Banks to hike home loan rates further

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

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

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

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

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

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

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

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

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

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

ICICI readies Rs 1000 cr, 44-floor Hyderabad hub

DNAIndia reports

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

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

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

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

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

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

100-storey towers coming up!

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

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

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

Realty scrips hit 3-mth low

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

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

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

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

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

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

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

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

Real estate chat

From rediff.com

Want to invest in realty? Wait for govt guidelines'

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

Here is the transcript of the scintillating chat:

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

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

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

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

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

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

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

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

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

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

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

RBI ends the party, loan rates will go up

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

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

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

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

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

The question now is by how much.”

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

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

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

How the CRR hike affects you

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

How tighter money will benefit you

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

WHAT TO DO NOW

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

Is the realty bubble about to burst?

DNA India reports

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

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

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

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

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

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

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

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

• Biggest acquisition! : View Special

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

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

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

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

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

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

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

CNBC TV18 interview on interest rates

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

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

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

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

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

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

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

Property stocks slide as interest rates crawl up

Economic Times
MUMBAI: Fears that property prices could be headed for a meaningful correction seems to be prompting investors in stocks of real estate companies to jump ship. Most realty stocks, which until a couple of months ago were being chased by enthusiastic investors, have shed 10-25% over the past one month.

With interest rates gradually crawling higher, players are worried that demand for property could be hit. Stocks of real estate majors like Mahindra Gesco, DS Kulkarni, Ansal Buildwell and Parsvanath Builders and Peninsula Land have been languishing over the past one month.

Shares of Mahindra Gesco, which closed at Rs 852.65 on January 8, has slid to Rs 645.35 on February 9, down 24%. DS Kulkarni Developers has come down from Rs 387.05 to Rs 304.10 during the considered period, down 20%. Parsvanath Developers slid from Rs 440.25 to Rs 339.20 during the period, down 23%. Peninsula Land, Ansal Buildwell and Sobha Developers have also fallen by around 23%, 22% and 17%, respectively over the past one month.

Said Nikhil Thakker, head research, UTI Securities, "Over the past three years, the housing sector has witnessed a CAGR of 60% to 65% on factors like easy lending rates and accumulated land bank (land purchased at low prices prior to the real estate boom). Hike in lending rates and peaking real estate prices could force the sector towards a slowdown."

Market watchers predict that it would take some time for the sector to regain its lost lustre. The decision to hike interest rates has not gone down well with most builders. "The current real estate boom has largely been contributed by rising income levels and affordable interest rates.

Hike in interest rates and skyrocketing land prices may hit the offtake initially. But we do not see the impact to be very significant,'' said a Mumbai-based builder, adding, "Real estate prices will not impact us as we have sufficient land bank to complete our announced projects. Probably, we will sell our space adding a bit more to the price tag."

Being demand-driven, the realty sector still appears to hold promise with several housing and infrastructure projects coming up at various parts of the country.

"Interest rates on home loans may rise, but this will not change the fact that people need homes. It will only result in people buying homes in less-preferred locations. This will, in turn, force builders to move away from metros to two-tier and three-tier cities.

This trend will automatically negate the concentration of price in a vantage spot," said Mangesh Korgaonker, director general, National Institute of Construction and Manufacturing Research (NICMAR), Pune. According to sector analysts, fresh IPOs by realty companies will pep the sector up occasionally during the days of lull.

"Short-term investors should be careful about sudden dips in stock prices. At current levels, investors, with a long-term view, can start accumulating stocks of companies with good fundamentals. Those who are currently holding realty stocks need not panic; prices will start moving up steadily once the industry factors in raised interest rates and people start booking spaces all over again," said an analyst tracking the sector.

Left home alone with loan rates

TIMES NEWS NETWORK[ SUNDAY, FEBRUARY 11, 2007 03:28:32 AM]
Chintamani is more worried these days. And not without reasons. Ever since he has taken a home loan, he’s seen interest rates going northwards, with no respite in sight. So much so that during the last two-and-a-half years alone, home loan rates (floating) have increased from 7.5% to 11.75%, forcing the EMI for a 20-year loan go up by around 35%.

Moreover, despite government assurances, bankers and experts see no softening of rates at least till the next one year or two, implying more worries and hardships for the people like Chintamani.

Says Deepabh Jain, business leader - mortgages, GE Money, “Interest rate follows a cyclic trend. 2002 to 2005 saw a downward trend in the interest rates and from the beginning of 2006, rates have gone up by approximately 2.5% to 3%. The rising trend is likely to continue for some more time and with current market conditions, rates are not expected to stabilise for the rest of the year.”

This means more trouble for home buyers, particularly for home loan seekers. “Home loan seekers today have to contend with the double whammy of rising interest rates coupled with sky-rocketing asset prices. While the home loan rates have gone up sharply over the last one year, the asset prices have moved by an average of 18-22%. As a result, homes have started moving in the range of unaffordability for the average home buyer,” says Ashish Kapur, CEO, Invest Shoppe India Ltd.

Thus, besides the houses becoming unaffordable, the current trend of rising interest rates is a matter of concern for consumers as even small upward changes in the monthly EMIs can play havoc with their personal finances. What, however, is the way out? The home loan seekers may postpone their plan to buy a new house for some more time, but what about the old customers? Should they switch from a floating rate to a fixed one or start prepaying the loan?

Says J S Grewal, president-operations, Religare Finvest Ltd, “Consumers who have already taken home loans do not have too many options at this juncture. It would, therefore, not be advisable for people with floating rate loans to shift to fixed rates, since most banks charge a premium of 1 to 1.5% for fixed rates over floating rates. In my view, however, home loan rates are not expected to go beyond this band in the coming year or two. Hence, paying this premium upfront today would not be advisable. Banks also charge a fee for permitting such a switch. This would also add to the overall cost.”

