is Rs 427 crore. It's revenues in the December quarter was nearly halved to Rs 80 crore.
Ditto another Bangalore builder Sobha Developers. Its revenues also nearly halved to Rs 180 crore in the December quarter. The company has Rs 1,090 crore of debt to repay.
Another analyst with a European brokerage, who did not wish to be named, said even though developers' debt is more than revenues, banks and financial institutions can do nothing more than extend the loan period or rollover short-term loans into long-term loans.
However, another analyst from a domestic brokerage, who, too, did not want to be named, said lenders may rather prefer to unload shares held as collateral.
Realtor debt to be twice revenues:-
Pooja Sarkar
Tuesday, February 3, 2009 2:48 IST
Mumbai: Ah ! well a-day ! what evil looks Had I from old and young ! Instead of the cross, the Albatross About my neck was hung.
-- Samuel Taylor Coleridge, in The Rime of the Ancient Mariner
Hung it is, around the neck of realtors. For their debt repayments are likely to be twice their revenues over the next 12 months, analysts assess.
That's the new concern for realty players after their worst quarterly results. All major players except Anant Raj Industries and Indiabulls Real Estate -- including DLF, Unitech, Puravankara and Sobha -- are in the line of fire.
"In most cases, we expect debt repayments to be more than twice revenues over the next 12 months," said Bhaskar Chakraborty and Param Desai of institutional brokerage IIFL.
DLF, India's largest realty player according to market capitalisation, reported a 62% drop in its revenues in the December quarter to Rs 1,367 crore as against last year's Rs 3,598 crore. DLF has to repay Rs 4,300 crore of debt in the next six months.
Rajiv Singh, vice-chairman of the company, said funds to the tune of around Rs 3,000 crore have already been tied up for this.
At an analyst call on Monday, Singh said receivables from DLF Assets Ltd (DAL) are approximately Rs 5,000 crore with no money during this financial year.
"Receivables as at end of current fiscal are likely to outstriprevenues if DAL is unable to raise funds in the current fourth quarter. We feel this could be one of the reasons why sales to DAL have been stopped," Chakraborty and Desai said in a note on Monday.
Ergo, DLF has had to fund the receivables via incremental borrowings.
Singh said the company's target of developing 50 million square feet this year is in doldrums.
"God knows when it can be completed," Singh said. Chakraborty and Desai expect Unitech, India's No.2 realtor, to have revenues of Rs 1,200 crore and debt repayments of more than Rs 3,000 crore next fiscal.
To top it, the company has to repay Rs 2,500 crore by the end of this financial year.
Similarly Bangalore-based Puravankara Projects had raised debt worth Rs 830 crore of which loans maturing within next twelve months is Rs 427 crore. It's revenues in the December quarter was nearly halved to Rs 80 crore.
Ditto another Bangalore builder Sobha Developers. Its revenues also nearly halved to Rs 180 crore in the December quarter. The company has Rs 1,090 crore of debt to repay.
Another analyst with a European brokerage, who did not wish to be named, said even though developers' debt is more than revenues, banks and financial institutions can do nothing more than extend the loan period or rollover short-term loans into long-term loans.
However, another analyst from a domestic brokerage, who, too, did not want to be named, said lenders may rather prefer to unload shares held as collateral.
33 comments:
This is exactly going the Japan Real Estate Bubble way of 1989-1990. We are heading for India's lost decade for sure !
Small builders who have borrowed from banks were hoping these giants will buy them off and save them.. Now small builders will be in the line of fire. India does not have a structured debt recovery system or foreclosure or bankruptcy protection. I wonder how will they cope with the coming storm ?
Shriniwas - it is a great decade for India. Cheaper and more realistic real estate prices will help the economy as people will spend their money in better ways instead of giving it to unethical builders.
I plan to read a book called Happionaire's Cash The Crash as soon as it comes, as it talks about lots of ways we can benefit from India's growth. A crash in real estate means more cash for all of us.
Anon above,
Happionaire's Cash The Crash - Ashish Chabaria is going to make money from people like you. There many things already said about money, assets and investment by many great people.
This guy suddenly coming in CNBC TV18 and trying get some lime light. Where was this guy 12 months back ? I dont know where CNBC finds people like these.Myfirst advice would be dtop watching CNBC TV18,IBN LIE and UNDIE TV etc.
We will see more skeletons tumbling out of closet in the month of Apr-2009.
