Goldman Sachs Research - Building up to a crisis

Also shows the trends are the last downturn in 1996.

Via R.N. Bhaskar at livemint.com. The original PDF can be found here.

Quoting Bhaskar:

The Mumbai attacks tipped real estate prices down by another 5-10%. This brings the decline in real estate prices in Mumbai to around 25% from peak levels. But market watchers say real estate prices in Mumbai could fall by another 25% over the next six months. Expectedly, most developers are bracing themselves for the worst of times (see the next item). The only silver lining appears to be the reduction in rates on home loans. But with consumers expecting real estate prices to fall much further, it is doubtful if too many people will queue up for such loans right away.

The last time when there was a crash in property prices (in 1996), it took four years for real estate prices to bottom out. This time, while property prices have fallen 25% rather sharply, the bottoming out is expected to take at least another year. So, evidently, the real estate sector could experience either a sharp downturn, or a slow prolonged one (see table).

Check out the article.

For a responsible citizen, is investing in land the wrong thing to do?

Like a few other NRIs, I got carried away during the boom years of Bangalore Real Estate and invested in land. I tend to think I am a responsible citizen, so in order to avoid the normal trappings of black money, went with a 'BDA approved developer' in an approved layout. All the money I put in was accounted for money - directly from my savings earned through my full time job. I made sure the money I paid was properly accounted for, receipts issued and so on.

To my surprise, at the time of land registration, the land was being registered for a fraction of what I paid for and the rest of the money going towards 'community development' towards the developer. Again, since this was all documented correctly in the documents I signed and since I had written proof, I didn't think twice about this. I was now a proud land owner in Bangalore.

Early 2007, I visited India and tried to sell the land. I was told that the best deal I could sell the land was through a 50:50 split of black vs white money. Even if I find a buyer to pay completely through white money, I would run into trouble trying to register the land at that face value, since the face value might be much higher than the prevailing rate or the rate the Government sets as fair price value.

Now the quandary. I dislike black money. I strongly feel it feeds corruption, feeds the mafia monster and in general prevents India from truly becoming the great nation it ought to be. From a pure investment point of view, as white money, I have barely beaten the Fixed Deposit rates offered by the banks and I have generated an equivalent amount of black money. The preferred way of disposing off the black money would be to re-invest the money into real estate, thereby feeding the corrupt system even more fodder. I disliked the idea and I haven't sold the land yet.

Every person I talk to treat this with an very casual attitude, "Every one does it, so what is the big deal?" - "There are much bigger fish to fry in India, no one comes after you and me".

In my view, it is pretty callous and the domino effect caused by many of us small investors is what drives the parallel Indian black economy. The more you feed the mafia monster, the more it grows. It controls countries in the long run.

Hence the title of the blog. For a responsible citizen, is investing in land the wrong thing to do? To be very clear, I am not looking for suggestions of what to do with black money - I am looking to hear from you what responsible citizens would do to avoid the black money mess in the first place.

Prices of starter homes

This is my first post to this excellent blog. Thanks to Vik for the opportunity.

One of the blogs I follow regularly is The Big Picture. Barry had an extremely interesting blog yesterday about home prices (in the US), but the similarities are very striking in India as well.

Real Estate is unique from most other goods and services, in that the purchase is not independent of other transactions. Buy 100 shares of stock, or a new or used car, or a can of soup, and only two parties are involved: The buyer and the seller.

Buy a home, and you are likely involved in a long transaction chain with five, six or even more other buyers and sellers. A newlywed couple buys a starter home from a family (with another child on the way), who are moving to a bigger home, and whose seller is moving to an even nicer part of town, and so on. It is a long chain, not of mere lateral moves, but increases in size, cost (and property taxes). If any of those sales fall through, the entire chain collapses.

And therein lies the problem.

The concept of constantly upgrading your home may not be as common in India, but has the real estate industry in India completely ignored the long tail of non IT earners? Entry level two bedroom apartments in Bangalore seem to sell for about 30 lakhs in a reasonable neighborhood, which given a Rs.30,000 per month salary, is about 9-10 years gross annual income.

Assuming this recession cleans up the speculators in the Indian real estate segment, in my opinion, the resurrection of the realty segment totally depends upon the long tail entry level homes.

I think we are somewhat beginning to see this happen already in Bangalore. From a recent Craigslist ad:

You would be delighted to know that DLF's premium homes project in Bangalore – WESTEND HEIGHTS, DLF BTM Extn. is now being launched as Westend Heights, New Town - DLF BTM Extn. We have completely redesigned the project to bring you an even better lifestyle experience than before to maximize comfort and convenience.

The new mix has come with an unbelievable price!

Apartment area Unit rate

1085 sft - 1225 sft Rs. 2000 / sft
1345 sft - 1410 sft Rs. 1900 / sft
1570 sft - 1820 sft Rs. 1850 / sft

This is an Unbelievable offer .Could you afford to miss it out ......

Is this the start of a trend? Is sanity returning?

Non-Immigrant visa and the housing bubble

I was browsing Murthy.com forums and came across this unfortunate situation of a laid of H1-b visa holder. Its painful to see the implications of of a temorary visa and iliquid assets backed by debt. The poor laid off employee probably did everything right but still coudn't escape the deathly spiral of foreclosure, layoffs and a temporary visa. Its a reminder for everyone to keep debt levels manageable, regardless of Visa status. If you have a housing loan, make sure you have atleast six months or more of emergency funds. Sometimes life comes at you hard, when you are not looking.

>>>

I got laid off from a Job almost a week ago. I just have 2 months left on my 6 year H-1B expiry.The chances of finding a new job in this market are very slim. I have a home and car in US. It will be extremely difficult for me, if not impossible, to continue with paying mortgage w/o any source of income. What if I have to go back to India in order to avoid being "Out of Status", in the event I am unable to find a new job. Do I need to file for bankruptcy/foreclosure for the home? I can still sell off my car, but to go thorugh the home foreclosure process may take months..I will not have that much time in the event I have to leave the country..What happens in a case like mine? I genuinely want to stay in US and find a job to pay my mortgage, but in the event, I have to leave the country, who eventually is responsible for the home? And what implications it could have on my future visit to US?Prompt reply will be really appreciated.

The end of Secret Swiss banking

Bloomberg reports on the collapse of secrecy in the Swiss Banking industry. From what I hear, Singapore is the new offshore destination for secret banking since their laws are tighter then Switzerland.

If India did something similar to the US, how many skeletons would tumble out of the closet ?

Switzerland’s unprecedented decision to let UBS AG hand U.S. tax authorities clients’ details risks damaging a banking industry that relies on a pledge of confidentiality to win business, legal scholars said.

“This could open the floodgates,” Peter V. Kunz, head of the business law department at the University of Berne, said in a telephone interview today. “Giving in to the U.S. sends a signal to other countries and the European Union. I don’t see what would stop them from acting in the same way.”

The Swiss Financial Market Supervisory Authority said yesterday it would allow UBS to pass on some client data to save the country’s biggest bank from criminal charges in the U.S. that it said could have “put its existence at risk.”

Switzerland is being increasingly pressed by countries such as neighboring Germany to amend banking secrecy laws, first introduced in 1934, which they say promote tax evasion. German Finance Minister Peer Steinbrueck said last year the Swiss should be put on a “blacklist” of uncooperative tax havens. The European Commission proposed this month to end anonymity for bank account holders within the 27-nation area, and may seek to expand the measure to cover Switzerland and Liechtenstein.

“Swiss banking secrecy will not exist in today’s form in two or three years,” said Dirk Nitzsche, a senior finance lecturer at Cass Business School in London. “Switzerland has already done a lot over the past couple of years. But the international community wants more.”

Offshore Center

Client confidentiality is a cornerstone of Switzerland’s banking industry, which has attracted some 27 percent of all privately held offshore assets, according to the Swiss Banking Association. U.S. law views tax evasion as a crime. Swiss law doesn’t. The Swiss view tax fraud as a more serious offense.

The U.S.’s success “is likely to encourage other tax authorities to pursue claims against the Swiss more vigorously,” Dirk Hoffmann-Becking, an analyst at Sanford Bernstein & Co., said in a note to clients today.

The U.S. is likely to continue to put pressure on both UBS and the Swiss government to make it harder for individuals to move money offshore as President Barack Obama’s administration attempts to finance its economic stimulus plan, he added.

The European Commission, the European Union’s executive arm, today said it welcomed any effort to improve governance.

“We expect a similar request from EU member states to Switzerland would not receive different treatment,” Maria Assimakopoulou, spokeswoman on tax issues for the agency, told reporters in Brussels today.