Rakesh Singh, business manager - mortgages, Standard Chartered Bank, is of the same opinion. “Floating rate loans are cheaper by 100-150 bps compared to fixed rate loans. Also, switching from floating to fixed attracts an additional fee of around 1-1.5%. We feel interest rates in the short-term are not expected to increase by more than 50-100 bps. Hence, our advice would be not to shift from a floating rate loan,” he says.

The case of home loan seekers, however, is different. “Going by the trend, one cannot completely rule out the possibility of home loan rates inching up further. This being the case, home loan seekers should consider opting for a fixed rate loan (i.e. fixed for 3-5 years).

This will protect them from a potential interest rate hike in the near term. At the end of the said 3-5-year term, they have the option of considering either to continue with the ‘fixed’ rate (if interest rates continue to rise) or migrate to a floating rate loan,” informs Kapur, adding that “however, in case interest rates were to decline going forward, the truly fixed rate loan will not reflect the fall in interest rates and the consumer will forfeit any chance of benefiting from a decline in interest rates.”

Jain agrees. “Interest rates are not looking to stabilise for some time and with property prices going up, decision to wait may not be the right approach. It is suggested that consumers opt for a fixed rate for the initial years and subsequently be on the floating one,” he says.

Put simply, your home loan will be a lot more expensive, but still it is better to go for it rather than wait for interest and property rates to come down.So far as prepayment is concerned, this option looks ideal, but should be handled with care.

Jain is of the opinion that prepayment is not a good option considering returns on the investment with any other instrument is much higher. For instance, take the example of a Rs 25-lakh loan for 15-year tenor at 9.5% IRR. On making part-payment of Rs 5 lakh, the tenor is reduced to 119 months, with the total savings in interest amount being Rs 11.11 lakh. “If the same 5 lakh is invested in fixed deposits with at least 9% returns, earning for 119 months will be Rs 12.17 lakh, which is over Rs 1 lakh higher than the savings made in the interest. Similar investment in stock markets or other market instruments can fetch even better returns,” advises Jain

Moreover, prepayment is an option that comes mostly with a prepayment penalty clause which is generally based on outstanding principal. “This prepayment penalty ranges from 3 to 4% of the principal outstanding. So, the amount of penalty would vary from consumer to consumer, depending on principal outstanding,” says Kapur.

Thus, if a consumer has the money to prepay the outstanding home loan, he must calculate the total Net Present Value (NPV) of both the options, i.e. regular instalment vs prepayment. The option with the lesser NPV is preferable.

Of course, however, if you are making the part payment from your own fund, this generally doesn’t attract any penalty. But make sure that there isn’t a prepayment penalty associated with your loan.

Says Singh, “Prepayment decisions should also be taken by customers depending upon their cash flow situation -- availability of surplus funds. Customers with surplus funds should look at the option of maximizing their investment returns based on their risk appetite.”

Besides, other considerations like tax savings on account of principal repayment and interest should also be taken into account. The principal repaid in a home loan instalment is currently allowed for a deduction up to Rs 1 lakh under section 80C. You can also claim up to Rs 1.5 lakh in interest payments as a deduction from your income, the combined deduction being up to Rs 2.5 lakh. Not a small amount to be ignored! Also, you should clear your non-constructive debts such as credit card, personal and car loans first before focusing on your home loan.

Experts are also of the view that the current trend of rising interest rates is likely to put a lot of pressure on financial institutions offering housing loans and will force them to review their portfolio.

“They will now have to be more careful about while assessing individual’s ability to service the loan being offered. This is good as the tightening of norms will result in lower NPAs for the banks and help them earn better profitability. This in turn will ensure that genuine buyers/investors with adequate finance capabilities remain in the market providing an overall sustained growth for the real estate sector,” says Varun Pawha, director, Pawa Builders. Thus, actual users are also likely to benefit as it will deter speculators from over leveraging themselves and cornering/hoarding housing flats for speculative gains.

In the final analysis, prepayment makes lots of sense. After all, it’s a great feeling owning one’s own house, and residing in a debt-free world. But if wishes were horses, wouldn’t everyone have been riding them?

Pune, India's next boom town

Business standard reports

Pune has been the hotbed of engineering activity for many years now, with the likes of Tata, Bajaj, Bharat Forge and several others based in the city. In recent times though, IT, ITeS and a lot of R&D work has considerably upped the ante of real estate development within the city. The pace of development is unprecedented here and those who visit the city after a long time may find it unrecognisable.

There is a spurt in all three segments -- commercial, residential and retail. Over the last 2-3 years the Pune residential market has seen huge appreciation in terms of its capital values.

According to Cushman & Wakefield research, certain premium projects in established residential markets like Kalyani Nagar which were launched and started selling in 2003-04 at Rs 1,500-1,700 per sq ft are presently estimate-valued at Rs 4,000-5,000 per sq ft. Land prices too have doubled in most areas over the last year-and-a-half, according to Aditi Watve, senior executive, CMIS, at real estate consultancy Trammell Crow Meghraj.

Development in Pune today is bipolar. The north western side on the road towards Mumbai as well as the eastern side are seeing a lot of IT-driven development.

The high-end residential development is happening at Koregaon Park, Hadapsar, Kalyani Nagar, Boat Club Road, Bund Garden Road, Shivaji Nagar and Law College Road. Places like Deccan Gymkhana, Bhandarkar Road, Model Colony, Kothrud, Senapati Bapat Road and Camp are old posh areas of the city, where generous new developments are taking place today.

According to some estimates, there are 20-25 malls being planned in Pune. As per Cushman & Wakefield estimates, there are 14 upcoming malls in the city that are in different stages of development -- under construction and in the planning stages.