Disclosure of pledging mandatory in quarterly results
"Market regulator Securities and Exchange Board of India (Sebi) today asked all the listed companies to disclose pledging of shares by their promoters in their quarterly shareholding pattern as well as financial results reporting from the current quarter onwards."
Parsvnath pledges 10% shares
Delhi-based Parsvnath Developers has pledged more than 10% shares with financial institutions as collateral for loans in different projects, said chairman Pradeep Jain on Monday. We have over 10% of shares pledged and all of it is for project financing," said Mr Jain, clarifying that promoters have not pledged any shares for their personal investments.
Meanwhile, Parsvnath Developers reported a 96% decline in the profit to Rs 5 crore and a 80% decline in the revenues to Rs 90 crore for the quarter ended December 2008.
Rats Abandoning the Sinking Ship
Mr Singh said he expects to raise over Rs 2,000 crore through private placement in the promoter group company DLF Assets (DAL), that buys IT space from DLF. Meanwhile, either of the two investment firms — DE Shaw and Symphony Capital — is looking to exit its investment in DAL. DLF’s shares fell 13.5% on Monday to close at Rs 153, while the benchmark Sensex fell 3.8%
Rates Have Eased But Banks Ask For Higher Contribution From Borrowers
Prabhakar Sinha | TNN
New Delhi: Despite interest rates easing, people are still finding it difficult to take a home loan. Reason: Banks now insist that borrowers need to contribute 20-30% of the value of the property upfront, instead of 10-15% earlier.
...
...
UCO Bank executive director T M Bhasin said as real estate price is declining, banks have increased the buyer’s contribution so that the market value of the property should not fall below the loan amount during the course of repayment. He said if the bank lends 85% of the transaction and the market value of the house falls by 20% within six months, the loan amount will become more than the value of the property taken as security.
In that scenario, the borrower can decide to walk off—surrender the house to the bank, and saying recover the money by selling the property. To avoid this, the bank has increased the buyer’s contribution. And this factor has played a big role in the current US crisis.
I do agree with Bhai that lot of people are day dreaming because the so called high end property is now insolvent. May be Bhai can give some Gyan to DLF & Unitech, who are selling prime properties to repay the loans. In all Nasty Bears there is only one & one intelligent Bull who is running in the same direction since last 5 years.
Some old investors are worried that 09-10 people will catch the 2005 or 1998 bus. Yeah it’s not rational, late comers should not get this bus, oops market is irrational.
The real problem with land prices is due to Govt. policy which allows the private equity to speculate in land investment. It should have clause that after acquiring a land by foreign entity, they should start construction within 2 years else give back the land to Govt. at original price.
Now there is a concern about Obama’s stimulus plan, as only small portion of it is addressing the near term stimulation & majority of its effect is spread over 2-4 years.
As solution for crisis is still not clear, Banking problem is not resolved, we can only wait & watch the same news & hope to avoid the depression.
http://economictimes.indiatimes.com/One_crore_job_cuts_likely_this_fiscal/articleshow/4072953.cms
So guys let it fall then only pick up, minimum 50% price cut is guarantee.
Vulture.
DLF asks K'taka govt to repay investment on Bidadi project
DLF's mega Rs 60,000 crore township project in Krnataka is now on shaky grounds as the state government has not been able to procure the land promised to the company. CNBC-TV18 has learnt that DLF is negotiating with the government to recall its investment of Rs 400 crore.
Here is a verbatim transcript of Sunanda Jayaseelan's comments on CNBC-TV18. Also watch the accompanying video.
It has been over 15 months since DLF won the bid to build its biggest residential project in Bidadi, on the outskirts of Bangalore. The project was a 50:50 joint venture with Dubai based Limitless Holdings, a sister company of Nakheel. However, the project has not progressed any further after the letter of intent was issued by the Bangalore Metropolitan Authority on Oct 10 2007. Now, in a tough economic environment, DLF, in a letter dated Jan 21, 2008 has asked for a refund of the Rs 400 crore that it has already paid to the government.
Not a surprising move by DLF, as none of the promises made by the government of Karnataka which include land possession and metro rail connectivity to Bidadi has been delivered on time. Now, the change in the government has further halted a free flowing talks and commitments. Given the current downturn in the real estate sector, DLF does not want to park its funds in a project that has not moved in the past 15 months.
This land parcel, a part of the 9000 acres earmarked by the government for this project is still not in its possession. In fact, sources say just a little over 2000 acres has been acquired and the remaining 5500 acres is still with the farmers.