Justice Department

Swiss Finance Minister Hans-Rudolf Merz described the settlement as an “isolated case” after the U.S. authorities set a Feb. 18 deadline for UBS to reach a deal or face indictment. While it’s “problematic” that the official procedure wasn’t followed, an indictment and possible failure of UBS would have had consequences for the whole Swiss economy, he stressed.

The U.S. Justice Department accused UBS of conspiring to defraud the country by helping 17,000 Americans hide accounts from the Internal Revenue Service. The U.S. will drop the charge in 18 months if the bank reforms its practices, aids prosecutors and pays $780 million. UBS will immediately turn over names of about 250 clients, according to people familiar with the matter.

“The U.S. authorities didn’t want to wait, as a constitutional state is supposed to do, but pressured for an exceptional allowance,” Kunz said. “The legal basis for such actions is very thin.”

‘Problematic’

The government should have followed the information-exchange agreement it has with the U.S. and waited for a Swiss court to rule on the matter, legal professors say. Clients have to be notified before their data is released under Swiss law. The federal administrative court received objections in November.

“What concerns me the most is that evidently legal protection for these clients is being impeded,” said Rainer Schweizer, a law professor at the University of St. Gallen. “Clients have to complain about this to the federal court.”

UBS agreed only to the immediate disclosure of account holders involved in fraudulent or sham offshore account structures, according to people familiar with the matter. The Swiss finance ministry has had some 40 people working on the case, trying to determine whether any of the clients whose information was requested committed tax fraud.

Merz said that data on some 200 to 300 clients that is transferred to the U.S. “clearly” relates to tax fraud rather than tax evasion. UBS Chairman Peter Kurer told Swiss television in an interview that the clients had made “false statements in writing” to the U.S. tax authorities.

Inviting bloggers to contribute to the blog

Hello Guys,
I came across this feature in the blog settings where I could invite bloggers to contribute to the blog. If people are interested I could invite them. I think we have some good rational people which contribute meaningfuly to the blog. Drop me a note in the comments sections with your email address and I will add you to the list.

Thanks
Vik

20,000 defaulters to lose homes

Here is another video where Nassim Taleb and Daniel Kahneman discusses the crisis hitting the US and consequently the world. Officially Japan is in depression. Just as Lehman was leveraged 30:1, I expect the builders to have similar leverage. Financial wizadry aside, we now turn to psycology for answers.

Source Deccan Chronicle 17/Feb/2009
Around 20,000 houses in the twin cities are to be auctioned after borrowers defaulted on home loan payments. This is the first time that so many houses are being put up for auction. Many of the borrowers are IT employees who were unable to pay the equated monthly instalments because of the current slowdown in the software industry. Several techies who took loans have lost their jobs and others were forced to accept salary cuts making it difficult for them to meet their financial commitments.

Apart from techies, there are many employees in the aviation sector too who are unable to pay their EMIs. Banks are in a piquant situa tion since borrowers have not hurried to pay their EMIs despite the threat of the auction.

In fact, they are willing for the auction as they are not in a position to mobilise resources. The borrowers have no option but to forego the amount that they have invested may come to around 20 per cent of the property value. Banks which provided 80 per cent amount as loan fear that they may not get the amount even if they auction the properties. “There is no option for banks except to dispose the properties when the borrowers are reluctant to clear the dues,” said the IDBI director, Mr K. Narasimha Murthy. “More auctions will be held in the next few months since many borrowers are yet to receive final notices from banks.”

Baseline scenario outlook on India

I just came across this site which seem to discuss all the economic situation of today and the Obama stimulus plan. What Obama does affects the world and India is no exception. Here is an excerpt from their outlook on India from a macro-economic perspective. The full link is to article is here. Simon Johnson's interview with Bill Moyers on the stimulus package and bank oligarchy in the US. With the 30:1 leverage we've seen how Lehman and Bear Stearns have helped dig a hole deeper then anyone could imagine.

India

There are striking similarities between the current policy debate in India and in the Eurozone. In both places, there is little or no concern that inflation will rebound any time soon. At least for people based in Delhi, there is as a result confidence that aggressive monetary policy can cushion the blows coming from the global economy. As in the Eurozone, all eyes are on monetary policy because of fears that fiscal policy cannot do much more than it is already doing, given that government debt levels are already on the high side.

The discordant note comes from the business community. They feel that Delhi does not fully understand that the real economy is already in bad shape. Sectors such as real estate and autos are hurting badly. Small businesses, in particular, are bearing the brunt of the blow. The banking picture seems more murky, but is surely not good. And of course the Satyam accounting scandal could not come at a worse time.

Overall, official growth forecasts need to be marked down for India, although the monsoon was good and the agricultural sector is not highly leveraged. India will likely cut interest rates further quite soon (and has space for additional cuts), but we should not expect much more from the fiscal side.

ICICI CEO and DLF talk price corrections

Looks like the banks are exerting pressure on the builders to dispose off inventory and pay their debts. DLF has slashed prices of its Bangalore Bannerghatta road prices to Rs 2000 per sq/ft.
Now with Banerghatta road at 2000rs, what should be the prices in Whitefield, Devanahalli, Electronic City all peripheral locations to Bangalore. With DLF starting a price war, the small builders will be squeezed to liquidate their holdings. Brigade, Prestige and Sobha might have the holding capacity to wade thru the DLF marketing blitz. Incidentally DLF did the same in Chennai for its project on OMR road. However even after 1 year of booking, there is hardly any construction activity on that project. Incredible as it sounds, the price of thin air is still Rs 2000 rs. Realistically this concrete jungle of G+19 floors should take another 4 years to complete. God save the investors.

Reuters reporting.

India property prices need to fall 20 pct or more-ICICI exec

MUMBAI, Feb 14 (Reuters) - The incoming head of India's largest private bank ICICI Bank (ICBK.BO) said real estate prices needed to fall by 20 percent or more as the market corrects amid the economic slowdown, the Times of India reported on Saturday.

Prices need to fall by "maybe 15-20 percent, or maybe more", Chanda Kochhar, who is set to become chief executive of the bank, was quoted as saying.

"Piecemeal corrections have already happened ... But they also need an adjustment in the paradigm."

Kochhar said there was no pressure on the bank's books from souring housing and auto loans.

"Maybe a little delayed, but there is no real increase in losses or non-performing assets," she said according to the report. "But we have not only substantially tightened credit norms there, we have also budgeted for any losses that may arise there."

She added interest rates and loans were expected to fall. (Reporting by Ruchira Singh; Editing by Jan Dahinten)

Al-Jazeera's coverage of the Indian housing bubble

Unfinished projects, shattered dreams, uncertain future, rampant greed, no accountability. This is what I was afraid of. Parsavanath and others builders need to take a lesson from this crash. Gravity is universal. In the credit unwinding spiral, there is the genuine buyer who is going to pay the price for the greed of the few. Lesson to be learnt for buyers. Go with completed projects and haggle hard. This is your time. Any investment in a project which is kicking off or half completed is destined to drag longer then you ever expected.

Here is Parsvanath's pricing At $400k per apt, at Rs 7000 per sq-ft, this is a price headed for a 50% correction in the next few years. I hope the couple hasn't take loans. If they have they will be bleeding pre EMI interest of close to 1.5L a month, not to mention the EMI interest which will kick in. This is a real life scary situation. God save these guys.

Thanks to Anon @ 9:34 am for the link

DLF feels the heat of CNBC's coverage

from moneycontrol.com

CNBC-TV18 learns that the company's Garden City project in Chennai is on shaky ground. CNBC-TV18 has access to e-mails of buyers of the project, including an online survey showing that over 50% of them want to pull out. The company started bookings last April and promised to sign the agreement within 45days. But nearly one year later, the project has not even got the necessary approvals.


Of the reported 1800 apartments sold in the project, nearly 53% of buyers want an out according to the survey citing delays in signing the buyers agreement. Other reasons including cost price, which DLF had hoped would be their USP has also gone against the company. At the
time of announcing the project DLF had quoted prices of 2800 per square foot, while the prevailing rates was around 3300 square foot. The prices now average between 1700-2700 per square foot and buyers are demanding that the company revise prices.


The final approval required is the stamping of the drawings by MSB panel. The panel meeting was completed on Jan 28, 2009 and we are expecting the final stamping approval anytime now. The price of Rs 2,800 per square foot is in itself the lowest price compared to prices charged by leading national and local brands and we are discussing this with an open view and are yet to take a decision.


When contacted, a DLF spokesperson said, ”The final approval required is the stamping of the drawings by MSB Panel. The panel meeting was completed on 28 Jan 2009 and we are expecting the final stamping approval anytime now. The price of Rs 2800 per square foot is in
itself the lowest price compared to prices charged by leading national and local brands. We are discussing this with an open view and are yet to take a decision.”