These upcoming malls are located in the micro-markets of Aundh, Kharadi, Bund Garden Road, Hadapsar, Shastri Nagar, Kalyani Nagar, Karve Road, Raja Bahadur Road, Warje, Wakad, Ganeshkhind Road and Pimpri. Cushman & Wakefield says approximately 4.7 million sq ft of retail (mall) space will come up by the first quarter of 2009.

Commercial office space coming up in different parts of the city, such as Hinjewadi on the western side and Kharadi and Hadapsar on the eastern side, is reserved for mostly the IT sector.

Originally commercial space in the city was in the central business districts (CBD) at Camp, Bund Garden Road and Dhole Patil Road as well as off-CBD areas like Deccan Gymkhana, Senapati Bapat Road and Wakdewadi. According to an estimate by Trammell Crow Meghraj, there is about 20 million sq ft of office space being developed across the city.

Some of the bigger national developers are showing an interest in the city. DLF has taken some land near Hinjewadi on the western side; Unitech has been reported to be looking for land; Reliance is planning a mall close to the Armed Forces Medical College in the Turf Club area. K Raheja Corp is looking at a 1 million sq ft development at Yerawada near Lohegaon airport. This might be a mall-cum-hotel development.

National developers might be here but the flavour of this market is local, says Watve. There are over 300 local builders, some of the more prominent ones being Panchshil Realty, Gera Developments, Paranjape Schemes, Kumar Builders, Kolte Patil and DS Kulkarni Developers.

In Kharadi, Panchshil Realty is building a 4.5 million sq ft IT/ITes SEZ called EON. The first phase at EON with 1 million sq ft of space will be fully operational by July 2007, says Atul Chordia, managing director of Panchshil Realty. Corporates like Honeywell and VSNL have already got space here.

On Senapati Bapat Road, the company is developing 2.2 million sq ft of space which would include an international convention centre, a 430-room Marriott hotel, half a million sq ft of family entertainment centre, a mall, art gallery, high street retail, IT park and a trade tower.

In the residential space, high-end projects are aplenty. Gera Developments are developing 3- and 4-bedroom Sky Villas at Kharadi. "These villas combine the feel and privacy of independent villas with the security and conveniences of apartments," says Sujeet Modak, general manger (product development), Gera Developments.

In addition to 600 Sky Villas, this project will also include a full-fledged country club and a hotel on a total of 25 acres. They also have Gera's GreensVille, with 89 luxury Garden Villas on 13 acres, again at Kharadi.

At Baner, they are developing the Regent Park which incorporates special environment friendly measures like solar water heaters, water recycling plant, motion sensor lights, rain water harvesting, use of efficient building material, along with high-end luxury.

Paranjape Schemes have a township project near Hinjewadi with 150 villas and high-end apartment towers. Shashank Paranjape, managing director, Paranjape Schemes, informs that the 4,000 sq ft villas here would cost over Rs 1.5 crore (Rs 15 million). A five-bedroom 2,500-3,000 sq ft apartment here would cost over Rs 1 crore (Rs 10 million).

Panchshil Realty has residential developments like the Waterfront at Kalyani Nagar and 1 North at Hadapsar.

1 North is a 1.5 million sq ft residential development with seven towers and a total of 400 apartments, which could cost anything between Rs 1.5-5 crore (Rs 15-50 million). The 14 penthouses here cost Rs 5 crore (Rs 50 million) each and have a private swimming pool, an island kitchen and an elevator that zips you straight into your living room!

With such a strong realty buzz, Pune's real estate action has only just begun.

Hospitality boom in Pune

Let's not forget the hospitality segment here in Pune, which is an essential part of the development process. At the moment, there are only three decent hotels in the city including Sun & Sand, Blue Diamond (now a Taj property) and Le Meridien.

This scenario is about to change soon. According to Siddharth Thaker, associate director -- consulting and valuation at HVS International, there are 30-odd hotels being planned in the city at the moment. We hear that in a couple of years there might be three Marriott properties, a Hyatt Regency, Radisson, Novotel, Traders Hotel, Royal Orchid and Lemon Tree (the list is very long. . . and still incomplete) in the city.