So, what's in the fate of this mega township project, will the government now brace up and deliver? Will DLF pull out of the project? What will then transpire of Nakheel's largest investment in the country? All these questions will find answers as the Karnataka government awaits DLF's answer to its request to reconsider the refund of its investment.
Jayaram
K- Firstly it is "Yogesh" not "Ashish", I guess you haven't read anything he has written. I have benefited a lot from his writing. I read Invest The Happionaire Way and decided not to buy a house that time and ended up saving a lot of my money.
By your logic we should be still reading what has been written on investing and money 1000 years ago. Most of it is not simple for the common man and a lot of it is not valid today. Have an open mind, because only then you can learn more.
I don't mind spending a couple of hundred - if it means it helps me learn more to save and earn lakhs.
Meltdown: 15 lakh Indian jobs to be lost by March
New Delhi: With global downturn taking its toll on India, about 15 lakh people employed in the exporting sector will be out of jobs by March 2009, Commerce Secretary G K Pillai said on Tuesday.
"We have figures from August till middle of January. We estimate something like between 7-10 lakh job losses till now," Pillai told a television news channel.
He said if the slowdown, especially in the US, Europe and Japan continues, another five lakh people would be unemployed by March.
Earlier in the day, Pillai told reporters that the prospects for the country's outward trade look bleak for the next fiscal as well.
"It would be an achievement if we reach USE 160 billion-mark in 2009-2010," he said.
After an impressive expansion of over 30 per cent in the first six months of 2008-09, export growth has turned negative with the result that the total shipments in the current fiscal would fall much short of the USD 200 billion target.
Though exports account for less than 20 per cent of the country's GDP, the sector is highly employment oriented with the total estimated 6.5 crore workforce.
"Exports are going to come down and we have to live with it," Pillai said.
http://news.in.msn.com/international/article.aspx?cp-documentid=1813181
This kind of news will be serious blow to Realty sector.
Bindas Bhai
Has the original Bindas Bhai turned into a bear or this is a different Bindas Bhai ? I'm confused
Dear Vik,
I am the same Bindas Bhai, not that i have turned into a bear nor am I bullish that the prices will go up.
I feel that lot of projects will come to a stand still and supply will be curtailed. In past one year i have given my views only about Mumbai as I would like to comment only after doing some homework.
If you could see my earlier post i.e. when i first started writing in this Blog. I always maintained that commercial property in Mumbai is for major correction i.e minimum 50% whereas the same is not the case of residential.
I had posted this view even before anyone knew about the US crisis and subsequent global meltdown.
about: Residential Property (Mumbai)
I still maintain that correction will happen only on those areas where the prices have gone up exorbitantly high. My earlier mail I had given an example that if X was the property price in 2000 then the prices should be around 3X or max 3.5X as of now.
In Mumbai some property has gone up to 5X. I am sure these kinds of properties will correct. Again having said that it is also the builder’s financial position which will play a major role in determining the prices. We may get s deal but carries a risk of project completion. In case you get a deal for the property which has falls in 3X category and the project is more or less complete, STRIKE IT!!!.
I am in this business for sometime and i interact with lot of builders in Mumbai. Most of the small time builders go for Society redevelopment and hence money is not blocked for land. These guys are just not launching any more projects. Infact in coming times you will see severe shortage of houses in Mumbai and this will keep the prices at bay.
Off course there are some builders who have overtraded and brought land at even at Rs.30000/sq ft, thinking they will develop commercial properties. Trust me these guys are in serious trouble.
Vik, I dont know if you could recollect RBI had asked builders to stop giving loan to these developers especially for Land in 2006. Trust me this move of RBI has so far prevented the crash.
Frankly speaking neither you nor me can time the market and hence I would again request people who are seriously interested in buying, look at ready 3X property with discount of 20%
If you ask me personally what i am planning to do then i am honestly looking for land outside Mumbai at least 100 acres. I am quiet sure in coming times (one year) seeing the Global scenario I will get a good deal. I am keeping a ten year view for the same.
All the best to this forum.
Bindas Bhai
Sorry ,RBI had banks to stop giving loans to builders in 2006
THERE IS NO JUSTICE
ONLY CASH IS KING
SO HOLD ON TO CASH
Bindas Bhai: Well it seems you are getting bearish. Now, just back up you 3x to 3.5x theory with any parameters like Income, Rent, Demand/Supply etc...
