Retail opening cheers big firms

Commercial space and shops in Tier-1 and Tier-2 cities will now see a jump in prices. In London Tesco Express is ubiquitous and found in every corner of the city. Tesco Express'es operate in 1000 sq ft of space. I forsee every suburb to have multiple mini big box express shops of every retailers as there is very little available retail space in most of these areas.  I would not be surprised  if prices of commercial shops rise another 25% from here. 

(Reuters) - India's move to open its supermarket sector to foreign investors brought relief to its capital-starved local chains but failed to impress small-shop owners who dominate retail in the country, despite rules intended to safeguard small operators.

The government approved its biggest reform in years by allowing global supermarket giants such as Wal-Mart Stores Inc and Tesco to enter India with a 51 percent stake in the hope it would attract capital to build much-needed supply chains and improve efficiency to alleviate food-driven inflation.

"This is an extremely important step for domestic retailers as this will get in much-needed capital, apart from domain knowledge," said Thomas Varghese, chief executive of Aditya Birla Retail.

Chain stores account for just 6 percent of a $500 billion retail market dominated by street stalls and corner shops.

Many Indian chains are cash-strapped and loss-making, struggling to build scale given high costs, poor supply chains and scarce real estate and have been eyeing equity investments and joint venture partnerships with global firms to build scale.

Vijay Karwal, head of consumer, retail and healthcare for Asia at Royal Bank of Scotland based in Hong Kong expects more than $5 billion in foreign investment into the Indian retail sector over the next five to seven years.

Given the relative lack of modern retail infrastructure in India, and particularly in the enabling back-end infrastructure ... the vast majority of investment this change is expected to trigger would be greenfield investment into new retail sites and infrastructure," he said.

Shares in Indian retailers Pantaloon Retail, Shoppers Stop, Trent jumped -- bucking a fall in the wider stock market -- on expectations that they will form tie-ups with foreign players, and not just compete with them.

Debashish Mukherjee, partner and vice-president at consultancy firm AT Kearney, expects joint ventures and investments in local players from overseas operators over the next six months.

"The set of transactions which will happen fast is foreign players who are in existing joint ventures with Indian firms, the increase or decrease in stake, will happen quickly," he said. "The second are a set of deals that are waiting to happen and have been just waiting for the announcement."

SMALL SHOPS UNHAPPY

To appease opponents, the government said foreign stores will only be permitted in cities of more than 1 million -- of which India has more than 50 -- and individual states can decide whether to allow global players on to their patch.

It also insists that foreign retailers source almost a third of their produce from small industries, invest at least $100 million in India and spend half of that on infrastructure such as cold storage and warehouses.

Many small shop owners fear for their livelihoods.

"It will affect my business as families prefer going to air-conditioned stores with fancy packaged goods these days," said Vinod Jain, a 27-year-old small grocery shop owner in the Lower Parel neighborhood of central Mumbai.

A trade group representing so-called "kirana" shop owners is planning protests.

"The move to let the foreign retailers in will most certainly lead to job losses," said Praveen Khandelwal, general secretary of the Confederation of All India Traders.

"They should have worked on some kind of protectionist mechanism for smaller traders before coming out with this policy," he said.

Foreign retailers who welcomed the Indian government's move to open the sector also view the entry conditions with caution.

"Some of the conditions look quite stringent. The investment in particular -- it's all quite big money. We'd need to know the details, and how that would be accounted for," said an official with a major global retailer who did not wish to be identified.

India's property prices bite the dust - with a few exceptions

Hindustan Times reports on NHB's index.

Residential property prices have dropped across most cities, with an exception of Delhi, Mumbai, Chennai and Pune, mirroring the trend that consumers are perhaps putting off planned house purchases due to rising interest rates and fall in disposable incomes. The movement in prices of

residential properties has shown a decreasing trend in nine cities covered by the National Housing Bank's (NHB) Residex during the July-September quarter of 2011 compared to the previous three months. ( see table)

NHB Residex tracks the housing prices in the select 15 cities. The classification has been designed so as to give the most representative index for each city based on the transactions in the market and data collected from various sources.

The data is put through a model that depicts the actual behaviour of the market and throws up the index.

Bank credit has slowed down in most sectors during the last six months prompted by deceleration in investment demand. Latest data mirror strong warnings on consumer spending slowdown.

Loans to real estate have also slowed down sharply to 2.3% during the first six of 2011-12 from 10.3% in the previous year.

The RBI has raised interest rates 13 times in the past 19 months to tame prices.

Credit growth to industry during April to September decelerated to 7.5% from 8.1% last year.

The coming NRI dilemma

I was speaking to a friend the other day and he bought up the issue of buying an apartment in Bangalore. Now IT folks these days have a lot of choice in terms of cities however this guy had lived in Bangalore in the past and therefore the decision was pretty much obvious. The next thing which came up was within Bangalore which area's are nice, inexpensive but at the same time accessible to the IT corridor. Koramangala was mentioned but easily discounted as it was too pricey, so was Indra Nagar and Jaya Nagar as they didnt't meet the inexpensive criteria. Next came up the Marathahalli - Sarjapur road belt. While it didn't meet the nice criteria, it was easily the cheaper option given that they were on the IT corridor itself. 