Changing Dynamics of IT

After a decade of growth, realignment, consolidation and expansion in the office sector, there are two themes that are likely to influence occupier choices in the near future. The first of these is the move from established metropolitan cities to smaller locations across India and the second is the emergence of a new format of Special Economic Zones (SEZ).
Tier II cities like Kolkata, Pune and Chandigarh saw rapid growth in new supply of IT space, as these centres took notice of the inevitable shift to new locations and positioned themselves as emerging hubs through proactive policies and development of IT park type facilites.
Looking ahead there are a few clear pointers of the anticipated theme for the office market. First, projections regarding the office property sector suggest that it is poised for yet more significant growth. According to studies by Nasscom-Mckinsey it is estimated that between 2005-2010, around one million additional people would be employed by the IT & ITES sector. This increase in the number of new people joining the sector is anticipated to further fuel a demand for nearly 100 million sqft of office space. This would manifest itself not only in increasing volume and depth of the sector in existing locations but also spread to emerging markets in smaller cities and towns (classified as Tier II and III) as occupiers would expand into these to tap into virgin workforce pools. Second, the Special Economic Zones (SEZs) drive that is presently underway is expected to add a new dimension to the office property markets by offering delineated duty free enclaves with global standard infrastructure.
A research report titled Changing Dimensions: Emerging Themes in Indian Office Real Estate Markets brought out by Trammell Crow Meghraj, Knowledge Centre elaborates on the transformation of the office property market where the availability of talent will be the driving force determining where offices will be set up in future.
The report says, companies have started spreading geographically beyond established metropolitan cieis to what have been designated as Tier II and III cities. Tier I are established metropolitan cities, Tier II- upcoming cities, and tier III including state capitals and district towns which are emerging as new IT and ITES destinations.
Although Tier I cities have an established brand name and a large talent pool they have to contend with increasing costs. They also are seeing increasingly rising employee turnover. Tier II cities have established themselves as destination for IT and ITES companies and include locations like Pune, Chandigarh and Kolkata. These cities are also now squarely on the radar of IT and ITES occupiers. Tier III cities include state capitals in most cases and in some cases nodal cities, which are emerging as the new destination for IT and ITES occupiers like Kochi, Bhubaneswar, Thiruvananthapuram, Coimbatore, Indore, Ahmedabad, Jaipur, Nagpur and Nashik.
FACTORS COMPELLING CHANGE
The hunger to have the best talent, in order to stay ahead of the rest, is a fact of life for occupiers. As the cost of recruiting and retaining human capital headed north in established hubs, it has compelled occupiers to look for new talent pools. This is not to say there is no attrition in new locations, but the rate of attrition is relatively lower compared to more mature markets. According to a study done by Mafoi (Talent Pool Mapping Study: 2006), on an average, the attrition rates in more established locations like Delhi, NCR, Bangalore and Mumbai ranges between 25-40 per cent. Comparitively the attrition rate in Tier II cities like Pune and Chandigarh is a little lower at between 10-25 per cent.
The high turnover rates is one part of the story, rising salaries is another. The difference in salaries between locations is one of the reasons for companies to look at new locations, in a bid to reduce their costs. The difference in salary at the entry level between a Tier I location and a Tier II location is approximately 19-22 per cent while in case of a Tier I and Tier III location, the difference increases up to 42-57 per cent.
The report further says, while it is good to say that Tier II and III cities hold the future for the IT & ITES industry, these new locations are not without their own issues. Occupiers looking at expanding to such new locations should carefully evaluate the fitment of such cities with their business strategy.
Human Capital is by far the most important factor while deciding on a new location. Availability of good infrastructure is paramount to the success of operations for occupiers in new locations. One key parameter that needs to be evaluated is connectivity of such new locations with established metropolitan cities, as in many cases bad connectivity could lead to several problems.
Low cost of real estate is just one part of the story. Occupiers need to secure good quality office real estate at appropriate costings in new locations. Although large national level developers have started to move into Tier II and III locations, there may be cases where ready availability of Grade A space may be limited in the short terms. In addition it is important to consider the softer issues about a location which may be equally important for attracting and retaining employees. These could include issues such as quality of life, general city environment, availability of entertainment.
The SEZ is still a recent phenomenon, the SEZ policy and issues are anticipated to evolve over a period of time and this will mean changing dynamics and hence occupiers need to be constantly aware of such changes and have an element of flexibility in their strategy to adapt to these changes.

Pune still climbing

Times of India

If you thought Pune’s property prices have reached a plateau, think again, says Prachi Bari

Incredible as it might seem, in last one year, property prices in some areas rose 60-100%. Even middle level properties in Magarpatta, which were earlier quoting at Rs 2,400, are now quoted at Rs 3500. High-end properties quoting at Rs 3,000 a year and a half ago are now quoting Rs 4,500. The city is also witnessing a new phenomenon with one-off properties in areas like Boat Club and Koregaon Park going at Rs 10,000 a sq. ft. So does that mean that prices have now reached a peak and are not likely to rise further? Not quite, say the experts.
Four factors – they say will continue to contribute to the rising real estate prices, especially in the Eastern and Western corridors of the city. First is the paucity of land and consequent rise in land prices, the second is a rise in construction costs, third is the rise in the developers’ cost of funds and fourth is the continued flow of migration thanks to increased employment opportunities.
Satish Magar, MD, Magarpatta city Development Corporation feels that although the market is looking good, there is a shortfall of land to develop. “Land is going to be a major problem and will add to the increase of the price of real estate in Pune.”
Rajesh Choudhary, MD Prestige Developers concurs with this view. “Land cost as well as building material cost have gone up and are adding to the rising prices of real estate,” he says.
Choudhary also points out that led by the IT and ITES industry, migration to Pune is only likely to gather steam. This will create fresh supply, he believes. “Thanks to more companies setting up base in the city, Pune is becoming the destination where in a lakh of job opportunities will be created on an annual basis. These jobs will translate in an increased demand for housing, as well as a greater demand for retail, entertainment and hospitality spaces. Given this demand a price correction is unlikely in the short
term,” he says.
Aditi Watve, Senior executive, Capital markets and investment Sales, Trammell Crowe Meghraj agrees with the viewpoint saying, “There is definitely lot of migration happening to the city which amounts in tremendous amount of job creation, especially in IT, Manufacturing and services,” she says. Watve adds that as long as genuine buyers and retail investors fuel the market, prices will continue to rise but it will not be steep.
Analysts point out that it is not just the increased demand but its quality has also undergone a change. With rising salaries, buyers are willing to pay for more and more amenities. Hardly any developer is today constructing a project with 1BHK flats since the demand is for a minimum of 2BHK flats, going up to premium 4BHK and 5BHK row houses and bungalows, with fancy fitting and high-tech amenities. This itself creates a price pressure. This is especially true of the Eastern and Western Corridors of the city, they say.
As a result market players say, prices in fact may rise higher. Rohit Gera MD, Gera Developers says, “If one were to look at the price rise of the new projects, there will be a good 10 to 15 per cent increase in the price rate. I don’t think the prices will come down as there is also an heavy increase in the construction cost.”
Jones Lang Lasalle also rules out any correction at least for the next six to 12 months. Zaheer Bandukwalla, Associate Director of the international property consulting firm says, “As of now there is no correction as the projects supposed to enter the market have not come up. There may be a slight slump in the market in 2008-09, with more supply entering the market, both in IT and residential.”
According to Mufadal, proprietor Realtors and Secretary of Pune Real Estate Agents Association, “The location of the project, its stage of completion determines the extent to which prices would rise. Demand for projects nearing completion is higher with actual users while investors are looking at pre launch projects in areas like Kharadi, Baner, Kalyani Nagar, and Viman Nagar.”
Shrikant Paranjape, MD Paranjape Schemes believes that a correction is likely first in Metros like Delhi and Mumbai, before it happens in Pune. But he believes that perhaps the rate rise in prices may be lower. “I don’t see any correction in the reduction of rates in cities like Pune, although the way the rates were galloping, 2007 will see them trotting,” he says.
According to Paranjape, Pune prices are still affordable — even at the rate of Rs. 3500 per sq. ft. But he believes that once the rates start going beyond Rs. 4000 per sq ft, then there will be a resistance.
So what this really means that if you were planning to postpone your decision to buy a home, hoping that there will be a correction in prices in the near future; think again. You could actually end up paying more, not less, a year down the line.