You are forgetting psychology. No one would want to buy anything even if the prices are going to remain stagnant. In that case, you are still loosing money as you are paying high interest.
Most buyers of today's built flats are move up buyers. They also need to sell their existing flat to move up to these nice looking building with amenities. So, if they cant sell their existing homes, who would want to buy newer homes with potential of loosing values in few years.
History has proved, all boom and busts over shoots on each side. I agree with Vulture on 50% on top areas, and 70% in outskirts. Already prices in far away suburbs are 40% to 50% down.
Main Question: Why the heck one would want to live in Mumbai anyway? I just could not comprehend living among Slums and paying crores. Even though I grew up in Mumbai.
Shailesh,
That's your personal view on Mumbai, I love this place.
Now look at the news i just read. I really dont know should we follow news and make judgement or use common sense based on market movement.
Revenues of Indian software industry to top $60 bn: Nasscom
New Delhi: The Indian software and services industry is expected to grow 16 percent this fiscal and log revenues of $60 billion despite the global slowdown, a top lobby for the industry said Wednesday.
The National Association of Software and Service Companies (Nasscom) said together with the business process outsourcing (BPO) sector, the revenues are expected to top $71.7 billion with a growth of 17 percent.
Of this, the export of software and services will account for $47 billion, growing by 16-17 percent. The association also said that the domestic BPO industry would log a growth of as much as 40 percent this fiscal.
“The current financial year has been challenging for economies across the globe. But the Indian IT-BPO industry has exhibited a balanced growth,” said Ganesh Natarajan, chairman of Nasscom and global chief executive of Zensar Technologies.
“We have seen Europe, Asia Pacific and rest of the world grow more than US, reaffirming geographical diversification as an encouraging trend for this industry,” Natarajan told reporters, while releasing the association's report.
Indo-Asian News Service
http://news.in.msn.com/business/article.aspx?cp-documentid=1808538
Regards,
Bindas Bhai
Bhai,
I am not sure how much you know about Indian IT industries; NASSCOM is just a LOBBYING OUTFIT for the IT. They give all this kind of info. to create some news.IT Cos planned everything neat and cheated all state & central netas to get all free land & tax holidays for the last 20 years. Even now they are getting free lands in many states that helps politicians to make money out any barren land piece as well black is converted into white easily.
Free land (converted to assets in the books) and tax less income,squeezing employees; they are firing and cutting salaries now; but they were not ready to sare the profit in the last 2 years when things were great.
We already know; salaries of IT fools was driving the RE prices to 'never before' prices.
Like politicians; IT companies are another biggest factor for the imbalance that we see in many urban centers.
Why is it that whenever a fact that is not in synch with the big crash slowdown myth is mentioned, it is always from vested interest lobbies whereas bear case is always supposed to be authentic? People keep spewing nonsense about death of IT outsourcing, but it will only be a temporary dip, that too a dip in the growth rate! It doesn't appear that IT sector is about to contract.
Realty bears have a hard time believing that even though RE firms are going belly up, negative news is all around, there is still no major crash in home prices expect for those in fringe localities like Bangalore International Airport road.
In most of the prime market, just a correction is all we have seen so far!
Anon about Yogesh;
Its not about learning with open mind; its only about from whom you wish to learn. Cashing the crash; sure but its for Yogesh by making money out of book. Its just IBN LIE and UNDIE TV; making it sensational and make money out of few minutes of Limelight.
There so many lakhs personal finance books; i am sure you won't mind reading everyone of it. They will save u lakhs of rupees.
If you have another arguement; I am sure u r getting my point. All the best to 'cash the crash'.
If you have another arguement; I am sure u r not getting my point. All the best to 'cash the crash'.
hello guys I am a sofware pro with a MNC. I am a regular visitor of this site, though I regret to say not a regular contributor. Regarding the prospect of IT I would like to give my 2 cents.
1>companies are downsizing bigtime. The news never reaches media because it is done in ones and twos.
2>Those remaining are hardly in a position to buy homes. Every Project Manager has been asked to "Cut Costs".
3>This year it has been hard to find projects. So many are on the bench. And it is a bad time to be on the bench without work.
So if there is growth ... I am unable to see it. If someone on this blog has a better understanding of the situation ... please let me know.