The topic of budget came up and a quick check of real estate websites puts the rate roughly at Rs 4,500-6000 per sq/ft all inclusive. A 3 bed flat should easily cost anything between 70L to 1 Crore. Now 70L is definitely not inexpensive however as compared to Koramangala this was definitely cheaper. Next the topic of the rupee came up. At Rs 51 a dollar the rupee has dipped 15% over that past 6 months. My friend was instantly salivating at the thought that he is suddenly 15% more richer then 6 months ago in terms of net-worth. Psychologically he felt more comfortable purchasing the home now then few months ago.

This led me to think on the impact NRI's have on Bangalore real estate. Come NRI season if 25% of NRI's interested in purchasing close deals at prevailing prices the builders have enough staying power in the game to close the the remaining 75% at higher prices. The biggest weapon which the builders have is that they can delay projects at will without fear of any litigation or judicial action. In such a scenario prices will always be held constant or increased with inflation. My NRI friend has the US dollar as his Indian inflation fighting weapon, however he must compete with other fellow NRI's to carve out his space in the Bangalore micro market.

At the end of the discussion my friend concluded that he will look at apartments in this belt, built up reputed builders with a gestation time of 3 years. He felt he had enough time then to get the apartment paid off without taking a loan from Indian banks. We talked about cheap financing available from US banks and he could easily get some 0-4% APR loans in the current market which can keep him liquid. One interesting thing coming out of the discussion was that we never discussed renting and briefly discussed buying plots as the discussion was focussed on the primary home at his destination city.

As we were wrapping up our discussion the only thing I asked him to do is to make sure he can sleep well at night, regardless of what happened to the rupee, interest rates, his job or the Bangalore real estate market. Anything which sacrifices sleep  is not worth the trouble. 

I would like for readers to point out if this sentiment is prevalent across cities among the NRI community. In my opinion builders who cater to NRI's will always have smooth sailing thru the ongoing tough times and will inflate the bubble as the supply of money is always increasing. 

India 2011 - Moving to Better Ground

Watch the builders in panel cringe on new Land Acquisition bill. I think minister Jairam Ramesh have them pinned down properly, now either they have to come down from ivory tower and compromise or live with anarchy ....

Lightning does strike twice

After Reddygate, I thought I had seen everything Bangalore real estate had to offer. Little did I know that, I was barely getting started. A friend said the Reddygate experience felt like a Bollywood movie. It was barely a trailer.

Once I walked out of Reddygate (that property hasn't sold yet, looks like they haven't found another loser yet), we kept looking around. We witnessed the enormous greed of Bangalore's flippers. People who don't consider a 250% return of their investment in an one year period a satisfactory return, for instance.

We zeroed in on another townhouse property, this time again by the same big name builders (if you remember from Reddygate, a tier 1 builder in Bangalore). This is an older property (~8 years old) and "BDA Approved", so I thought once we negotiate and settle on the price, things should settle down rather quickly.

We haggled on the price with the seller. We went back and forth for a while and settled on a fair price. We liked dealing with the sellers as well. They were pretty straight forward, "educated", would deal with "100% white money". Ideal match. We gave a token deposit and got the legal documents to start the legal vetting process. That's where the fun started.

You don't appreciate the genius of a real estate developer like this one until you see what methods they use to penny pinch the Government out of stamp duty and registration costs. Agreed, it is moronical to charge ~9% of the sale value as tax and stamp duty per sale. But the developers take it to a different level to beat it.

1) For properties under 1500 sq ft of area, the stamp duty is less. Over 1500 sq ft, it is a "luxury" property, so the stamp duty is more. Since this property was about 2500 sq ft, the developer came up with an ingenious plan.

They sold the two level "row house" as two different units. The ground floor was sold as a different unit and the first floor was sold as a different unit. Two sale agreements, two sale deeds, the full shebang.

This property was about 2500 Sq Ft built on 2200 Sq Ft of land. As equal opportunity provider, they split this as two different "villas" of 1250 Sq Ft constructions built on 1100 Sq Ft of land :).

This physical impossibility of building a structure more than the land allows in one level is missed completely. Enough people were greased along the way that this property was registered successfully.

2) This might be a good time to introduce my seller. My seller is a PhD and MS from IIT Delhi. He has a MBA from IIMB to boot. He is also the CEO of a top tier company. As smart and savvy you can get.

Remember the two sale deeds? That implies, he should have two "kathas" [a Kannada document that says this is your property] and thereby he has to pay two different property tax each year. But the seller has one katha and he has been paying one property tax. Apparently, there is a way to "merge" the two properties into one by a process called "amalgamation", which my seller says he isn't "aware" of and is what he has probably done.

3) The address in the property tax he pays is about two kilometers away from the actual property. The "villa" is in Deverbesarahalli and the property tax is paid for an address in Marathahalli, which is about two kilometeres away and is a different village ;).

This is just the beginning of the legal paperwork mess. This goes on and on and on. The seller hasn't given the most basic set of documents needed to my lawyer to inspect. The seller points to the realtor, the realtor points to the developer, the developer points to the home owner's association and the home owner's association says they don't have all the documents needed.

Basically, the critical documents that have the appropriate approval from the authorities have gone "missing". No one knows where the documents are.

My "broker" suggested gently that I should be using "his" lawyer, the same lawyer he used to buy the neighboring row house for his "gelf" customer. The "gelf" customer trusted the broker to "do the needful" and "make sure all documents are correct legally". So the broker asked "his" lawyer to "verify" and of course, all documents checked out correctly there. So I must be doing this wrong.