Massive bubble in home builder stocks

In comparison Google seems to have taken baby steps.
Feb. 9 (Bloomberg) -- Shares of Unitech Ltd.,
India's largest real-estate developer by market value, soared 26,869 percent during the past three years. Anant Raj Industries Ltd., a competitor, leapt 39,548 percent.

Both have dropped at least 5 percent (shocking.....)from peaks in November and December and further losses may lie ahead. The highest interest rates in four years, tighter lending requirements and seven share sales this year are hurting real-estate stocks. Those companies had rallied as a property boom pushed apartment prices in southern Mumbai to near-Manhattan levels.

Property stock valuations are approaching bubble territory

Real estate-related stocks last year accounted for six of the top 10 performers in the BSE-500 index, the broadest measure of India's stock market. Three of the six are down this year ....

Most Expensive
Indian developers are among the BSE index's most expensive members on a price-to-earnings basis. Unitech trades at 31 times expected earnings, while Anant Raj, a New Delhi-based developer in which billionaire George Soros bought a stake last year, is at 67 times. That compares with 21 times for the BSE-500 and 19 times for the eight stocks in Bloomberg's Asia-Pacific Home Builders Index.

Average home prices tripled over the past three years, buoyed by the world's second-quickest growth rate among major economies after China. Prices rose 50 percent to 100 percent over the past year in cities such as Delhi, Bangalore and Hyderabad,

Millions for Apartments
A six-bedroom duplex apartment in the Malabar Hill area in South Mumbai, where Bollywood actor Vinod Khanna and Citigroup Inc.'s India head Sanjay Nayar reside, sold for about 250 million rupees ($5.7 million), ....

A comparable apartment on the Upper East Side of Manhattan would cost between $6.5 million and $8 million, said Jonathan Miller, president of Miller Samuel Inc., a real-estate appraisal firm in New York.

India's developers also look expensive when their share prices are measured against the value of the land they own for construction,

Land bank valuations by developers are unrealistically high,'' he said. The valuations may not be justified because the projects will take five or six years to complete, he said.

Expensive Offices
Mumbai's office rentals are now the third highest in the Asia-Pacific region after Hong Kong and Tokyo, ..... It costs annually $88.2 per square foot to rent office space in Mumbai, compared with Tokyo's $97 and Hong Kong's $141.

The central bank is moving to cool the market. The Reserve Bank of India on Jan. 31 raised its overnight lending rate for the fifth time in a year to 7.5 percent and asked lenders to double provisions for commercial real estate loans to 2 percent in an attempt to curb defaults.

`Matter of Concern'
Housing Development Finance Corp., the country's second- largest mortgage lender, raised its rates four times over the past year to 9.5 percent.

Commercial and residential construction in India, Asia's fourth-largest economy, will surge to $50 billion by 2010 from $12 billion in 2005, according to a Merrill Lynch & Co. report. India will need as many as 10 million new housing units a year by 2030, ..

IPOs
Initial share sales, though, will be competing with existing listed real estate companies for investor funds. Seven property companies have sought regulatory approval for IPOs so far this year, up from just two last year. The largest will be billionaire Kushal Pal Singh's DLF Ltd., which aims to raise about $2 billion, expected over the next couple of months.

As more supply of paper hits the market, valuations and returns will come down to more stable levels,'' said Krishnan, at DNB Nor Asset Management in Chennai. "Companies may not be able to get the pricing they want"

Inflation and interest rates explained

The wealth of a nation is directly proportional to low interest rates and low inflation. Looks like 2.5 years of low rates are hurting the middleclass

Times of India

A climb in inflation rates has always seen a frown on the foreheads of countless borrowers. Hike in inflation rate has often been succeeded by lenders hiking the interest rates on home loans. Banks have inserted clauses in their loan agreements that empower them to increase interest rates under special circumstances. And it is not only the floating but also fixed rate borrowers who have borne the brunt of increased rates.
So how does inflation impact home loans?
Inflation is the rise in general level of prices as against the purchasing power of the common man. Inflation in small doses is always considered healthy for an economy. Increasing prices and wages eliminates the need for negotiating and making downward price and wage adjustments that is usually associated with deflation. Inflation is a driving factor that motivates people to invest rather than save money over the longer run.

An out-of-control northward-bound inflation is detrimental to the economic fabric of a nation. When there is increase in money in circulation (government printing money in excess) when compared to the ability of the economy to supply, we see a demand-pull inflation. Then there is the cost-push inflation which can occur from certain events like scarcity of crude oil supply. Whatever be the cause, inflation hurts people, particularly those who have locked themselves in fixed instruments like the pensioners. Inflation can lead to a wage spiral where trade unions may demand more wages, and consequently industrial productivity will suffer.