There are other issues as well; buyers want an Undivided Share Land clause to be signed by the company. Also; clubhouse facilities, which DLF claimed were exclusively for buyers' use, is now being thrown open to outsiders as well.


What are the options now available to the buyers? A minority section of say they might just re consider their decision to pull out if the company meets their demands. The others though say that they want their money refunded and have given the company till February 12 to do
so.

Hiranandani Faces Penalty, Denies MMRDA Violation Claims

How many thousands of crores have been paid to the politicians and babu's for this scam to go unnoticed for 23 years. It will be naive to think, Hirananadani is going to accept these acccusations without bringing down the house. These same allegations should be levied on the Raheja's for selling Jodi flats in the Malad(w) link road area where they have destoryed all the mangroves. These scams are part of the Indian scenario and nothing will be learnt. The Satyam case provides enough evidence that whistle blowing on these scams are just lip service to further personal agendas. The Indian legal and political system is of the rich, for the rich and by the rich. All the common man can do is to be vigilant and aware and not get caught up in this cesspool of corruption. In the past some reports have suggested Hiranandani was given the Powai land at 40 paisa per sq ft. The government officials who approved this paperwork should be prosecuted before Hiranandani. If someone approves such a deal, any moron with an iota of grey matter will take it. Why blame Hirananandani for a ultra ineffecient corrupt system ?

By ugesh sarkar, Section Real Estate
Posted on Thu Feb 05, 2009 at 09:38:36 PM EST
In what could be the highest penalty imposed on a builder for alleged gross violation of land misuse, the Mumbai Metropolitan Region Development Authority (MMRDA) has recommended to the state urban development department that developer Hiranandani Group be made to pay a penalty of Rs 2,000 crore. Though the developer is yet to receive a notice of levy for the amount, Niranjan Hiranandani, MD, Hiranandani Group, has denied the charge in totality, stating that the state agency was unaware that no development in the area had been done without obtaining the necessary permissions and sanctions of government departments.

Meanwhile, the metro authority has charged the builder with constructing large apartments instead of the 40 sq m and 80 sq m flats, for which permission was accorded. The second charge is for building commercial complexes in violation of the original agreement and the third, an add-on penalty component, for utilisation of transfer of development rights.

Hiranandani said development rules and notifications, since the 23-year-old Powai Area Development Scheme, comprising 92.2 hectares, was signed, had undergone changes and consequently implemented after sanctions during different periods. The MMRDA has used the current ready reckoner rates to compute the alleged violations to arrive at the penal sum of Rs 1,993 crore.

The Powai Area Development Scheme was not classified under any scheme for weaker section / lower income group of the society, he said adding that a Bombay High Court decision in 2005 stated that the development at Powai was not for any weaker section / lower income group of the society and the same does not apply to the said lands.

On increase in the size of tenements, Hiranandani said the scheme came after a tripartite agreement was signed on November 19, 1986. Under the agreement, there was a condition restricting sizes of the tenements. However, the MMRDA permitted the amalgamation of tenements as per its order dated August 18, 1989.

The larger premises were constructed utilising transfer of development rights subsequently, when the TDR concept was introduced in 1991. During the period when the tripartite agreement was executed, the development by TDR was not available.

The Bombay High Court is hearing public interest litigation petitions pertaining to the project development.

The MMRDA has also recommended that all concessions extended to the builder be withdrawn, to which Hiranandani said he had not availed himself of any concessions thus far.

Flat buyers exempt from service tax

What happens to people who have already paid service tax ? Will that tax be refunded by the builders to the buyers ? As usual the order is incomplete and ambigous. Kudos to the tax board.

DNAIndia reports.

Mumbai: The Central Board of Excise and Customs (CBEC) has made it clear that flat buyers, developers and builders are not liable to pay service tax.

In a circular (F.No.137/12/2006- CX.4) issued on January 29, the board has said that generally, the initial agreement between the developer (promoter/builder) and the buyer is an "agreement to sell". As per provisions of the Transfer of Property Act, this does not "create any interest in or charge on such property".

It is only after the construction is completed and the agreed sum is paid that a sale deed is executed, transferring the ownership of the property from the builder/developer to the buyer, the board has said.

Any service provided by the developer during the construction of a residential complex -- before the execution of the sale deed -- would be "self-service" and, consequently, not attract service tax, the board has clarified.

If the buyer enters into a contract for construction of a residential complex for personal use with a developer (promoter/builder), who provides design, planning and construction, then such an arrangement would also not invite service tax.

Flat buyers don't need to pay service tax
It is excluded from service tax under the definition of "residential complex", the board has said.

However, in both these situations, if services of a contractor, designer or a similar service provider are taken, then such persons would be liable to pay service tax, the circular says.

The board has clarified that the builder is not a service provider and, hence, not liable to collect service tax. But contractors or designers engaged by the builder should charge service tax from him.

The Authority for Advance Ruling had in the case of Hare Krishna Developers ruled that the builder/developer was liable to pay service tax.

But in the case of Magus Construction Pvt Ltd, the Gauhati high court had ruled that the builder/developer was not liable to service tax.

The two conflicting judgments had created confusion, which the CBEC circular has now put to rest.

U.S. Housing Slump Has ‘Just Begun,’ Says Forecaster Talbott

Feb. 5 (Bloomberg) -- Let’s say you own a $1 million home in Santa Barbara, California.

The house seemed like a steal when you bought it with that adjustable-rate mortgage in 2005. You still love the white beaches and those yachts bobbing up and down in the harbor.

Then you awaken early one morning, troubled that your monthly payments will soon double. You go out to pick up your newspaper and see for-sale signs on five houses on the street. One identical to yours just sold for $500,000.

Are you going to pay the bank $1 million plus interest for your place? John R. Talbott, a former investment banker for Goldman Sachs, poses that hypothetical question in his latest book of financial prophesy, “Contagion.”

His answer: “I don’t think so,” he says. “If I’m right, then this housing decline has only just begun.”

Talbott is an oracle with a track record: His previous books predicted the collapse of both the housing bubble and the tech-stock binge before it. A friend who runs a New York steak house introduces him as Johnny Nostradamus, he says.

What sets him apart from other doomsayers is his relentless emphasis on simple arithmetic. He walks you through the numbers to show how U.S. house prices got so out of kilter with wages, rental prices and replacement values -- the cost of buying a property and building a home. (“Homes in California by 2006 were selling at three to five times what it would cost to build a similar home from scratch,” he writes.)

Five More Years

Talbott’s latest predictions are sobering. The U.S. is only halfway through the total potential decline in housing prices, he says. Home values will continue to deteriorate for four to five years, he forecasts. Adjustable-rate mortgages issued in 2004 and 2005, for example, are only now resetting for the first time, he notes.

Bankers may “try to blame the crisis on poor Americans with bad credit histories, but that is not the real cause of the housing crisis,” he says. “The greatest home-price appreciations and the homes most subject to price readjustment are in America’s wealthiest cities and its glitziest neighborhoods.”

At the end of 2008, a record 19 million U.S. homes stood empty and homeownership sank to an eight-year low as banks seized homes faster than they could sell them, the U.S. Census Bureau said this week. Almost one in six owners with mortgages owed more than their homes were worth, Zillow.com said the same day.

By the time the crash ends, Talbott predicts, homeowners will have lost as much as $10 trillion, with investors and banks worldwide losing almost $2 trillion. And just as the U.S. starts getting over a prolonged recession, the first big wave of baby boomers will retire, depriving the economy of their productivity (and high consumption), he says.

Back to 1997

So how far will the price of your home on the range fall? Citing historical data and trends, Talbott concludes that real prices should return to their average 1997 levels, adjusted for inflation. Why 1997? A 120-year historical graph shows that real home prices in the U.S. stayed relatively flat for 100 years, then began rising in 1981 and surged from 1997 to 2006.

A return to 1997 prices “would get us out of the heady, crazy days from 1997 to 2006 in which banks were lending large amounts of money under poor supervision and aggressive terms.”

How did we get into this mess? Talbott blames everyone from average Americans who caught “the greed bug” to hedge funds and credit-default swaps. The single biggest error, he says, was for U.S. citizens to allow their national politicians to take large campaign contributions from big business and Wall Street -- a theme Kevin Phillips developed in “Bad Money.”

‘No Accident’

“This crisis was no accident,” he says. It began, in Talbot’s view, because the U.S. government was “co-opted” into deregulating the financial industry. Politicians were “paid to deregulate industry,” taking billions of dollars each year in campaign contributions.

His investment advice for this prolonged recession: Hang on to cash and invest in gold or Treasury Inflation-Protected Securities, or TIPS. If he had to invest in stocks, he would put his money in China.