Now, this is where things get a tad bit more interesting. I had hired a lawyer to help me through this. Turns out the seller is also a client to the lawyer at his corporate day job. The chief legal consul of the parent megacorp where the seller works for, makes a "friendly" call to my lawyer "enquiring" what's going on with the legal difficulties with the property.

Around the same time, my seller calls me and says that based on his professional experience with my lawyer, my lawyer is too conservative and I shouldn't consider her words completely. After all, when he bought the home, he didn't hire a lawyer, nor did he verify all the documents. He took a 90% loan from HSBC bank who verified everything, so everything must be hunky dory, you see.

That, to me, sums up India's real estate woes. Really smart people, really intelligent people who run companies buy real estate on a whim, without doing the basic document checks and sanity checks needed. They assume and trust the wrong people.

The real estate developers, even the supposedly very good ones, find out ways to scam people and they get away every single time. At the end, the careless one who buys this last ends up at the end of this Ponzi scheme, with a piling dump of crap. Sad.

There are a few learnings with regards to Bangalore real estate, both as a seller and as a buyer. I will add them in a bit. For now, I am still looking for a property with clean titles.

Reddygate

This was originally posted in R2IClubForums.

I R2Ied 6 months ago. Immersed myself in the Bangalore Real Estate. Sold my land during the time period. Tried to invest it in a "villa" - twice so far. For good or for bad, both the villas were by the same builder, a tier 1 builder in Bangalore.

Here is my story, in 2 parts.

Price of Reddy 'Villa': Rs. 1.3 Crore
Advance paid to Reddy: Rs. 50,000
Legal documents in DVD: 1300 pages
Lawyer hours spent: 30+
Personal hours spent: 50+
Number of lawyers involved: 5
Sleepless nights: 12
Finding out how Reddy was going to screw you: Priceless

There were six Reddy sisters who owned the land who inherited it from their father Reddy who inherited it from his father Reddy who got it from some other Reddy who we don't know how he acquired the land. (Red flag 1).

The six Reddy sisters enter a joint development agreement with a big name builder to develop row houses. As part of the deal, the six Reddy sisters get 33% of the houses.

There are 58 villas in total. At 33%, those are 18 houses, so each Reddy sister gets 3 houses each.

Now, the eldest Reddy sister is selling one of her property. Her husband Seller Reddy is the one who is acting on her behalf. I interact with Seller Reddy.

The house I was supposed to be buy was #47 in the earlier plans. It was changed to #58 by swapping it with the other #58. There is no documentation or correction submitted to this regard to the Government. (Red flag 2).

The 33% sharing agreement lists what all houses each Reddy sister gets. My house #58 (old #47) is not in the list. The developer dodges the question as to how this happened. So I get all the people in a meeting, my lawyers, developer's lawyers and the Seller Reddy.

Turns out Seller Reddy got some more land after the fact and attached it to the community. As part of this he got 2200 Sq Ft of salable area assigned to him from the developer. When he did the contract, his wife Reddy and the developer unilaterally sign a document. That document is not counter signed by the other sister Reddys. (Red flag 3). The document just says 2200 sq ft of land and does not name the villa. (Red flag 4).

The house he is selling is 2700 Sq Ft + terrace and not 2200 Sq Ft (Red flag 5).

If you approach this as a con job, you will see that the renaming of the house was a slight of hand just to confuse the buyer. The house was in the original approval plan, so that should pass the checks. But the renumbering and making it house #58 of 58 provides them with an out. Even though this house was approved earlier, since the number changed, is it now approved or is it not approved? Why did you make the real last house you built as #47? (red flag 6).

Seller Reddy says he can do all supporting paperwork and get all sisters to sign off and so on. This just seems ripe for litigation. Not worth the fight.

tl;dr - Seller Reddy got cute. By-passed sister Reddys, got an extra house allocated for him, used slight of hand to confuse buyer.

Atleast one person can afford Mumbai real estate

Full marks to Sushil Kumar on winning 5 crores on the Kaun Banega Crorepati show. The builders have atleast one person who can afford to buy the priciest real estate in Mumbai or Delhi. If only there were more winners Mumbai realtors would use the KBC story to drive up prices to even more ridiculous levels

Indian Realty in Trouble....

Nice Article, Must Read.... House of Cards crumbling, Bring your own popcorn to the movie...

Article Link

The numbers are all moving in the wrong direction for developers in Asia's third-largest economy. Debt levels are rising as sales volumes and profits fall. Banks are shutting their doors to the industry just when it needs cash the most. Prices are stagnant and expected to fall.

"The marketplace is not foolish," said Lodha. "A price correction will happen naturally."

===
"Are there going to be months where companies might have to delay paying their interest? Yes," warned Lodha.

==
In early 2008, DLF, with a market capitalisation that peaked at over 2 trillion rupees ($40.6 billion), announced a fiscal year profit of over $1.5 billion - an annual increase of over 300 percent - thanks to an insatiable appetite for property.

But times have changed. With a market capitalisation that has shrivelled to $8 billion, the firm has turned to selling the family silver. Amanresorts, the luxury hotel chain it bought in 2007, is on the block as part of plans to sell $650 million of assets by March .

It is expected to announce the sale of the prime 17.5 acre plot adjacent to the World One site in December, two sources with knowledge of the matter told Reuters.