A lot of the growth of Indian IT in the past 5 years had been business out of the BFSI (Banking, Finacial Services, Insurance) industries in USA. This sector has collapsed and will be unable to support Indian IT companies any longer. At best it will stagnate, at worse it will pull the carpet from under the feet, so to say. So forget any growth, even holding on the existing businesses will be difficult. Most large IT cos rely on some 10-15-20 clients for their bread/butter/jam. If the client goes bankrupt, then not only will the growth be affected, the existing revenues itself will not hold. For those who see this and yet talk about 30% growth (in business as well as margins) they should show the figures.The Satyam scandal will also have far reaching implications. If I as an MNC client think that by outsourcing , I am shaving off some costs but exposing my business to unpredictable risk, certainly I will not go for the offshore outsourcing model. And if domestic or MNC outsourcing seems less risky then it will be IBM/Accenture who will benefit certainly not Satyam's new owners or L&T or Infosys or whoever.
Speaking of cash - there is one more distinct possibility if Builders wont budge and reduce rates that the Indian Rupee value will decline to more than 60 v/s the US Dollar - and the revenues of IT companies eventhough small will turn into mega Rupees. Healthy domestic demand is key for a local currency to flourish. Low oil prices have pushed the US $ up so far.
In India people payed 40 Rs a liter for petrol when it should have been Rs55 and now they are paying 40 Rs a Liter when it is actually Rs25 . Same Thing is in Real Estate. When the US real estate is selling for peanuts, Indians are stuck with Builder determined prices and not the demand supply determined prices. This anomaly will take toll the same way it happened in Japan in 1989-90 after which the Yen collapsed. Please brace for impact - I am reconsidering transferring any US$ to India as I dont see me going back for a while now !
Finally, The Great Indian Housing Bubble is about to...u got it!
Greedy builders lobby running for shelter (of course Banks and Govt officials) after being deserted by buyers. Let’s celebrate and welcome new members onboard and witness/share news/observations on nearby events and wait for few more months. Better late than never. After all, it’s our hard earned money after TAX and will not let easily go…
Check this out for now
Noida: Meltdown hits mega project
Feb 03, 2009 11:14 am
INTEREST RATE CUTS INEVITABLE
By Ruma Dubey
The pressure is on. RBI has done its bit and now it is unto the banks to bring down the interest rates. There have been spates of rate cuts and stimulus packages announced by the Govt and RBI in tandem but this is yet to actually percolate down to the people. SBI announced a 8% interest rate on home loans and it was expected that the other banks would soon follow suit and there would be a sort of rate cut war unleashed. Yet, nothing like that happened. SBI is thinking of announcing one more rate cut. Other banks continue to sit tight.
Why are the other banks not biting the bullet? Those in the banking sector say that banks just cannot afford to cut rates at this juncture. Banks want to keep their retail loans at the lowest possible rates to avoid a burgeoning Non Performing Loans (NPLs) in the balance sheet. Banks just do not want to lend in a high NPL environment. Banks have become risk averse and they just want to assess the situation before giving in to the pressure from the Govt to cut rates.
The Govt has done its bit but they are now vexed as the banks are not cutting rates. For the stimulus package to work, it has to ensure smooth flow of credit to boost domestic demand and thereby help arrest the moderation in economic growth.
Irrespective of the fact whether the banks want it or not, rates will come down. Most of the banks have announced an impressive set of results for third quarter FY09. Right now, inflation is down and is expected to come down further. And in this atmosphere, it is expected that banks – PNB, Canara Bank, UCO Bank and Oriental Bank of Commerce might be amongst the first to announce a rate cut. Deposit rates have come down so surely, these lending rates have to come down. There is scope for a100-200 bps reduction in lending rates.
Given the state of the economy – the Q3 results have indicated the pain and the realty sector has posted the worst possible performance. Unless people start buying, demand would not pick up. Unless demand picks up, more goods would not be produced and unless more good are not produced, the economy will remain down. So how do you get people to buy more? First and foremost would be the improvement in the sentiments. It’s all about sentiments, always. So unless people see the light at the end of the tunnel, they will not bite any bait. And to improve sentiments, just as the Govt has been proactive and taken measures, the banks have to ensure that credit flows so that growth once again picks up. As Union Cabinet Minister, Mr Pranab Mukherjee, who currently holds the Finance portfolio, said, “We have to ensure faster credit flow to boost demand, especially in the rural economy and highly labour-intensive sectors.”
Rate cuts by banks would be positive for the markets too as that in itself would be a good sentiment booster. Once banks reduce rates, realty prices would also have to come down so that there is some parity between the two. But mind you, this time around, banks would be extra vigilant when it comes to lending. Gone are the days when you used to get phone calls from banks, offering you interest free loans. That was then and this is now.