Living in smaller houses with their savings gutted, U.S. baby boomers will face yet another big challenge, Talbott says:

“The toughest job to get in the future will be the elderly person greeting you as you enter the local Wal-Mart.”

“Contagion: The Financial Epidemic That Is Sweeping the Global Economy . . . and How to Protect Yourself From It” is from Wiley (256 pages, $24.95, 15.99 pounds, 19.20 euros).

EMI Quiz

I was running some numbers thru an EMI calculator and was surprised at some of the results, so I thought why not play a little game with the bloggers and have some fun.

Q-1.
Assuming a principal of 10L, interest rate of 12% and repayment of 20 years, how much of the EMI payment would go towards interest at the end of 5 years ?

Interest paid
A) 2.52 L
B) 3.85 L
C) 5.78 L
D) EMI = equal interest and principal payments so does not matter.

Q-2.
Now if a US homeowner borrowed the same at 6% what would be the result

A) 1.20 L
B) 2.78 L
C) 3.21 L
D) Half of the answer of Q-1


The answer as some people have pointed out is C for Q1 and B for Q2. The black magic of the EMI is responsible for a payment of more then 500% of the EMI towards interest as opposed to principal. After 5 years the borrower wouldve paid 80k as principal and 5.8L as interest. At the end of 10 years the principal payment is 2.3L as opposed to the interest of 10.8 L. After 15 years, you have finally paid of 1/2 the principal and 15L as interest. At 20 years you have paid off the 10L principal and 16.4L as interest.

Now for an average apt of 1crore in Mumbai with 10% down lets do the numbers for 90L loan. Here I wouldve paid an interest of 1.4 crores for a 90L loan and god forbid if I couldn't make the EMI after 5 years and had to sell the apt I wouldve paid 52L as interest with 7L as principal and the house would have to be worth atleast 1.4 crores to break even.

The EMI method of loan repayment is one of the worst methods of calculation and benefits the banks the most, leaving the borrower shackled in loans forever. As finance professionals will tell you, there are many ways of calculating interest where interest and principal are paid off in equal chunks per payment. Here the interest payment is drastically reduced due to the reducing principal. Unfortunately the bank has no interest (pun not intended) in principal payments and all they care about is the interest.

Realtor debt to be twice revenues

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.

Builders and their inflation predictions

It comes as no surprise to me that the members of the real estate community including investors are disappointed at the contents and comments on this blog. Lets put things in perspective and maybe they can understand a bit more about investing and economic boom and bust cycles. When the biggest builder DLF makes a comment on national TV that real estate prices will to return to inflation adjusted prices of 1998, that is a pretty strong statement.

Lets examine the official inflation numbers from 1998 as reported by Reserve Bank of India publication. I'm no economist but cursory look at the inflation numbers shows an average WPI inflation of 5.1% over 1995-2004. If we go with another average for the subsequent period of 7% for the period 2004-2008, we have a combined average of (5.1 + 7)/2 = 6.05% inflation adjusted numbers for a 10 year period 1998-2008. To keep up with the compounded inflation of 6.05% annual inflation 100 rupees in 1998 should be worth Rs 187.71 in 2008, a total return of 87.71%%. If DLF is correct prices have to be roughly 1.87 times 1998 prices. A 3 bed room apt worth 20L in 1998 should be worth 37L in 2008, however we have seen that this apt is now worth 80L, a 400% return over a 10 year period instead of an 87% percent return. This apt has to drop 50% from the 2008 level to revert to the inflation adjusted number of approx 40L.

Even we we assume the alternative inflation number of 8.1% listed in the document for 1995-2004 and assuming an 10% inflation number for 2004-2008. We still have an inflation number of 9% compounded leading to a return of 137% over a 10 year period, still far cry from the 400% number we have seen in real estate pricing.

Either prices have to fall 50% to return to mean, or DLF is making statements they don't believe in.

Real estate using leverage is a great investment when money supply is infinite and loans are granted without scrutiny. Under any other situation, the game is going to end only one way, with a big thud. If this was not the case, we wouldn't see block buster ipo's of 2007 now trading at 5% of their peak value in a period of 15 months. For all the perma-bulls like Dilip who are still hanging by the thread of godly deliverance and hope, I have a bridge to sell.

I just started reading this article on economic theory and I hope Dilip reads it. He is probably surfing at 28.8k bits right now so expecting him to read and understand it is akin to asking a caveman the boiling point of water. Many people didn't buy over-priced real estate and missed the big boom. However they ended up leaving the apartments mentally bankrupt folks who are now keeping awake all night worrying about EMI's, while they the smart ones are sleeping soundly in their rental bliss.

David Swensen's interview on Charlie Rose

As Yale’s chief investment officer, he manages more than $20 billion in endowment assets. During his tenure at the school, he has contributed more to Yale’s finances than anyone ever has to any university in the country. His new book is called "Pioneering Portfolio Management," and it is an update of his 2000 book of the same name.
Video link here

Where to invest in 2009 in ITndia

The soothsayers are back with predictions. Not where prices will drop, but where prices will rise.
Jones Lang LaSalle Meghraj, the sophisticated marketing arm of the building industry are making new predictions. Here is the link for the pdf on LiveMint.com's site. The analysis seems pretty straightforward as it proximity to the IT/ITES industry as the main drivers and I've headlined this post to reflect that.

Mumbai
Mumbai has witnessed some of the highest selling prices in the residential market till the
beginning of this year. Clearly, those prices were not sustainable, since buyers for super
luxury homes are shrinking fast.

One of the focal areas was central Mumbai (specifically Lower Parel and Worli) that
witnessed the highest price escalations. These now faces the challenges of the slowdown.
The current slowdown has curtailed the investor segment in the residential property market.
The driver for what demand exists now are real end-users.
In Mumbai, there is no dearth of those desperate to find homes within an affordable range -
affordable housing is therefore now the silver lining on the dark cloud of today’s slowdown.
Mumbai has three different directions in which growth can still be observed. Appreciation is
not a factor currently, but these are the areas that will sustain their prices – while other areas
in Mumbai will correct.
The extended western suburbs; Vasai-Virar sub-region
Drivers:
1. Economic drivers such as the MP SEZ by DHL, BIO tech SEZ by Mahindra
and IT SEZ
2. Connectivity is going to increase by introduction of additional suburban trains
from next year
Prices are in the range of Rs2,500-3,500/sq.ft
Area adjoining Panvel
Drivers:
1. This region is benefiting significantly from trunk infrastructure enhancements
such as the upcoming new airport, the Trans-Harbor Link, a railway terminus,
mono rail etc.
2. Positive impact from the upcoming Mega SEZs by Reliance and others.
3. The expansion of JNPT.
Many developers have already initiated large township projects in this region. The price range
are Rs. 3000-3800/sq.ft.

Bandra-Khar area
Prime property hunters are still focused on this area.
Drivers:
1. It will witness increased connectivity by the Bandra-Worli sea-link, the
proposed Metro Line 2 and also the upcoming Santacruz-Chembur Link road.
2. This region is always a preferred destination for prime property seekers
because of its elite profile, and because of the high level of available
shopping, healthcare, education and recreation facilities. Developers there
are offering products in redevelopment schemes.
The prices range from Rs18,000–25,000/sq.ft.

DELHI
Currently, there is a definite slowdown in growth in the suburban residential market.
Construction has stopped on new projects, resulting in a stabilization of rates for readypossession
flats. This scenario also reflects in Delhi, where the rates for good properties rates
are now stable.
However, the areas around the 150-meter road that will eventually connect Gurgaon to
Dwarka – specifically, Sectors 103-111 – have significant growth potential.
Drivers:
1. Sufficient developments will come up in this area, and one can expect a year-on-year
appreciation of at least 5-7% even now.
2. The area is currently under-developed – however, when residential projects there
reach completion in 2-3 years, the appreciation will be between 30-35%.
3. A lot of this depends on the ability of developers to raise enough cash to complete
their projects. Those who do not have the requisite finances will miss out on an
extremely lucrative opportunity.
The current rates in this belt range between Rs. 2200-2300/sq.ft. In Dwarka, the rates are
between Rs. 4000-4500/sq.ft and in the further locations of Gurgaon between Rs. 3500-
4000/sq.ft.

CHENNAI
Chennai’s residential real estate scenario is considerably depressed at the current time.
Developers who have projects along the once booming IT corridor are all set to reduce their
rates by as much as 20%.
However, the Mogappair-Porur composite region continues to hold mid-to-long term
investment potential.
Drivers:
1. This overall location is very close to the prime residential catchment of Anand Nagar
and also to Chennai railway station and the bus terminus.
2. The fact that it is not near the IT corridor also increases its potential.
3. The rates there are competitive at Rs. 2800-3000/sq.ft.
The expected appreciation for residential properties here is between 20-30% long term).