===
Real estate, which has garnered a growing slice of India's foreign direct investment (FDI) pie over the past few years, from 8.9 percent in 2007-08 to 11 percent in 2009-10, accounts for just 6 percent of the FDI this financial year, according to Ernst & Young.

India's realty index has fallen more than 36 percent since January, more than double the 17 percent slide in the benchmark Sensex , pouring cold water on the roughly $6 billion worth of planned initial public offering from developers.

Lodha's planned $570 million IPO has been stuck on the shelf for nearly two years.

More than $370 million in hoped-for IPO proceeds had been earmarked for construction costs, with another $61 million set to repay loans. That money has had to come from elsewhere.

Private-equity investors, which have poured $10.2 billion into developers since 2006, are set to withdraw around $5 billion in the next few years, forcing top developers including Lodha, Shriram Properties, DLF, Phoenix Mills and Unitech to buy back their investments, a Nomura report said in May.

===
But they may not be able to hold out much longer. "The current market sentiments and excess debt levels at high interest rates, against seriously impacted volumes, should bring about an immediate 10-20 percent price correction," said Sanjay Dutt, CEO, business , at property consultants Jones Lang LaSalle India.

"That means taking a cut in profit or accepting a loss on some projects ... We are likely to see some developers default on their debt," Dutt said.

Allotment of additional 33% FSI in Mumbai suburbs to correct realty prices

Move to bring down TDR prices, curb cartelisation

Mumbai's realty sector has received a much needed boost as the Maharashtra government has announced a crucial decision to allot 33 per cent floor space index (FSI) in suburbs for premium. This is expected to substantially bring down the TDR (transfer of development right) prices, increase housing stock and reduce their prices.

Besides, the move would generate an annual revenue of up to Rs 5,000 crore from the recovery of premium to be shared by the state government and the Municipal Corporation of Greater Mumbai (MCGM). Initial estimates by the state government and the realty sector show that the allotment of 33 per cent FSI would increase in supply of TDR to the tune of 10 millionsq ft annually. Prices of residential properties are expected to fall by Rs 500-1000 per sq ft with the correction in TDR prices.

Chief minister Prithviraj Chavan told Business Standard, "The government had already completed the legislative part by amending the Maharashtra Regional Town Planning Act during the winter session of the legislature last year.

It was not implemented as the government thought it fit to seek a second opinion as there was a view that it may put pressure on existing infrastructure. However, the MCGM commissioner gave his view in favour of the allotment of 33 per cent FSI in suburbs for premium."

Chavan, who was speaking at the sidelines of investor after care conference organised by Maharashtra Economic Development Council, said this would help correct realty prices and also lead to increase in housing stock.

A government official recalled that the Bombay High Court had last year quashed the rule saying that it had no right to levy premium under the existing Act. After the High Court order in June last year, constructions with additional FSI had come to a standstill, forcing the government to issue an ordinance. With the amendment in the MRTP Act, the planning authority would be in position of levying premium against additional FSI of 33 % given to the builders executing projects in suburbs.

Realty industry has welcomed the government's move. Sunil Mantri, former president of Maharashtra Chamber of Housing Industry said "It was a long pending move. It comes at a time when the TDR market is highly volatile in Mumbai, Very few players control and decide the TDR price. About two years ago TDR prices had increased to a level of Rs 4,250 per sq ft which was resulted in the utilisation of TDR unviable. The current prices of Rs 2,700-3,000 per sq ft are also discouraging for may realty players." However, he informed that with the government's decision realty players are expected to pay a premium between Rs 1,200 and 2,000 per sq ft. Immediately after the premium payment the realty players would get TDR utilisation certificate.

Mantri said the government move would help create more TDR stock in middle segment which would reduce TDR prices. "In view of fall in TDR prices, realty players will be able to pass down benefit to consumers and the prices are expected to fall by Rs 500-1,000 per sq ft," he noted.

Yomesh Rao, director YMS Consultants Limited clarified that the 33% FSI was not above the cap of FSI 2 in suburbs, "It is just replacing the TDR at Rs 2,900 per sq ft by FSI premium at Rs 600 to 1,200 per sq ft from Andheri and Dahisar. The premium collection of well over Rs 2,000 crore annually can be used for the betterment of the city." He added that this would marginally affect the TDR cartel as TDR was still very much a required commodity.

Rao said the government's move is a win win for the Mumbaikars, the state government and the realty players.

Ashutosh Limaye, head for research at Real Estate Intelligence Services, said "There will be lesser dependence on TDR which will be reduced now to .67. The allotment of 33% FSI at premium is very transparent and the rate will be as per the ready recknor rate which are revised every year in January. It is transparent and fixed rate and not subject to demand supply situation. TDR rates will come down and the realty players in the present conditions are expected to pass down benefits to consumers."

Rajesh Raha, managing director Raha Realtors shared views of Rao and Limaye. He noted that "This will increase lot of development potential in suburbs. TDR price will reduce and we hope the realty players to pass down benefit to the actual users."