Along with the reduced interest rates, to avoid higher NPLs, banks would now tighten the lending norms. Giving in to the pressure, banks will have to bring down the interest rates but getting loans would not be easy. Govt can put pressure to reduce rates but cannot exert pressure on whom to lend. So rates will come down but it might not actually percolate to the people.
Each is protecting its own interest – banks want to avoid NPLs and yet have no option but to reduce rates; Govt has to ensure that it gets India out of the current slowdown. Each is caught in their own ‘Catch 22’ situation. And we the people? For now, we just have to grin and bear, with an eye on the light at the end of the tunnel.
THIRD STIMULUS – HAS TO BE SECTOR SPECIFIC!
By Ruma Dubey
The big question doing the rounds is – should the Govt give sector specific stimulus? The two stimulus packages given by the Govt have not really worked. The slowdown is so deeply entrenched that it is quite clear that it would take quite a long while to work our way out of this deeply dug hole.
The biggest problem staring at India right now is of huge unemployment. The Commerce secretary himself stated in a television interview that India could lose another five lakh jobs before 31 March. One million or 10 lakh jobs have gone since August, so are talking of 15 lakh people being jobless by 31st March 2009. And mind you, this is just the jobless number of those servicing the export sector.
The Federation of Indian Export Organisations has said the job losses could be far worse, predicting the global economic slowdown would see at least one crore Indians in the export sector become unemployed by March. That is huge! The economic problem which we are seeing right now could soon become into a huge social problem and that is more dangerous.
Sectors facing the maximum brunt of the slowdown are textiles, leather and jewellery. With importing countries – USA and Europe scaling down their buying, naturally exports from India have taken a hit. Apart from exports, tremendous pain is seen in auto, realty, IT, metals and ancilliary units supporting these sectors.
So the argument doing the rounds is that the Govt needs to work on these troubled sectors – have a micro view rather than go with a macro view. Why give a broad spectrum medicine dosage when you know the disease and its site of infection?
But on the other hand, there are those who feel that this “bailout” is not right. And we feel that argument just does not hold any water. Well, firstly, this is not a bailout like the one in USA. There, the few rich on Wall Street squandered away the money and got the country to the present state. And then the US Govt bailing them out at the cost of those who were not even involved, at the tax payers cost, is an unfair bailout. But if that bailout had not been done, the whole world would have been in a worse state than it is in today.
In India, if the Govt had decided to do something for the IT sector in the aftermath of Satyam, had decided to provide help to Satyam; then that would have been an absolutely unfair bailout. Why should we be taxed for the mistakes of a scamster? That would have then been unfair to the scores of people in the textile and jewellery sector, who are probably going through the toughest phases in this slowdown.
There is just no doubt – the third stimulus package which the Govt is talking about has to be sector specific. The effect of the earlier announced two packages would start showing some benefits now, hopefully. But surely, if it had been more specific, apart from instilling more confidence, it would have actually worked immediately.
So what needs to be done?
Ø Focus has to be on creating employment opportunities - ensure job security and to minimise job losses.
Ø Stimulus for textile, jewellery, leather and other export oriented units. Chemicals, steel, tyres are also sectors facing a rough road and they need a helping hand too.
Ø Banks have liquidity but do not want to lend. Understandably, they are overcautious. This needs to be corrected.
Ø Auto and construction sectors need special attention and impetus has to be given to increase demand in these two sectors.
Ø For the textile sector, FICCI, which has conducted a study on the sector, said a moratorium for one year on term-loans, increased drawback rates, export credit at international rates and extension of sunset clause for Export Oriented Units (EOUs) for five years should be part of the special package for the industry.
Ø For the jewellery sector, the industry has demanded that status holders should be allowed to import gold directly and sell to exporters as this will help alleviate the crisis of inequitable gold supply being faced currently by the industry and will also enable smaller exporters to fulfill their requirements of yellow metal in smaller lots.
When the real estate boom was at its peak, New Okhla Industrial Development Authority or better recognized as Noida was one place which probably saw the maximum number of projects being announced. Every developer worth its name in salt announced projects in Noida. But now with the bubble having burst, things in Noida are also stated to be not too good. And caught in a tight corner, Noida authorities are now looking at ways and means to work their way out of this corner.