BENGALURU
Bengaluru (erstwhile Bangalore) is surely feeling the brunt of the IT slowdown. However,
established suburban areas like Koramangala, Outer Ring Road and Bellari Road continue to
be good investment destinations.
As in the case of Mumbai, appreciation is not a focal point in the current scenario - these are
the areas that will sustain their prices, while other will correct.
Apart from these, Mysore Road –which encompasses the upcoming NICE corridor, has lots
of future promise thanks to good connectivity to Mysore and many commercial developments
being planned there.
Koramangala
Drivers:
1. No scope for fresh developments
2. Close to Electronics City
3. Residential demand is high
Rates are between Rs7,000-8,000/sq.ft.
Outer Ring Road and Bellari Road
Drivers:
1. Close to IT hub
2. Outer Ring Road is close to Whitefield and is a commercial area.
3. New developments are coming up on Bellari Road, which is also close to the
Devenhalli airport.
Rates – Rs3,500 – 5,500/sq.ft. Appreciation potential between 5-8% short term. Long term
10-15%.

PUNE
With Talegaon not picking up in the anticipated manner, Pune’s new growth corridor now
encompasses Kharadi and Nagar Road. This can be safely considered as the most lucrative
real estate investment zone for 2009-2010.
Drivers:
1) Eon IT Park – 4 million square feet of prime IT space in the last stages of completion
2) Other IT SEZs as well as commercial ventures also on the anvil
3) Proximity to revamped airport
4) Improved connectivity, largely via the opening of the VIP Road connecting Viman
Nagar to the airport
5) Imminent arrival of 5-star hotels such as JW Marriott, Grand Hyatt and Leela
6) Reasonably low entry costs:
Rates – Rs2,700-3,500/sq.ft

HYDERABAD
Hyderabad continues to hold its own in the current slowdown scenario, though significant
growth has now been restricted to certain specific areas.
Residential real estate investment growth potential in Hyderabad will center primarily around
Gachibowli and Tellapur.
Drivers:
1) Proximity to the financial district, which is where the highest growth of IT and other
commercial projects is happening
2) Could become another CBD over the next ten years
3) Outer Ring Road (Phase 1 in advanced stage, phase 2 scheduled after six months) in
the vicinity will reduce commuting time of residents to key workplace locations
Rs3,000-3,500/sq.ft.
Appreciation in these areas will be about 5% in 2009 and might increase in further years.

MOHALI
Residential rates at Chandigarh have gone through the roof, and there is little scope for
appreciation for now. Moreover, because Chandigarh is a planned city conceived on certain
density specifications, which give rise to limitations on development.
It is therefore not dynamic in real estate terms, which means it will not change much with time.
Chandigarh could not partake in the IT boom for these reasons. However, adjoining Mohali
presents a completely different picture. The area called Greater Mohali, which encompasses
the fast-developing Landra-Mohali Road area, is a very promising residential nexus.
Pan-India developers such as Unitech, Emaar-MGF, Ansals and DLF have snapped up land
there for development into mega, multi-sector residential hubs. These will be highly organized
cluster projects, and all the right drivers are in place:
Drivers:
1) International airport coming up
2) Indian Business School coming up
3) Multi-terminal bus stand soon to be commissioned
4) 120 acre township with IT SEZ coming up
The investment opportunity here is in land, which currently sells at between Rs12,000-
14,000/square yard. After 3-4 years, the land rates in these areas will surpass those in central
Mohali, which currently stand at Rs30,000-35,000/square yard.

KOCHI
Kochi has the fast growing residential market in Kerala. The NRI investments has caused
sudden spurt in residential demand in Kochi City.
Apartment units have the highest demand owing to affordable prices and availability. In
addition, high ranking of Kochi as IT/ITES destinations which resulted in demand generated
by the infrastructure initiatives like the Smart City Project, Cyber City project, Infopark,
International Transshipment Container Terminal Project, etc.
Waterfronts are the most sought out residential real estate destinations and usually get a
premium. The prime residential areas adjacent to M.G. Road and along Marine Drive still
command a premium with landmark projects asking for Rs7,500/sq.ft
Drivers:
1) Close to CBD
2) Attractive Water fronts
3) Huge demand for waterfront apartments
Peripheral areas of the city such as Kakkanad, Edapally and Kalamassery currently face a
short-term oversupply of mid-range flats that are selling in the Rs. 2,500-3,000/sq.ft range.
Drivers:
1) Close to the existing InfoPark
2) Positive impact from the upcoming Proposed Smart city and Cyber city in Kakkand
3) Good infrastructure has lead to a diverse and robust economy and job creation.
Commercial trade, a traditional sector of the economy, is being complemented by growing
sectors such as IT/ITES (due to large scale IT parks and SEZ), BFSI activity and tourism.
4) Excellent connectivity resulting from a combination of airport, sea port, road and rail,
has positioned the city for long term growth and competitive advantage.
5) A disproportionately large number of NRIs, or non-resident Keralites to be more
specific, are investing from abroad and have increased demand for residential space.
Appreciation in the peripheral areas of the city will be about 5% in 2009. We expect a 5-
10% increase over the long term.
Rates: Rs2,500-3500/sq.ft.

AHMEDABAD
Ahmedabad, which has recently started leveraging its real estate potential for ‘real’ now, has
some real residential hotspots coming up.
For instance, there will be considerable economic activity with the arrival of the Tata Nano
project, which will definitely boost the value of real estate in and around the corridor of
Sanand.
Drivers:
1) Located in an industrial region rich with SEZs
2) NANO plant coming up
3) Infrastructure upgradation in process
4) Good connectivity due to S G Highway and SP Ring Road
5) Good land availability
6) DMIC investment region
7) Low land prices (Rs. 650/sq.ft)
Some of the reputed developers active in this region include Pacifica Sahara, Savvy and
Safal. Residential units are primarily villas, selling at rates between Rs2,600-3,000/sq.ft.
Prahlad Nagar is another good area to consider. It is surrounded by premium areas, has a
high income population and the prices are still relatively low. It is also close to the new
business district on SG Highway and has good connectivity to the core city. Rates range
between Rs. 2300-3000/sq.ft
One should also mention the Sabarmati-Gandhinagar highway, which is close to the airport
and Gandhinagar as well as the upcoming GIFT city and Ecopolis, has good connectivity and
infrastructure and will soon see many institute campuses like NID, IIT and DAIICT coming up.

JAIPUR
Jaipur has witnessed some of the best-planned and balanced real estate developments in
commercial, retail and residential space.
While affected by the current slowdown, Jaipur still manages to sail through on account of its
growing population and sound purchasing power.
While residential projects within central locations of the city have witnessed high absorption,
the city seems to be expanding towards two new prime destinations for residential
development.
Two key destinations with the highest investment potential in residential real estate include
Ajmer Road and Jagatpura (both suburban locations).
Ajmer Road (NH-8)
Drivers
1) Availability of land parcels to support large expansive townships as against low land
availability within city limits
2) Low land prices
3) Proximity to Mahindra World City; Mahindra’s SEZ being developed close to Ajmer
Road having campus developments by Wipro, Infosys, Deutche Bank, among others;
this makes the region a potential business hub of the future
4) Rapid connectivity to neighboring towns of Rajasthan as well as the prime city of
Jaipur with NH-8
5) Presence of numerous townships being developed by established developers like
Vatika, Omaxe, Ansal among others provide multiple options for sound investment
Rates - Rs2,500-3,000/sq.ft.
Jagatpura
Drivers
1) Proximity to South Jaipur, the hub of upcoming institutional, commercial and retail
developments. The location is also close to the new airport coming up, which
provides good connectivity
2) Availability of land parcels to support large expansive townships as against low land
availability within city limits
3) Low land price points and entry costs attracting good investor interest
4) Rapid residential development accruing to large number of townships and group
housing projects and townships in and around the area
5) An upcoming destination as a residential hub, with a large concentration of
government housing projects as well; a new expansion zone for the city population
Rates - Rs 2,000-2,500/sq.ft.

Housing bubble comparisons - US vs India

Rediff.com has an article bankbazaar.com on the reasons why the US housing bubble went bust. At the end of the article there is a paragraph which downplays the impact of the Indian housing bubble and focusses on the Indian tendencies towards home ownership among other things. What the article fails to mention is the meteoric rise in prices over short period of time, the affordability issue in cities like Mumbai, Delhi, the black money aspect of the construction business and finally the steep drop in realty construction company stock prices. This the exact soft marketing which we have discussed and now see in action.