Quick look at the bubbles elsewhere

As recommended by a commenter in the last article here is some news about property bubbles in emerging markets (also I want users to post new comments here) - most links from the last 2-3 weeks

Property
BRICS other than India

• http://www.marketwatch.com/story/property-gloom-deepens-as-china-holiday-ends-2011-10-07
• http://in.reuters.com/article/2011/10/09/idINIndia-59759220111009 
• http://www.time.com/time/magazine/article/0,9171,2096345,00.html 

• http://brazil.homesgofast.com/news/seven-brazilian-cities-seven-real-estate-rises-I2303/
• http://rbth.ru/articles/2011/10/05/bricks_and_mortar_back_to_the_bubble_13538.html
• http://housepricesouthafrica.com/graphs/
• http://www.brazilianbubble.com/

 Non Brics

• Canada http://www.canadianrealestatemagazine.ca/news/item/828-bubble-talk-on-the-rise-in-canada 
• http://thehousingbubbleblog.com/?m=20111007

  
Other bubbles 

• Commodites http://www.economonitor.com/lrwray/2011/09/27/is-the-commodities-bubble-a-case-of-index-speculation-by-money-managers/
• Chinese internet and  Tech bubble http://www.forbes.com/sites/panosmourdoukoutas/2011/09/30/the-chinese-internet-bubble-is-busting/
• Indian Internet bubble http://www.businessinsider.com/india-tech-reaches-near-bubble-stage-2011-10
• US bubble #3 - Groupon, Facebook, Netflix. Google, Twitter, Zillow, Zynga, No comments on this http://www.theregister.co.uk/2011/09/20/bubbles_and_silicon_valley
•   http://www.nytimes.com/2011/10/10/business/global/households-pay-a-price-for-chinas-growth.html?ref=world

Developed world economy - Lost decade(s) looming

•  Back To Mesopotamia http://www.bcg.com/documents/file87307.pdf
• http://www.zerohedge.com/news/muddle-through-has-failed-bcg-says-there-may-be-only-painful-ways-out-crisis
• Merkozy and the Greek tragedy http://www.telegraph.co.uk/finance/financialcrisis/8782663/Debt-crisis-live.html

Fresh bout of gloom and doom. Remember the last time the world was in this rut was in 1937 and it took a world war to come out of it ...

Gold price over the decades

(courtesy Bullion Vault)

USD INR

http://www.google.com//finance?chdnp=1&chdd=1&chds=0&chdv=1&chvs=Linear&chdeh=0&chfdeh=0&chdet=1318234074792&chddm=365965&q=CURRENCY:USDINR&ntsp=0

Financial times reports

http://www.ft.com/cms/s/0/8f5eda74-e064-11e0-ba12-00144feabdc0.html#ixzz1YMpFUNdU

Indian real estate faces cash crisis

By Neil Munshi and James Fontanella-Khan in Mumbai

The Indian real estate sector, once the realm of high-risk investments with astronomical returns, is facing a liquidity crisis in the face of escalating commodity prices, interest rates and inflation.
With the sector carrying a debt burden of about $24.6bn in the year to July 2011 – up almost seven times from $3.8bn in September 2005 – many small- and midsized Indian property groups face the risk of default. Major developers are delaying projects, discounting properties and looking to sell big assets.

More

On this story

• India raises rates after inflation rises
• Indian inflation rate at 13-month high
• Land disputes spur New Delhi into action
• beyondbrics India
• Indian tycoon held in illegal mining swoop

“This is one of the worst liquidity crises the sector has ever faced,” says Dipesh Sohani, an analyst at MF Global. “Investors are staying away from the sector as the risk associated with it is too high.”
DLF, the biggest developer, has been trying to raise as much as Rs100bn ($2.2bn) by selling its non-core assets, such as hotels and land. Its debt burden rose to $4.4bn on the back of a tenfold increase in its interest costs since 2008, according to Bloomberg data. DLF paid Rs25.9bn in interest in the year ending in March 2011, compared with Rs2.78bn in 2008.
“We are living in a difficult environment,” says Saurabh Chawla, executive director of finance at DLF. “We see some moderation in demand. The cost of capital and cost of mortgages is high.”
Meanwhile, other major players are having trouble completing their projects and are seeking new buyers. Orbit Corp, which operates mainly in Mumbai, has been seeking potential buyers for its unfinished building in India’s financial capital since the start of August.

In the three months to June, an 8.7 per cent increase in annual industry revenues was accompanied by a nearly 20 per cent annual decline in profits, according to research compiled by Edelweiss Securities, a Mumbai-based brokerage firm.
In such dire times, the banks have almost stopped lending to the sector, and there are few companies willing to take a high-risk bet on high-priced development projects or buyers able to pay high mortgage rates.
“Basically, no one is lending to the sector right now because they see a risk attached to it,” says Sharan Lillaney, real estate analyst at Angel Broking. Total banking industry exposure to real estate was 3.1 per cent in July, down from 3.7 per cent in July 2009.
Meanwhile, residential demand in India’s financial capital dropped to a 30-month low in the second quarter and sales fell 11 per cent during the same period, according to real estate research company Liases Foras.
Between slumping demand and recalcitrant banks, developers find themselves in a catch 22 situation. “The builder can’t reduce prices because then they have to restructure the loan with the bank [at a higher rate],” says Mr Lillaney. “But they have to reduce prices because otherwise they can’t get any bookings.”
Many buyers are unable to secure a mortgage because record high interest rates, which India’s central bank raised to 8.25 per cent on Friday – the 12th hike in 19 months – are taking a big toll on the industry. The average loan rate to buy a house in India is 16.5 per cent, according to the Housing Development Finance Corp, India’s largest home lender by revenues, up from 10.25-11.25 per cent in December 2008.
The industry is facing strong headwinds, says Mr Sohani, including high commodity prices. “Steel and cement ... are up more than 20 per cent, [and] are hitting the companies’ margins,” he adds.
Ramesh Nair, a managing director for real estate consultancy Jones Lang LaSalle, adds that the government’s Rs3.14 per litre petrol rise would further hurt the industry.
Those higher costs, coupled with project delays, have caused private equity investment in real estate between April and August to drop by 20.2 per cent – at about $831m, down from $1.04bn during the same period last year – according to Venture Intelligence, a research firm. It all adds up to Indian property launches being down 42 per cent in June compared with the average number of launches in the past 12 months, according to Kotak Institutional Equities.