The Noida authorities plan to relax transfer rules for land bought from it so that land can be sold even before construction is carried out on it. As per current rules, a plot of land bought from the Noida authority can be sold only after 50% of the construction on it is completed. This relaxation of rule will help developers caught in the bind. They will thus be able to transfer plots of land before construction is completed if they are finding it difficult to implement their project. The only caveat is that land transfers will only be allowed only if the buyer clears all dues to the authority.
Several developers have bought land from the Noida authority in the past two-three years. Last year, Business Park Town Planners clinched the largest land deal in India by value when it won a bid for 95 acres meant for commercial activities for about Rs5,000 crore. And now this “bailout” by Noida would surely provide the much needed exit route to many developers, who have been stuck, with no way out. Come to think of it, we need to thank USA for the word “bailout” which has become the catch phrase all over the world. Just as they were the ones to usher in XL and XXL sizes, this is one more American thing which is now a worldwide phenomenon.
FEW YEARS AGO, former Prime Minister HD Deve Gowda gave full expression to his earlier training as a civil contractor. He questioned the demand from the information technology giant, Infosys, for substantial land around Bangalore. Deve Gowda, who represents the ‘detestable' stereotype of politicians that were trashed by candle-carrying chattering classes in the wake of the Mumbai attacks, wanted to know from Infosys boss, NR Narayanmurthy, why his company needed the gargantuan land. Expectedly,Deve Gowda was hammered by editorials in the pink press and by self-opinionated and morality-spewing anchors and studio experts - all those fascist page three types who want to run the nation without dirtying their manicured hands.
They all wondered at the gall of a politician to ask the demi-god of India's IT success of what he was going to do with so much land. So fi erce and vicious was the attack that his questions were effectively buried. The important link between the cyber world and real estate was never adequately explained. Now some of those queries, blundered into by Deve Gowda, are being met squarely by the skeletons that are hurtling out from the investigations into the Satyam scam.
Although no one blew the whistle on Satyam or the bizarre money-making ways of its promoter, Ramalinga Raju, what is evident is the growing merit in the fact that the real driver of IT growth was not really software export, but the galloping valuation of real estate. In one of his board meetings, the pragmatic Raju, cognisant of a melting economy, told his directors that he saw in the company's real estate investments as one of the two bulls that would take Satyam forward. Raju had tried to shift his cash reserves from Satyam to his infrastructure company, but due to resistance by investors, he could not succeed in his enterprise. Later, he owned up fraud and the fudging of account books. Investigations by the CID have displayed a Byzantine network of companies through which money was siphoned out and invested in real estate.
As real estate was booming, it seemed like a good investment. The investment was premised in the old classical economics belief that land was limited and so it would be wise to put money in it. Raju failed to realise the catastrophic impact large investments can make in real estate in an environment of economic slowdown. Not only did it increase the supply of land, it also sucked in money from all other sectors of the economy that would have helped in fuelling job creation and improving purchasing power.
Also,land was used for speculative purposes and generating credit in an economy. It was a boom destined to bust as easy money was not used for fast-tracking infrastructure projects. Banks used land as collateral and made real estate companies the darling of the stock market. Petty property dealers became real estate tycoons flaunting huge land banks. No one questioned, including the investment banks, about the quality of the land or whether their registration papers were genuine.
Satyam's Ramalinga Raju has revealed how fraud is king in India. The collapse has shown that the foundation of the India Shining story has been built on fraud and deceit.Satyam would have carried on with its ways if it had not been for the global slowdown.He would have squared his books and glorified himself as the India boom-boom story.Satyam's story is just the beginning of the windingly long bad story in bad taste and bad faith. A story that is replete with corruption, falsehood and amorality.
Tragically, this saga has been sustained by a government that allowed such criminality lest it spooked the stock market and stemmed the flow of hot money coming to India. The coming days may see the collapse of real estate companies and banks that got swayed by their own hype. As billionaire Warren Buffet said: "Only when the tide goes out do you discover who's been swimming naked." Tragically, this organized callousness and corruption means misery for the unwashed, naked masses at a time when governments have no answers to slow death - during and after the slowdown.
Bhai: You have yet to substantiate any claim on Home prices based on either Rent, Income, Construction cost, or Demand/Supply constraints.
The last one is just a big scam created in people's psychology. Mumbai has lot of land in surrounding areas. Also now that Supreme court has allowed 4 times FSI for redevelopment, the amount of supply is significantly more than what population of mumbai will need for next 10 years. Just drive by Thane Ghodbunder road and you see 80% flats are empty. No lights burning at night.