The lending scenario in India - Bankbazaar.com

A subprime crisis of this nature and magnitude is unlikely to occur in India, thanks to some very strict bank policies that are in practice.

As a general rule the borrower needs to pay a down payment that covers 15-20 per cent of the cost of the property. This by itself is a test of the borrower's credit worthiness and enables him to have a stake in the property. Also, the bank safeguards its lending interests by ensuring that the money lent is below the market value of the property making allowance for a nominal dip in property prices.

Another important factor is the initial screening banks conduct to confirm the eligibility of the loan seeker for the requested loan amount. Banks make sure that the EMI of their loan applicants does not exceed 50-55 per cent of their monthly incomes. This ensures that as long as the borrower is able to maintain his current income levels, he will have no trouble in making his monthly payments.

Moreover the Indian sentiment revolves around buying a house and spending a lifetime there. Home buyers looking to live in the house purchased rarely change homes in short time frames while in a place like America embracing change is second nature. A situation like this may be far away for India, as we are a growing economy, where mortgage levels are not comparable to developed economies.

We also have strict regulatory bodies like the Reserve Bank of India [Get Quote], which ensures that loan products that could produce systemic risk never make it to the market. Besides this aspect, a favourable market does not exist in India for similar loan products like the Option ARM. The psyche of the Indian consumer does not easily accept debt instruments and a loan is usually high priority and the focus is usually on closing it as early as possible.

Satyam land grab scandal

How many people feel that Hyderabad real estate is headed for the steepest drop among IT cities ??

Prosecution opens Raju can of worms
G.S. RADHAKRISHNA

Hyderabad, Jan. 22: Government agencies today portrayed a hydra-headed Satyam scandal involving bogus employees, systematic skimming of money, countless land deals as well as a cover-up and laid the blame at former chairman Ramalinga Raju’s door.

The disclosures, made in court and outside, were rebutted by Ramalinga’s lawyer who termed them “concocted”.

Public prosecutor Ajay Kumar opened the floodgates in a metropolitan court, changing the complexion of the revelations that have so far been confined to “leaks” by unnamed sources.

“Investigations reveal that he (Raju) had created false employee accounts for over 10,000 bogus employees and siphoned off almost Rs 20 crore per month in their name,” Ajay Kumar told the court today. The prosecutor also claimed that Raju had “stashed almost Rs 7,000 crore in the accounts of his mother and brothers”.

Later, officers of the Andhra criminal investigation department (CID), which is handling the case, said the erstwhile Satyam promoters had been crediting the money each month for four years to as many as 13,000 non-existent employees.

The officers gave the break-up as 10,000 bogus employees and 3,000 retired ones. “The then Satyam management has given hikes, promotions, bonus and LTA to these invisible employees all these years,” a sleuth said. If true, the amount on this count alone adds up to Rs 960 crore.

In the evening, the CID went on record to say it had found documents suggesting 400 benami companies were used to acquire vast tracts of land.

“The documents reveal a mind-boggling land acquisition spree by the Satyam promoters across the country,” said V.S.K. Kaumudi, the inspector-general heading the CID investigation.

The payments for the land deals were made from domestic and overseas accounts of the promoters, the CID said.

The benami companies have been floated by SRSR Advisory Services, a company through which the promoters used to control Satyam, the CID said.

Ramalinga’s younger brother Suryanarayana, apparently a key figure managing the SRSR cash, has not been seen in public since Tuesday night. The police have impounded the passports and frozen the bank accounts of 18 relatives of Ramalinga.

Late tonight, the CID raided six apartments across Hyderabad allegedly used by the promoters to “dump” papers and documents. The sleuths are examining their authenticity.

Prosecutor Ajay Kumar told the court where Ramalinga was produced this afternoon that the promoters had generated false documents for around 2,000 acres in and around Hyderabad so that Maytas Properties, the family’s realty venture, could raise bank loans. Nearly Rs 3,300 crore in loans were allegedly raised using the land documents.

The prosecutor claimed that fake fixed deposit certificates worth Rs 4,000 crore had been found. Some had been mortgaged to raise loans.

Ramalinga’s lawyer, Bharat Kumar, said the CID had never asked his client anything about the alleged non-existent staff, bogus land papers and fake FD receipts.

Bharat Kumar pointed out that the public prosecutor was making verbal allegations without mentioning them in the petitions filed this morning. Government sources later said the chargesheet would mention the specific points.

Open Yale courses on Finance

Robert Schiller, the bestselling author of "Irrational Exuberance" teaches a finance course at Yale. Its fantastic to see the contents of the course online. Stockmarket investors and speculators need to digest this course before burning money at the altar of greed. Here is the link. Knowledge is power.

Devanahalli realty dreams grounded

This is HUUGGGGGEEEEEEEEEEEE!!!!!!!!!!!!!!!!! The house of cards in Devanahalli has collapsed. Couple of years ago, one of my friends servants sold their family arid farm land in Devanahalli for 1.5crores. Lucky for them they could escape the poverty at the expense of the speculators. They ended up buying a house in R.T Nagar and were very happy to send kids in to decent schools. Unfortunately the educated IT folks gambled and ended up as suckers. Life comes full circle.

DNAIndia reports

Bangalore: Another dream built around the Bengaluru International Airport (BIA) is crashing. Investors who pumped in lakhs of rupees to buy housing plots in the vicinity of the BIA in Devanahalli hoping to encash the boom, are in for a shock.

Addressing a DCs' meeting in the city on Friday last, chief minister BS Yeddyurappa announced that the state government is reconsidering sanction granted to conversion of agricultural land to non-agricultural purposes.

If the Yeddyurappa government indeed reconsiders the conversion sanction, the result could be that all lands in the vicinity of the BIA will remain solely agricultural. Neither can houses be built on these lands nor can they be exploited for any other real estate purposes.

According to official estimates, at least 90% of the Devanahalli lands are agricultural. Besides real estate sharks having invested huge sums of money on these lands, scores of housing societies have carved up small residential plots in the area and sold them to the public.

The government had, in fact, even floated a local area planning authority, the Bengaluru International Airport Planning Authority (BIAPA), to streamline development.

However, it is now being argued in the official circles that the government might face problems in future on various fronts, especially infrastructure facilities and civic amenities, if large-scale conversion of agricultural lands is allowed.

"There are reports from geophysicists that the groundwater level has depleted considerably in the area and borewells have to be dug up to more than 900 feet deep to strike water. The selection of Devanahalli for locating BIA itself was wrong for this reason alone. We have only provided water supply to the BIA and an adjoining industrial estate. The demand for drinking water from a public utility can just not be met if the newly formed layouts and housing colonies of the area are developed," a senior official in the revenue department said, explaining the context of Yeddyurappa's statement.

"The government will not be able provide any more civic amenities like drains and sewerage treatment plants for the new residential enclaves coming up under BIAPA," he said, adding: "We have strict provisions in revenue laws that agricultural lands cannot be passed on to non-agriculturists whose income from other than agriculture sources is Rs two lakh and more."

The official said that reasons to curtail development of Devanahalli lands are manifold.
"There are no proper revenue records maintained at the taluk office on several survey numbers. Sixty per cent of the lands are grants to Scheduled Castes and Scheduled Tribes. This can only complicate conversion sanctions," he added.

Offtopic items of interest : America on Sale

As everyone is reading the bad news flowing out of New York, London, Tokyo, Mumbai and every financial capital of the world, all is not bad for the consumer with cash at hand. Some of the deals I'm seeing these days is incredible. Most consumer goods are discounted 70% now online with many even upto 80-90%. Here are some links which I'm following. These are items I would never pay even the normal sale price but at 80%, I'll buy them anytime. If people have more links please post and I will compile them. I'm looking forward to a day when we can have a list of properties which are on fire-sale. It looks like that day is not far. The bigger issue which everyone needs to consider is whether their job is secure enough to pay off the house, even if it was bought at fire sale prices. How many readers think their job is secure ? I know mine is not. comments ??

Express Sale

The shoesteal.com site has reduced the discounts to 30% from 80%. I guess the 80% was the gimmick to attract page views

Sobha, Unitech offload assets to pay debts

Cash-strapped realtors look to offload assets

Livemint.com reports

The developer has debt obligations worth Rs2,500 crore coming due by the end of March

Bangalore / New Delhi: India’s second largest developer by market value, Unitech Ltd, is selling parts of its 14,000-acre land bank, leading a trend among realty firms putting up parts of their properties for sale to tide over a financial crunch and repay debt.