‘Residential property prices in Mumbai may correct by 33%’

Article Link

"I can see a 33% correction coming in residential property prices in Mumbai, because the market is going to enter a consumer circle," Pankaj Kapoor, managing director, Liases Foras, a real estate rating and research agency, has said. Mr Kapoor was speaking at a workshop on real estate prices, hosted by Moneylife Foundation at the Moneylife Knowledge Centre today.
=
Mr Kapoor said that on the basis of current property offtake, Mumbai was in the worst position, while Pune was the best-placed. "Pune's stock can be cleared in 12 months. However, Mumbai will require 40 months," he said. He said that since many financers were shifting to Pune, more capital would be injected in that market and set off speculation. "After a year or so, may be Pune will also see irrational price hikes fuelled by speculation," he said.
=
"The problem with most valuations is that they go by the prices next door. So when a developer hears that the adjoining property has been priced at Rs2 crore, he will also hike his own prices. However, he doesn't consider whether sales are actually happening at those prices," Mr Kapoor said. "Even professional valuations are faulty on these accounts. So, inventory piles up, prices rise and the market becomes more lopsided."

Realtors fear Lokpal will expose nexus with govt

Aricle Link

Among many other things, the implementation of a strong Lokpal Bill will expose the nexus between government officials and developers. It will also control the flow of unaccounted black money in the real estate sector, which has been used as a parallel source of funds and income for decades.

“Developers as a private player will not directly come under the ambit of the Lokpal, but their nexus with the BMC and especially income-tax officials will surely be exposed. The flow of black money is enormous in real estate sector. Buyers frequently become victims of developers who demand black money. Citizens need to be alert and file regular complaints if something amiss is happening,” said noted IPS officer turned activist YP Singh.

Another developer said, “If we stop accepting black money, then the majority of profits will go in paying huge government taxes. We are not the only ones involved in this wrong practice, Even buyers do so while selling their own flats. They do not mention the real transaction amount in the sale agreement to save on taxes.”

Bombay Dyeing moves into Real estate, Retail

Parsee business and trusts like Bombay Dyeing, Godrej, Tata hold vast amounts of prime land in Mumbai. These guys are are now unlocking the land value by developing these land parcels and selling these outrageously priced apartments to black money holders. The airline GoAir which is run by Jeh Wadia is a flop airline. I wonder how CNBC TV18 touts it as a successful aviation business. In fact Jeh Wadia had made some disparaging remarks on the poor kids when he started the airline promotions at 500 Rs per seat to Goa. I wonder if he will say the same things about the rich luxury apartment owners who will still be living in 'below the poverty line' apartments as compared to a rich trust fund baby.

On the retail front with the imminent arrival of supermarket chains like  Walmart, Tesco and CarreFour into the top 6 metro cities of India, I am expecting a big jump in prices for  rentals/outright sales of shops in all major neighborhoods. Indian cities are just the right model for Tesco Express stores (1000-5000 sq ft)  which stock Kirana style items while maintaining high quality standards of goods and customer service. A Tesco Express/Walmart express in every neighborhood is not unthinkable as these guys have the processes and knowhow defined to handle large scale operations smoothly

Project ‘ Bombay Dyeing Makeover’ has begun under the leadership of Jeh Wadia, the man behind Wadia group’s successful aviation business. CNBC-TV18’s Tanvi Shukla reports that the two key takeaways from the first annual general meeting (AGM) after Jeh Wadia took over as joint Managing Director of Bombay Dyeing is one, their focus on real estate and two, de-focusing from textiles and focusing more on retail part of the business.

To begin with, real estate is something that management has been talking about. Today they updated the shareholders that construction work has finally begun at the Dadar Spring Mill project. They are also going to be developing the Worli property.

In an interview Wadia says that high interest rates will put pressure on people buying apartments. “But fortunately for us we don’t have very high volumes, we have low volumes. Also, we are in the luxury end of the spectrum. So I don’t see much of a shortage as far as sales are concerned” he added.

Talking about the Group’s retail business, Wadia said that the company will now focus on opening more number of stores and introducing higher value added products. He aims at an entire revamp of the retail business, which would probably give them higher margin profitability, something that they haven’t really seen in the textile business for quite a while.

So Bombay Dyeing seems to be shifting from a textile giant to a company whose core focus will now be in real estate and in retail.

NOIDA mess - What to do about it

India Real Estate Market About to Crash Or Consolidation?