Cost of construction is also big scam. Generally it is about max 1000 rs psft for Grade A construction. That does not justify today's prices.
Bhai:
The one I am particularly interested in is the claim that real estate "investment" yields returns upwards of 12% CAGR!!
With these kind of returns MF's should forget the stock market and focus exclusively on real estate.
Could you pls. shed some light on how you arrived at these kind of yield results from a historic perspective? and is this for Mumbai only or does it apply to real estate as an asset class?
More good news for the bears .. Realty cos water down 'boomtime' deals
Dear Shailesh & Bharat,
Was a bit busy and hence could not reply to your specific questions.
Most of the asset class will not grow YOY on a fixed percentage. In property generally after the crash, it will be stagnant for couple of years, later show some moderate growth and when the sentiments are right it will shoot up.
The same has happened to this time, we saw a crash in 96-97and again a boom started in early 2005 and went on to mid 2007. It was during this period the prices of property went in multiples of 3 times and in some cases 5 times.
Area which have gone three times have grown @ around 9% CAGR but areas which have grown 5 times have seen more then 13% CAGR,(year 1997 to 2009) which I feel is abnormal for a city like Mumbai.
When we look at our 97 salaries vis a viz the current salary I feel 9% CAGR is not a great jump. If we look at India during 97 and the current India, we all know that things have changed drastically.
Shailesh the basic change is mind set of people, their expectation. Sizeable number of people with one kid and in some cases with no kid is looking for 3 & 4 BHK.
Look at the cars around, owning a 800 was a big thing in 97 but now even a Octavia is like OK types.
There are lot of thing I can keep on writing but does not make sense as I am sure we all will be knowing about it.
Bharat: I work for an MNC in Mumbai and I have personally checked with people who have brought houses in late 60's, early 70's and even early 80's. I have done the working personally with today’s price and have arrived at this figure of 12% CAGR for 3X properties(refer my earlier post).
I would request you to carry this simple exercise for Mumbai and let this group know.
I don’t want to influence anyone in this forum to buy now or later because I am no authority but the reason I participated in this blog was only because of my strong conviction.
Some days back one of my friends told me Mumbai is in for a 100% crash because we are only 20% lower then Tokyo. I just asked him what areas are you comparing of Tokyo with what areas in Mumbai. Even assuming if you are comparing the likes of Tokyo to likes of Mumbai even then we cannot say that we are only 20% lower.
Tokyo has an FSI of 10 and whereas Mumbai with TDR has only 2. Which means Tokyo is 6 times more expensive.
I know this is a calculation has not taken into account a lot of other parameters and hence wont make any sense but lot of report which we read and make judgment on also does not necessarily reflect the truth.
All the Best to all you guys!!
Bindas Bhai
Shailsh said:
The last one is just a big scam created in people's psychology. Mumbai has lot of land in surrounding areas. Also now that Supreme court has allowed 4 times FSI for redevelopment, the amount of supply is significantly more than what population of mumbai will need for next 10 years. Just drive by Thane Ghodbunder road and you see 80% flats are empty. No lights burning at night.
Shailesh,
If you could see my earlier mail, around six months back I have always mentioned that Thane and New Mumbai will correct in a big way and the same has happened especially in Thane
I have no doubts that where ever there is excess supply rates will definitely come down
about: FSI
Govt of Maharashtra had proposed FSI of 3 in City i.e Dadar down south of Mumbai and 4 for Suburbs. This is only for very old tenanted building and not across the board and with effect the supply will be limited.
I feel no builders will go for any fresh development till things settle down.
Let us wait and watch and understand the trends. I feel by June this year we will get some more clarity where Mumbai market is heading for.
Bindas Bhai
@K: Reading your comments was like reading my own mind on the topic. I was in Bangalore when Deve Gowda had raised that question against NRN and the much ado that followed. I, for once, was with Gowda.
My skepticism was validated by Polaris Software getting into real estate business -- http://www.thaindian.com/newsportal/sci-tech/polaris-software-to-enter-real-estate-business_10072745.html.
So, the "real" business is really nice for these "software" companies -- get land for peanuts from the govt. and sell them after just a few years at 4-digit appreciations, not to mention the fact that most of the exec staff of these companies had already bought acres of land adjacent to alloted land prior to the allotment.
Slowly we all will realize that Satyam is not an exception, it's the rule -- the rule (in some form or the other) by which most companies are being run.
Adios!
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