About 30 plots of the company in the National Capital Region centred on New Delhi, that are part of Unitech’s mixed-use developments and were dedicated for building hospitals and schools, are now up for sale.
“We are selling some of the plots but not all of them,” a company spokesperson said. “We have already sold two such plots.” He declined to give further detail.
Unitech had earlier said it was looking at “monetization” of some of its completed properties to meet debt commitments. The company is trying to sell land parcels in Noida and Gurgaon, both on the outskirts of New Delhi, to meet its debt obligations, analysts say.
The developer has debt obligations worth Rs2,500 crore coming due by the end of March. Unitech is trying to raise funds to repay this debt through several measures such as selling some hotel, office and retail assets and by diluting equity at the company and at the project-specific levels.
Unitech, which is holding an extraordinary general meeting of its shareholders on Monday to seek approval for an enabling resolution to raise up to Rs5,000 crore through various means, has to repay Rs1,100 crore in the next two weeks and meet further debt obligations of Rs1,500 crore over the next three months, according to a 15 January report by BNP Paribas Securities.
“The management has hinted that it is in the process of raising Rs800 crore to tide over the near-term liquidity crisis,” Sandeep Mathew, an analyst with BNP Paribas, wrote in the report. “Failure to do so could lead to forced sale of underlying assets (primarily land).”
In the heart of Bangalore’s business district, a 1.5 acre plot has been put up for sale by Sobha Developers Ltd, a leading developer in south India.
The land, strategically located close to the city’s main shopping and business district of MG Road, at the junction of Church Street and Museum Road, is a fetching piece of real estate in an area that is one of the most expensive in the country’s technology hub.
The builders, analysts said, have been trying to sell off the plot for the last four months, where it had initially planned a shopping mall and a hotel. But the high asking price of Rs120 crore has kept away buyers. The money will be pumped into Sobha’s under-construction projects that are delayed and to repay expensive loans.

Realty firms are looking at other avenues to manage cash flows as debt has become more expensive, analysts at Credit Suisse India Research said in a 13 January note. The report states that Sobha, for example, borrowed funds at 24-30% for short-term periods in October-November and seems to have defaulted on some repayments during this period.
Unitech borrowed at 19% in the same period. “These borrowings are due for payment in January which could become a problem for both Sobha Developers and Unitech as volumes in the property sector are yet to pick up. With mutual funds having stopped lending to this sector and private banks reluctant to lend, Sobha is selling off its ‘excess’ landbank,” the report states.
Unitech and Sobha Developers are only two of many such cases of forced land sales in the past few months that have witnessed aborted land deals, low demand and few sales, pushing developers to defer launches, stall projects and scurry for cash to beat the financial slowdown.
Sobha Developers managing director J.C. Sharma declined to comment, citing a so-called silent period firms need to observe ahead of quarterly results announcements.

“The Church Street land was bought on a 60-year lease period and the developer is planning to re-lease it away. But the sale price is too high,” said a Bangalore-based real estate consultant close to the negotiations. The consultant didn’t want to be identified.

“These are land parcels that would have been bought in the last two-three years at steep prices and where construction hasn’t yet taken off. There are some buyers still—mostly high-net worth individuals—who can buy, but are hard bargainers. With demand being low, it is a buyer’s market now, putting developers in a tough situation,” he said.
Tables have turned for developers, who till the beginning of 2008 would scout for land and pay steep prices. Not any more. “Today, I am flooded with proposals from builders wanting to sell some land assets. But where are the buyers?” asked Praveen Kumar, chief executive officer of One Third Earth, a property and land advisory in Bangalore.
“Many developers are selling the licensed land or developed/under construction projects to get working capital,” said Manish Aggarwal, director, land and industrial agency, at consultancy Cushman and Wakefield India.

Developers are selling assets that will fetch the maximum price such as hotels, office or land licensed for residential group housing.

Land prices in the periphery of cities across India have on average fallen by 25-40% over the last few months, said Aggarwal. “Should the landlords or developers decide to price their products rationally, it is expected that there may be an interest for joint development, joint venture transactions for sellable projects starting from July-October quarter this year,” he said.

Builders under pressure as buyers press for refund

Economic Times reports

Real estate boom are now under pressure from buyers and investors who look to exit these projects.

Already in a spot due to unavailability of bank loans and a fall in sales, the developers are less inclined to oblige the buyers who are coming together to mount pressure for refunds in projects that are yet to take off.

Several buyers and investors, angered by the developers’ inability to start work on projects, have stopped payment of installments on their purchases, adding to the companies’ cash problems.

Investors in DLF’s commercial projects in Delhi and Kolkata have come together with the help of brokers to put pressure on DLF to start construction or refund initial deposits. “DLF is way behind schedule in their projects. It should either start work on the project immediately and deliver in time or return our investment with 15% interest,” says Amit Jain (name changed), a senior executive with an MNC who invested Rs 1 crore each in DLF’s projects in Okhla in Delhi and Kolkata.

Mr Jain says since DLF follows a time-linked payment plan, it has been demanding payments from buyers even without starting construction.

The broker, who facilitated Mr Jain’s purchase, says DLF has not even paid the government to convert the industrial plots at Shivaji Marg and Okhla in Delhi into commercial plots. However, a DLF spokesman denied this saying, “We go by the agreement with the buyers signed at the time of booking. The allegations over the status of our projects are not true. We will deliver as per schedule.”

Several projects of Omaxe, Unitech and Parsvnath are also facing similar problems. Akash Verma, a Noida-based garment exporter, had booked an apartment each in projects of Omaxe and Unitech in Noida. He booked an apartment at the ‘soft launch’ of Omaxe’s Noida project in May 2007. Omaxe had promised to launch the project formally a few months later at a higher rate. The formal launch never happened and investors like Mr Verma are stuck. Omaxe has turned down requests for a refund. An Omaxe spokesman, however, said the company has ‘considered and taken care’ of all such requests.

Mr Verma has also been unsuccessfully seeking a refund of his investment in Unitech’s Grande project. “I am paying Rs 4.5 lakh as EMI. Unitech executives say the project will be delivered on schedule, but there is no worker at the site,” he says. A Unitech spokesman said, “We generally discourage cancellations. But if the buyers insist, we refund the money after deducting 10-15% of the total value of the apartment.”

Most realty firms do not encourage refund requests. Till the end of 2007, investors could easily sell their property in open market as the prices were going up. But with buyers disappearing from the market, investors are forced to approach developers for refunds.

Some property buyers are seeking refunds due to their weakened financial positions, while several others do so as they are not sure of the developers’ ability to complete the project. There are a few others who seek refunds as they feel that they can strike a better deal now with prices undergoing a major correction.

MLAs are eyeing 300 plush Mhada flats

Why blame only Raju and Maytas for the land grab ? Here is an example of a legal land scam, where members of all parties will collude to gift each other this precious commodity. Corruption and greed of Indian politicians is at its peak. It is not even two months for the Mumbai attacks where hundreds of Mumbaikars died for no cause of theirs and brave policemen and commandos battled terrorists with obsolete weapons. Instead of compensating the family members of the slain citizens with a place to live these uber corrupt politicians want to rape and pillage any asset which comes their way.

These guys are no better then Ghazni or Genghis Khan and deserve to be taught a stern lesson. I appeal to everyone to forward this message to as many people, blogs, newspapers and TV channels and stop these looters at their doorstep

DNA reports.
Mumbai: In a move likely to anger hundreds of prospective flat buyers wanting affordable housing, the state government is considering a proposal to allot 300 newly constructed flats in a posh area at Lokhandwala complex in Andheri (West) to housing societies of past and current legislators.

Keeping this proposal in mind, the Maharashtra Housing and Area Development Authority (Mhada) kept aside 300 flats and did not bracket these with the 686 flats released for sale this week.

Mhada has constructed 1,088 flats of two and three BHK admeasuring over 800 sq ft carpet area in the sole high income group residential complex at Lokhandwala costing Rs44 lakh and Rs57 lakh respectively -- a steal as the Mhada prices are about one-third the prevailing rate quoted by private developers in the area at Rs12,000 a sq ft.
Sitaram Kunthe, state housing secretary, refused to comment.

However, HK Jawale, chief officer of Mhada's Mumbai board claimed that construction is still on at the HIG colony.

The legislators' demand is reportedly being spearheaded by two cabinet ministers. The ministers claimed that the government had earlier allotted land in survey number 161 at Versova to housing societies of legislators. But since the land fell under coastal regulation zone, buildings could not be constructed.

In lieu of the flats at Lokhandwala, the government has initiated the process to change the reservation of land near Bhakti Park at Wadala from no development zone to a residential use, said an official.