Article Link

It is not easy to find an analyst on the street who will be mildly bullish on the real estate market leave along someone who is irrationally bullish. In a scenario where the market seems to be short the real estate market, the laws of contrarian investing state that “when the whole market is long/short a trade, the trade may not fructify” which is what is happening to the real estate market in India. Fundamentally, the market is poised on a knife edge with multiple triggers slowing the market down. Some of the macro pointing to an imminent fall in real estate market are:

75 bps Rate hike by India central bank in 2011 has had debilitating effect on families who have been thinking of a new house purchase. Rising borrowing costs and inflation are reducing ability of Indian families to purchase a house.

With more interest rate hikes from RBI in the offing, macro environment is expected to continue to get tougher. Therefore, the risk of an accelerated downturn in sales still remains.

Lower Loan/Equity ratio: RBI has now instructed banks to accept nearly 20% of house value as equity portion from the buyer thus effectively reducing the ability Indian families leverage to buy a home.

Developers borrowing cost: Rising borrowing cost have also effected developers who now find it difficult to complete projects.

Aaj ka Mahabharat.

Pure Genius

How your dreams of a new home go bust

Article Link

Despite 90,000 flats lying unsold in and around Mumbai, MiD DAY finds that Rs 50 lakh will not get you a home even in places like Kandivli, Ghatkopar & Deonar.

Armed with a budget of Rs 50 lakh, MiD DAY reporters went to areas like Kandivli, Malad, Ghatkopar and other suburbs distant from the island city, where one would expect to find a flat in this range, but came back empty handed in every case but one. The only flat we could find within our budget was a 1-BHK for Rs 46 lakh in the poorly connected Kurar Village in Malad, which would be ready for us to take possession of only in 2013.

You have to wonder, why Government is sleeping at Wheel. Indian policies were admired when RE and finance bubble burst in US. Indian media and government were all praise saying how smart they were compared to US. Now, if the prices below do not yell, BUBBLE...., then what does? What happens when this bubble bursts? Do Indian Banks have no exposure to these absurd prices? I think we are in for a big surprise when this bubble crashes....

RNA Royal Park, Charkop (Kandivli)
Price: Rs 1.64 cr

Nand Dham, MG Cross Road (Kandivli)
Price: Rs 70 lakh

Orchard Residency, LBS Marg (Ghatkopar West)
Price: Rs 1.25 crore*

LBS Marg (Ghatkopar West)
Price: Rs 2 crore

Vrindavan Terrace, Sion-Trombay Road (Deonar)
Price: Rs 8 crore

India's subprime builders stocks

Here is a brilliant article by R Jaganathan on the destruction of weath in the real estate stocks.  I had written a similar article few years ago when the parabolic real estate stocks had crashed to the earth and people were holding losses of upto 90%. 

>>> Article below. I have cut paste it, just in case some smart Alec decides that it is no longer new-worthy. 

A curious phenomenon exists in the real estate sector. In the last three-and-odd years, you know, I know, and the dog at the lamp-post knows, that land prices have only gone up, flats cost more, and our EMIs on housing loans have gone up. We are paying through our noses for the few square feet we want to call our home.

Who gains when this happens? One presumes that the real estate companies and builders must be raking in the moolah.

But here’s the paradox: between January 2008 and June 2011, stock market listed real estate companies have destroyed investor value. The Bombay Stock Exchange Real Estate Index has dropped vertically by 85%, yes, 85%, when the broader market has fallen less than a fifth. The BSE Sensex fell by 15% during this time.

In a sample list of 10 listed realty companies compiled by Firstpost, the investor value destruction adds up to a stupendous Rs 2,66,952 crore. AFP
Investors have cried all the way to their brokers. In a sample list of 10 listed realty companies compiled by Firstpost, the investor value destruction adds up to a stupendous Rs 2,66,952 crore. DLF leads the list of losers— or rather, loss-creators— with a drop in market value of over Rs 1,43,520 crore.


What gives? When house prices have either not fallen too much and, in fact, may have only risen, when the land on which these houses were built was probably bought when prices were lower, why have real estate companies left investors holding the sack?

Far from investors deserting in droves, companies like DLF have, in fact, drawn new and more powerful investors. One example is Robert Vadra, hubby of Priyanka Gandhi, daughter of Sonia Gandhi.

According to a report in The Economic Times a few months ago, Vadra has been quietly diversifying away from his jewellery and handicrafts business into real estate. The paper says:

“…the 42-year-old Vadra, known for his punishing fitness regime and love for fast bikes, has sought to scale up and diversify his business activities since 2008, acquiring tracts of land in Haryana and Rajasthan, a 50% stake in a leading business hotel in Delhi, and attempting an entry into the business of chartering aircraft. Regulatory filings available in the public domain and reviewed by ET reporters reveal the changing graph of Vadra’s business interests. These include wide-ranging transactions with the DLF Group.”

Someone married into the country’s first family presumably has lots of advice available to him on how profitable, or unprofitable, the real estate business is, as is evident from the fall in the market values of shares. But we are surely missing something here?

Sure, we are. When house prices are high, when the profits reported on balance-sheets are falling, and share values reflect the same thing, it can mean only one thing: poor corporate governance. And in the real estate business, poor corporate governance means the profits may be hidden somewhere else, and investors are left sucking their thumbs.

Anecdotal evidence tells us that land is the currency used by politicians for storing their ill-gotten wealth. In fact, almost all recent scams implicating, bureaucrats and even judges involve land.

Sharad Pawar, the Nationalist Congress Party president, is widely believed to be a pastmaster in this business (Read more on this here.) Karnataka Chief Minister BS Yeddyurappa is under fire for corruption due to alleged land-grabs by his family members. (Read and listen here.)