Inflation can be reined by increasing interest rates. When the central bank hikes interest rates, it reduces money supply. This is the oldest method of controlling inflation. Increase in rates is associated with unemployment and fall in production that is immediately followed by a curb on unhindered price increase.

The Reserve Bank of India (RBI) is justified in increasing the repo and reverse repo rates to bring inflation under check. Repo rate is the benchmark rate at which the RBI lends to banks for a short term. All the banks that borrow money from the RBI have to bear this cost. Often used in conjunction with the repo rate is the reverse repo rate. When the RBI borrows money from banks against its securities, the interest rate at which it does so is known as reverse repo.

The reverse repo rate can also be defined as the return banks earn on excess funds parked with the central bank against Government securities.
When the RBI increases the repo rate, a natural fallout is an impending increase of the bank rate. This will soon snowball into hardening in interest rates - both lending and deposit rates. The lending rates or prime lending rates on the basis of which banks lend to customers will go up. A notable increase in the deposit rates offered by banks on fixed deposits for various maturities can be perceived.

An associated term is CRR or the cash reserve ratio. That is, the portion of deposits to be maintained by banks with the RBI. Increasing CRR pulls away excess money supply from the banking system. This reduces resources with banks and impacts its interest income. Hence, this usually leads to a rise in interest rates on loans like housing loans, that is passed on to borrowers in the longer run.

Home loan's too hot for property buyers

Loan rate hike hits lower, middle income

Pune: Tejraj Parab, a service industry professional who has been hunting for a flat in Pune for the past six months, has postponed his plans. The prevailing home loan rates are way beyond his capacity, says he.

Sudhakar V., an IT professional, too has shelved his plans to buy property. "I'm rather comfortable staying at a rented place,rather than paying such a heavy price now for buying a flat."

"With the equated monthly instalment (EMI) on home loans going up every second day, it's beyond my means to go for a loan at this stage," Parab said, pointing to newspaper reports that rates on home loans may touch 11.75%.

Floating rate on home loans has gone up from 8-8.25% in the beginning of last year to 10.25%. ICICI Bank on Tuesday increased its floating rate to 10.50% and fixed rate to 12.5%, from 11.5%. This was a day after the finance minister requested banks not to hike home loan rates. Also, other housing loan institutions are expected to hike rates.

While property dealers in the city have admitted that many prospective buyers have decided to wait and watch, hoping prices of real estate would fall, builders and developers are upbeat.

"The increasing rates of home loans will not have any adverse effect on Pune's real estate," said P.A. Inamdar, former president, Promoters and Builders Association of Poona. The growth of the sector is spurred by the gap that still exists between low supply and high demand, particularly from IT professionals, he added.

First residential real estate price index to be launched

Bringing significant transparency to one of the hottest sectors of the economy, India’s home loans regulator is rolling out the country’s first residential real estate price index in March.

The index, to be called the ‘NHB Residex’, will initially cover real estate prices in Mumbai, New Delhi, Bangalore, Kolkata and Bhopal. Within a year, the index will be expanded to cover 36 cities.

“Today, there is opacity,” says the regulator, S. Sridhar, chairman and managing director of National Housing Bank. “We hope to bring transparency.”

“India lacks a database on real estate prices, other developing markets have a series of housing indices,” Sridhar says. “A house price index can lead to monetary and fiscal action.”

Indeed, the index comes on the heels of what some in the government see as a worrying trend of soaring home loans, driven by a runaway rise in real estate prices rather than a surge in the number of new homes that are being built every year.

In the five years ended March 2005, home loans grew at a compound rate of 32.15 percent to touch Rs 76,819 crore. During the same period, the number of new houses grew by 8.5 percent- 9 percent, he notes.

Despite concerns about a possible real estate bubble, the government has also been treading cautiously as it remains concerned about the impact of recent bank lending rate hikes on home loans, a politically sensitive issue.

On Monday, finance minister P. Chidambaram said at a conference that he had asked banks—and they had agreed—not to pass on higher rates to home mortgages. The housing regulator will maintain the index and is being advised by a committee made up of representatives from the government, its parent Reserve Bank of India, and independent experts in the field.

Real estate experts welcomed the proposed index, saying it would be a step toward empowering buyers. Home buyers “will get some general direction on where the prices are,” said Anurag Mathur, executive director- project management, at the real estate consultancy Cushman & Wakefield.

Having an index could also help give credibility to the market because recorded real estate transactions in the country are widely believed to under-report the actual amounts that change hands, because of cash being paid to the sellers.

“Black money does create a credibility issue,” said Revathy Ashok, director at TSI Ventures, a real-estate joint venture between private equity firm ICICI Ventures and the large US real estate company, Tishman Speyer. An index created by a government-backed entity would be more credible than if the index was created by the real-estate industry, she added.

Even if a real-estate index can’t match more popular and widely-used stock market indices in terms of credibility, it will still give users a sense of what’s happening in the market, said Saumitra Choudhuri, economic advisor at the credit rating agency, ICRA, and a member of the Prime Minister’s Economic Advisory Council.

Home Lenders Plunge as More Subprime Mortgages Sour

Massive losses at subprime lenders in the US How many lenders in India are in a similar boat ?

Feb. 8 (Bloomberg) -- Shares of U.S. mortgage lenders plunged after New Century Financial Corp. and HSBC Holdings Plc said losses from bad home loans are piling up faster than they expected.

The stock of Irvine, California-based New Century fell $10.92, or 36 percent, to $19.24 in New York Stock Exchange composite trading, the biggest decline since October 1998. Accredited Home Lenders Holding Co. lost 6 percent to $27.25, Novastar Financial Inc. tumbled 11 percent to $18.31 and American Home Mortgage Investment Corp. slid 8.1 percent to $33.06.