Old wine in new Nano bottle

I guess am getting old and cynical. Last year Sabeer Bhatia was announcing a Nano city in Haryana. This year in Gujarat. There is another one planned by Vinod Dham near Hyderbad. There is a smart city planned in Kochi. How many nano cities do we need ? All these nano cities are fronts for real estate plays by policitians and land owners. If there is something to emulate it is the Mahendra World City in Chennai. It took 6+ years to get it all setup and humming. All these one trick ponies are trying hard to sell the sabarmati river front as lifestyle living to the NRI Gujju community along with the community in Mumbai. To Modi's credit he has done a good job, however he is 10 years too late in trying to move IT to Ahmedabad. Maybe he can try Cleantech and other upcoming industries. Maybe it becomes the Green Valley, though I doubt how he will curtail the pollution and population and prevent Ahmedabad from becoming another Mumbai or Bengaluru. Ironically in Gujarathi 'Nanoo' means small or tiny. All one can hope is the bubble and Rokda (Cash) become Nanoo

Gujarat may be next Silicon Valley

AHMEDABAD: Hotmail Co-founder Sabeer Bhatia said he looks toward cultural innovation in Gujarat and has plans to develop the state as the next Silicon Valley.

"We have got Letter of Intent (LoI) from Carneige Mellon University for setting up a Nano city that will have software development facility for niche sectors such as nano technology, bio-sciences and material sciences," Bhatia said, during the inauguration of Vibrant Gujarat Global Investors Summit which began on Monday.

"With world class infrastructure here and support of the Gujarat government, we can make the state as next Silicon Valley of India by setting up a Nano city here," Bhatia said.

Sharing his experiences on emergence of silicon valley decades ago, Bhatia said the innovation at that time had led to phenomenal creation of value, and the model could be replicated here.

"Five decades ago Hewlett Packard created a small hub outside Standford that led to the birth of Silicon Valley, and in the last 10 years I have seen 1 trillion dollar of value being created because of cultural innovation," he added.

"India has huge potential for it, with a population of 1.2 billion people we create around half-a-million engineers annually, but somehow they are not able to make to make it to top echelons in key innovative hubs, therefore we need a nano city," Bhatia said.

The innovation can come through education and the Nano city will play a key role in software development for niche segments.

Rajus' land bank could be much bigger

Farfetched but true. The greed for land is has sunk a solid cash cow business built on cheap labor, dollar arbitrage and government subsidies. Along with Raju, there will be hundreds and thousands of mini Raju's who will be crushed under the weight of this collapse. In one stroke Ramalinga Raju has setback the development of Hyderabad and AP by atleast half a decade. There is no need for Telangana for now as the crown itself has crumbled.

If 6800 acres is put on the market to liquidate what will be net asset value of this illiquid asset. I think the figure is much more then 6800 acres. Satyam has land in Nagpur close to Mihan and those bozos there propped up the prices by quoting Raheja, Satyam and Infosys.In all my dreams I could never think that the end game for the real estate bubble would be the largest corporate fraud in Indian history.

I always thought the US slowdown will affect jobs, liquidity concerns etc. just like it happened in the US. Raju has created a script which will beat the slumdog millionaire several times over. Maybe he should write his memoirs and make a film on it. I'm sure he will regain his riches if that happens. A Satyameve Raju should be a good title.

It is mind boggling thinking about the hobsons choices which are presented to the Satyam employees.All the moronic newschannels and papers have yet to digest the scope of this scandal and the effect it has on employees whether in India or abroad. There is a satyam blog which is trying to bravely counter all the negative news. Unfortunately the kids don't realize that business leaders of GE/Nestle and others are cut-throat competitors. If they don't think twice in axing their own employees what chance do they have to keep contractors when the company which employs is close to bankruptcy, and will soon have few thousand lawyers crawling all over them. A simple question to ask is "Knowing what you know about Satyam today would you do business with them ?". If you answer yes for whatever reason, you are destined to be a sucker for life.

The Indian political establishment is also making some weak attempts so appear that they are working towards fixing the problem. As with politics they are looking for the problem to vanish and let some other issue take over the media. Unfortunately in this case the US shareholders will get their pound of flesh. Corrupt Indian politicians let Union carbide get away by sacrificing the lives of thousands of Indians. In a country where lives are much valued and law followed, the US lawyers will make sure the misdeeds are punished and the company assets are distributed to their shareholders. If the Indian govt. cannot assure the FII's, safety of their Investments, expect the Sensex to go back to 2003 levels. No more free lunches for anyone. The destruction of money here is of gigantic proportions.

If someone doubt's my analysis, just google for Filipino BPO companies which are touting itself as an attractive outsourcing destination for BPOs due to their ethical business practices. If the government fails to act swiftly, book offenders and liquidate Satyam quickly, one can be rest assured that dark days are ahead.


Let the scavenging begin.

DNA reports
Hyderabad: B Ramalinga Raju has claimed that Maytas Properties had a land bank of 6,800 acres, sources said it could be more than that, considering the properties the family had acquired in other countries.

The uncertainty about the actual amount of land held comes from the fact that most of the property was either handled through a general power of attorney (GPA) or held in somebody else's name.

While Teja Raju was completely in charge of Maytas Infra, a listed entity, Rama Raju, Jr, was handling Maytas Properties, a family-owned, closely-held entity. It is in the family-owned business that the Rajus had built the land bank.

Sources said that the family was acquiring land along with the immediate relative of a top politician in the statehoping that the politician would get a project to the area, or at least a good buyer for the property. "There are many such properties lying with the family which do not have any immediate market unless something major happens at the location," a source said.

However, the real estate market crashed in the last eight months, locking up the assets of the Rajus. The market is unlikely to see any upswing in the near future. "Even if you take the land bank of 6,800 acres, it means at least Rs 4,000-5,000 crore is locked up. Though Ramalinga Raju is a stakeholder in both Maytas Infra and Maytas Properties, it is his sons who are handling the affairs of both the companies," the source explained.

Livemint reports

UK investment bank Noble sees more Satyams in the pipeline

Noble Group was “disappointed but not surprised” by the Satyam development

Mumbai: A day after the Satyam Computer Services Ltd scandal broke, UK-based independent investment bank Noble Group released a report that points to widespread accounting lapses across the broad index of 500 Indian companies listed on Asia’s oldest bourse, the Bombay Stock Exchange (BSE), and warns of “more Satyams in the pipeline”.

Cheat code: Satyam Computer Services headquarters in Hyderabad. Mahesh Kumar A. / AP

The report suggests that as many as one-fifth of these companies have accounting issues. Noble Group was “disappointed but not surprised” by the Satyam development.

“Our experiences over the past few months...suggest that manipulative accounting and aggressive promoter practices are more common in India than is generally believed to be the case,” the report says.

The group’s analysis shows at least five types of accounting malpractices exist across BSE 500 firms—among them, recording revenue ahead of time, booking “fictitious” sales, expense manipulation and cash manipulation.

At least 30 companies, the report says, recognize revenue at the time of sales. This, it says, is disclosed by worsening cash flow from operating activities despite a rise in earnings before interest, taxes, depreciation and amortization, or Ebitda, a widely used measure of profitability.

At least 60 firms on the index, the report says, seem to have booked sales that might actually have come from investment income or other income.

Also, reducing depreciation rates to push expenses to a later period is noticed in at least 10 companies. And at least 15 firms have handed out the bulk of their loans and advances to companies in which their directors have an interest.

“Pump and dump” and “blab and grab” are among the more popular ways that promoters use to push their stock up, according to the report. In the former, the promoter “pumps” up the stock to generate liquidity, follows it up with announcements that send the price up and then “dumps” the holdings.

In the latter, the promoter announces a new venture, even when it has nothing to do with the company’s main business. This infuses fresh funds, which the promoter “grabs”, but then sells his/her own holdings. The new venture is then conveniently postponed, sending the stock price down.

A third method promoters use is to simply siphon off funds during bear markets, when the pressure to show strong earnings is less. The most common method, the report says, is to inflate “other expenses” or “sales and distribution expenses”, or even “miscellaneous expenses”. In bear markets, the report says, such expenses rose by almost 25% (as a percentage of operating expenses).

The problem exists on three fronts: lax accounting rules, weak market regulation and corporate corruption.

In the first category, the report says, there is a lack of restrictions on auditors to do consulting work for the firms they audit.

Second, the Indian market does not seem to place restrictions on how quickly after the year-end a firm has to publish its annual report, which deprives investors of a timely look at the true state of affairs. The report also castigates market regulators that are driven more by political decisions.

And the third fault-line lies, the report says, with the promoters, whose powers are largely unchecked by directors, auditors or regulators.

Still, in the face of all the doom and gloom surrounding Satyam, the report says this is the best time to invest in India, as the markets are unprecedentedly cheap, noting that such scandals do not appear to have an overall bearing on market direction.

Investors must do three basic things before they open their wallets—primary data checks on management, forensic financial analysis and in-depth interviews with management.