The Adarsh Society scam, which cost Ashok Chavan his job as Chief Minister in Maharashtra, is about real estate. It also implicates his predecessor, Vilasrao Deshmukh.

YS Jagan Mohan Reddy, son of late Andhra Chief Minister YS Rajasekhara Reddy, is accused of owning lots of real estate in Andhra and Bangalore, as a Firstpost expose last month showed.

The Satyam scandal, where Chairman B Ramalinga Raju confessed to overstating accounts and profits, is also related to property: money was siphoned off to Maytas, a real estate company. And Jagan Reddy’s father YSR was a key player in allocating land and infrastructure projects to Maytas (reverse of Satyam).

Several judges of the higher judiciary are also being accused on involvement in land deals. Among them are former Chief Justice of India KG Balakrishnan, and Paul J Dinakaran, former Chief Justice of the Karnataka High Court, who is now being probed by a Parliamentary committee for various unexplained dealings.

If we have established the close linkage between the powerful and real estate skullduggery with this indicative list, here’s a speculative pointer: a part of the steep fall in the market values of listed real estate companies represents money parked elsewhere on behalf of the powerful.

If the total drop in value is Rs 2,66,952 crore for just 10 companies, and assuming even a 40% value drop due to weak sentiment in real estate stocks (when the BSE Sensex has fallen 15%), we are still left with an unexplained loss of over Rs 1,60,000 crore.

It is more than likely that this loss represents value that lies outside the companies in the hands of speculators, politicians, bureaucrats and middlemen who are part of the realty corruption chain.

And remember, we have only talked about listed companies. The real, real estate sector, may be even bigger than this.

Hinjewadi calling

It appears that protests of every kind are fashionable these days.  Now Hinjewadi tech workers are demanding better infrastructure for their own backyard.

Some interesting statistics : 70k tech workers contributing to total of 300k jobs. Roughly $4B in revenue. Projected growth to double in the next five years one can only imagine the plight of workers who commute from far off places to Hinjewadi.  The next logical think which people do is to move closer to work. If this happens we will see prices closer to Hinjewadi jump as demand will begin outstripping supply. Right now Baner/Pashan/Kothrud/Balewadi/Bavdhan are poised for another jump in prices. Pune prices have stabilized and now rising slowly again. With 70k people in Hinjewadi, Magarpatta and eastern pune are way behind west pune. I've heard recently Cap Gemini has opened a big office in Hinjewadi and Accenture is moving to Hinjewadi in a big way and moving people there from their Magarpatta office. IBM, TCS, Infosys and Wipro are already big in terms of headcount. If the headcount reaches 140k in the next 3 years investors in these areas will be amply rewarded. However the million dollar question is which builder to trust even after being convinced that a location is ready for prime-time ?

PUNE: Information technology (IT) professionals of the Rajiv Gandhi Information Technology Park in Hinjewadi took to the streets of this prime IT hub of Pune on Friday afternoon to express their anguish over the poor infrastructure, sub-optimal traffic management and inadequate security arrangements.

The silent protest of these knowledge workers triggers 'Hinjewadi First', a three-month-long campaign aimed at attracting the attention of all stake holders - including the administration, law-and-order machinery and local residents, to the need for a better Hinjewadi.

These professionals, who are generally busy creating cutting edge software solutions for businesses spread all across the globe, were unperturbed by the monsoon showers as they stood holding umbrellas and banners in their hands asking for better infrastructure, better traffic management, enhanced power supply and security for Hinjewadi.

Over 70,000 professionals work in Hinjewadi generating IT exports of around $4 billion, to contribute nearly 40 per cent of Maharashtra's IT exports annually. Incidents in the last couple of years have raised concerns about security in the area and the physical infrastructure being inadequate.

Mritunjay Singh, president of the Hinjewadi Industries Association (HIA), told mediapersons earlier in the day that Hinjewadi First is an initiative that intends to gain the attention of the stake holders of the state and the city through a series of activities planned over the next three months. The intention is to highlight the need for improvement in the Hinjewadi area, making it a world class IT destination.

"We get adequate support from the government for specific problems raised, but the time has come to look at the growth potential of the area. We need to take a proactive approach in developing infrastructure, power, security and traffic on an urgent basis, looking at the growth potential of the area," he said.

Singh pointed out that there is only one arterial road in Hinjewadi and this is inadequate by any standards to handle the number of vehicles that carry the 70,000 plus professionals in and out every day. "If we allow things to go as they are, the road will choke very soon," he added.

According to Singh, the growth of Hinjewadi can be well-planned and structured if a dedicated and competent authority is created by the government to develop a holistic strategy for Hinjewadi and Pune as an IT hub. HIA is looking for completion of a fire station in Phase III, development of more connecting roads from Infotech Park to Balewadi and Baner to ease the traffic flow, improvement of public transport, increasing the water storage capacity by 5,000 cubic meters along with an alternate water line from Kasarsai dam, improvement in pumping facilities and changing the old water line to new.

Singh said HIA has planned many more activities involving a variety of stakeholders to find a comprehensive solution to Hinjewadi's issues. These will include round table meets, symposiums, traffic regulation drives, tree plantation week, opinion poll through different mediums and a big conclave to conclude the drive and the creation of a vision document for Hinjewadi, he added.