Both New Century and HSBC blamed rising defaults on so- called subprime loans they made to borrowers who had little credit history or heavy debt loads. Defaults on subprime loans increased nationwide last year as competition and a slower housing market prompted lenders to lower their standards and give mortgages to borrowers who couldn't make their monthly payments.

``It's kind of a watershed moment where the magnitude of the problems really is starting to come to the surface,'' said Brian Horey, general partner at Aurelian Partners LP in New York, which has sold short shares of New Century. ``If you could fog a mirror, you could get a loan.''

New Century, the second-largest subprime lender, said late yesterday it probably lost money in the last quarter and will need to restate 2006 earnings, and the company won't make as many loans this year as it had previously forecast.

Wider Impact

HSBC, the world's third-largest bank by market value, announced a management shakeup today after setting aside $1.76 billion more than analysts estimated to cover bad loans in 2006. Shares of the London-based bank fell as much as 2.6 percent, the most in eight months. They closed down 14 pence, or 1.5 percent, at 917 pence in London.

Other big declines at mortgage companies included Fremont General Corp., which fell 11 percent to $12.41, and Fieldstone Investment Corp., down 12 percent to $2.97.

The damage spread to stocks of other companies including H&R Block Inc., which is trying to sell its Option One home lending unit. The shares fell as much as 3.6 percent, closing with a 1.3 percent loss at $24.52.

Washington Mutual Inc., the nation's biggest thrift, Countrywide Financial Corp., the largest independent mortgage lender, and IndyMac Bancorp Inc. each shed more than 2.5 percent.

Among subprime loans, delinquencies of more than 90 days plus foreclosures and seized properties are at their highest level in at least six years, according to a Friedman Billings Ramsey Group report.

Goldman Sees Trouble

``That is the one area across all businesses in all firms that is actually in a bit of trouble now,'' David Viniar, chief financial officer of New York-based Goldman Sachs Group Inc., said today about subprime lending. ``That market's going to get worse before it gets better.'' Viniar spoke at an investor conference in Naples, Florida.

Cooling demand for the mortgages spurred lenders including Wachovia Corp. and KeyCorp to shut or sell home-loan units in the past year. National City Corp. sold its First Franklin mortgage unit to get some of the riskiest loans off its books.

``There's a lot of camouflaging going on in credit quality,'' said analyst David Hendler at CreditSights Inc. in an interview late last month. ``We're getting the sense in this shop that this is more than normal deterioration, that it speaks to deeper difficulties.''

Layers of Risk

Washington Mutual CEO Kerry Killinger blamed worse-than- expected erosion in credit quality among subprime loans for a $122 million fourth-quarter loss at the Seattle-based company. At IndyMac, CEO Michael Perry told shareholders Jan. 16 the Pasadena, California-based lender missed its own profit forecast as defaults increased.

``The banks have headwinds that will make it tough for them to outperform the broader market this year,'' said Chris Hagedorn, a money manager at Fifth Third Asset Management in Cincinnati. Hagedorn, whose company oversees $21 billion, wonders why bankers aren't more pessimistic. ``I got the sense that they're saying we're just at the start of this thing,'' he said on Feb. 5.

Federal Reserve Governor Susan Bies said last month regulators are particularly worried about lenders that added layers of risk by combining low down payments with low documentation, or with interest-only loans that allow borrowers to skip payments and add the sum to the total amount of the loan.

The Fed added a special set of queries on bad loans to its regular quarterly survey of senior loan officers. The Feb. 5 report found half expect credit quality on non-traditional mortgages, such adjustable-rate and interest-only loans, to get worse in 2007. In response, more banks tightened lending standards in the past three months than in any quarter since the early 1990s, the survey said.

Govt to let rupee rise to bring inflation down

Economic times reports.

NEW DELHI: The government is plumping for a stronger rupee as the most effective short-term measure to combat inflation, according to sources in the finance ministry. The ministry has already indicated to RBI governor YV Reddy that the government will be comfortable with a stronger rupee. The central bank has been allowing the rupee to appreciate of late.

The Reserve Bank could also resort to a hike in the cash reserve ratio (CRR), as merely tinkering with interest rates at the short end does not reduce the excess liquidity that is feeding inflation, which is currently pushing 6%. The bulk of inflation reflects supply constraints: metal prices are high globally (nearly 30% increase over 12 months in dollar terms) as also food prices (up 13%, again in dollar terms).

The government has taken several supply-side measures to reduce prices: slashed import duties on base metals, cement and wheat, curtailed export of sugar, and imported wheat at zero duty. It is trying to import pulses from Myanmar and Canada and planning to step up open market sales of wheat. However, the price rise has not been contained. Longer term supply-side measures will take time to kick in.

Also, the current price rise is not just a supply-side impact. There’s another villain in this story: the huge amount of foreign capital flowing into the country, seeking to cash in on the India boom. Just over the last one week, $3 billion has come into the country, said the finance ministry official.

When foreign capital flows in, money supply goes up as RBI purchases the inflow, giving rupees in return. RBI seeks to take back this extra money in the system by selling government securities. When the public picks up bonds, the cash flows into RBI, reducing the money supply. But such sterilisation is not complete and external capital inflows lead to a rise in the money supply.

Boom to bust to bake

Hindu reports on Hyderabad

While builders blame Government's auctions for the slump in real estate, experts feel it's only a matter of time before it hits the growth curve again

After a free run for almost two years, is the property scene set to take a `U' turn? Have the real estate prices that zoomed up and up begun to crash?

Should one buy now or wait for some more time in anticipation of cheaper prices?

Or is it just that property prices are undergoing the much-awaited correction? In what some describe as a cooling-off period in the city and suburbs which had remained hot for some time, there seems to be a slight dip in land dealings in the last couple of months.

Passing phase

Though various theories are floated and causes attributed for the new trend — some even describe it as a crash — observers look at the lull as a passing phase and a spurt in transactions staging a comeback.

Though some feel tempted to attach the separate Telangana demand as a factor for the slight drop, industry watchers term it an unrelated and temporary phenomenon. Some builders themselves are candid in admitting that the prices have gone beyond the margins of reason and the slowdown will offer some sort of correction.

It is widely acknowledged that the activity has slowed down a bit, particularly on the city suburbs and beyond, where plots and acreages had been sold like hot cakes till November. From Maheshwaram to Nagaram to Shamshabad to Ameenpur, it is said the stream of agents and buyers has come down, much to the consternation of those holding properties there.

Nothing unusual

"It is happening across the country and the phenomenon is not restricted to Hyderabad alone," points out M. Murali Mohan, film actor-turned-real estate developer of Jayabheri Group.

Despite the sharp escalation in the last couple of years, land and apartment prices are reasonable when compared to other metros, he says.

The trading may be down but the real estate scenario is definitely not out.

"There is so much of development activity going on in the real estate field. The boom will pick up soon. Perhaps, after a little correction. I expect that to happen by March," Mr. Murali Mohan says.

The construction activity in the city is need-based and hence will withstand the fluctuations, observes P.S. Reddy, president of the Andhra Pradesh Real Estate Developers' Association.

"Around 15 lakh new jobs are expected to be generated in coming years. Imagine the need and demand for housing that the city is set to witness," he says.

No `T' factor

What about Telangana factor? "The city real estate growth has become oblivious to such issues. IT boys and girls, who constitute almost 40 per cent of our clientele, hardly seem to be perturbed by it," Mr. Reddy points out.

The property prices have indeed gone up. But builders feel the Government, too, should own up responsibility.

"How can it go for the kind of auctions that we had witnessed last year when bids were allowed to hit unscientific levels. At the same time, has the administration done anything to contain the cement and steel prices?" asks a builder.

Mr. Murali Mohan concurs: "The auctions are to be blamed to some extent. The growth should be gradual. It should not lead to situations spiralling out of control."

T. LALITH SINGH

Bangalore all set for a makeover?

Hindu reports

Eight Government agencies unveiled their agenda to make the Garden City the best global address in the world. A look at some of the grand plans by A.B. SUDHINDRA

At the "Bangalore Today, Tomorrow," an interactive workshop held here last week, the heads of eight government agencies unveiled their plan to make the Garden City "the best global address in the world." The tagline was "Well Known, Still Young" and citizens of "today and tomorrow" participated with great enthusiasm.

Here is what the various civic bodies are planning to achieve. The Bangalore Development Authority (BDA), under a new housing scheme, will offer more than two lakh houses for the lower middle and poor sections of society. The project will be implemented in Bangalore east and west zones.

Over 1.6 lakh houses will come up in the east zone and 81,000 in the west. All the houses will cost around Rs. 3 lakh. BDA has also announced that now the focus will be on vertical growth. There will be no 20X30 sites and 30 ft. wide roads in new layouts. A hi-tech corridor will come up at a cost of Rs. 140 crore. The BDA will also distribute 50,000 sites in the coming years.

Three-pronged strategy

The Bangalore Metropolitan Region Development Authority (BMRDA) has a three-pronged strategy to "decongest" the lives of Bangaloreans. Integrated townships, ring roads and expressways will add value to "Brand Bangalore".

It will also ensure that the forests, water bodies and heritage sites of the city are protected. The redevelopment of 39 roads of special economic relevance will be taken up and one can zoom on BMR ring roads which will have a speed limit of 180 kmph. The second phase of the airport expressway will connect NH 207.

BBMP projects

The Bruhat Bangalore Mahanagara Palike (BBMP) will unveil projects worth Rs. 2,000 crore in 2007 to boost infrastructure. These include six underpasses, 155 km of arterial roads and modernisation of Malleswaram market.

It will also upgrade five slums at a cost of Rs. 13 crore. Revamp of solid waste management, landfills on 500 acres and a modern abattoir at Iglur are also on the anvil.

Water supply

The Bangalore Water Supply and Sewerage Board (BWSSB) will complete Cauvery IV stage II phase project by 2010. The project will provide another 500 million litres per day (mld) to the city.

Bruhat Bangalore will require about 1,576 mld of water and there is a shortfall of about 700 mld. The agency has plans to quench the thirst of Bangaloreans by completing the Netak Balancing Reservoir project which will provide 100 mld. Recycled water from Yelahanka and Vrushabhavati plants will be supplied for non-potable use for industries. It will also complete water supply and sewerage connections in all slums by 2010 and replace corroded underground water and drainage lines.

BMRC work

The Bangalore Metro Rail Corporation (BMRC) has identified four corridors to commission its project. Bannerghatta-Mysore Road, Mysore Road-Tumkur Road, Tumkur Road-Bellary Road and Bannerghatta junction - National College projects will be taken up. The works under Reach 1 from Byappanahalli to Cricket Stadium will start in February.

The Bangalore Metropolitan Transport Corporation (BMTC) will add 737 Euro III buses. It will commission eight depots and seven stations.

Modernisation of existing bus stations is also on the anvil and it will establish traffic and transport management centres at Jayanagar, Domlur, Yeshwanthpur, Kengeri and Bannerghatta.

# BDA to offer more than two lakh houses in Bangalore east and west zones for the lower middle and poor sections of society.
# All the houses will cost around Rs. 3 lakh.
# There will be no 20x30 sites and 30 ft. wide roads in new layouts.