Thursday, 26 June 2008
Ajit Dayal writes on EquityMaster.com.
In July 2006, at an Equitymaster conference, I made a prediction: Indian property prices will decline by 30% over the next 6 to 12 months.
Boy was I wrong! Property prices in most Indian cities increased by 50% or so between July 2006 and December 2007.
My "prediction" was a bust!
If property prices were 100 in July 2006, they had reached probably 150 in most cities. And my expectation was for a "70". Ouch!
But look around you today and the only place where Indian property is still booming is in the headlines of some newspapers and lead articles on some websites.
Developers and financiers of property projects are desperate to make us believe that property prices are still increasing. They want to hold the "price line". If potential buyers know that the supply of property is large - and sales of apartments are slow - they will wait. They will buy later - or ask for a better price now.
Any reduction in the selling price is a loss of expected profit for the developers and their financiers. Not a good thing.
News or Olds?
We get much of our information from newspapers.
Note the "new" in the word "newspapers".
And what we read shapes our opinions and, eventually, our actions.
But, sometimes, the "newspaper" may be carrying "oldspaper" information that, at one level, creates a false impression in our minds.
And could makes us act in an incorrect manner.
So, contrast these headlines.
Business Standard, in their online version, June 23rd, 2008: writes: "Booming Indian property mkt beckons UK investors".
In this article, there are a few statements of "fact".
Indian property prices, we read, are up some 70% in 2 years. "Merrill Lynch consultants", according to this article, "have predicted a 700 per cent increase in the Indian property market by 2015". Quite a clever statement - its vagueness leaves room for varied interpretation. The article does not say whether this 700 per cent increase is an increase in the amount of square feet being built, or in the prices of real estate. But something to do with real estate is increasing by 700%. The mind takes that "700%" and imagines a bull market in property.
"Realty promoters pledging shares to raise funds" warns an article in the print version of the Business Standard, dated June 19th, 2008. The article lists 10 listed real estate companies whose share prices had collapsed from their 52-week high by between and -58.2% and -78.1% as of June 18th, 2008.
The large shareholder-owners of some of these listed real estate developers have apparently been pledging shares they own to financiers in exchange for loans. With sales not as brisk as in the years 2006 and 2007, cash flows are not as per expectations. And, to add to the woes of the real estate industry, many developers had already committed to larger projects. They now need to pay for this new land and the initial cost of development to get the land into some sort of "build-able" shape.
And another screaming headline, "Cash Crunch" in the Economic Times, June 15th, 2008 states that property developers are borrowing money at interest rates ranging from 35% to 50% per annum. Their "normal" interest rates range from 18% to 24% per annum. The higher borrowing, says the article, is due to the slowdown in sales and larger commitments.
A boom is a bust.
So, what happened between the "old" news of June 18th (the date of the "Realty promoters pledging shares to raise funds" article) and the "new" news of June 23rd (the date of the Booming Indian property mkt beckons UK investors" article)?
The share prices of these realtors, I assume, have declined even further - for what that is worth. The fundamentals of the industry - slow sales and large commitments for new projects - could not have changed. As these share prices decline, the "promoters" of these companies that pledged some shares will need to give more of their shares as a pledge. Additionally, if any loan is not repaid, lenders will sell the pledged shares into the stock market - probably at any price. This could result in a decline in the share prices of the real estate companies - and create a potential downward spiral of wealth destruction for investors in shares of real estate companies.
From a "buying-power" perspective, the news on inflation is worse than expected, so interest rates are likely to increase. And, under that higher interest rate scenario, the cost of borrowing money for buying a home will only increase. Not good for demand. And if demand slows down still further, sales of property will get worse and prices will decline even more.
Uh, oh - does not sound like a "boom".
Sounds more like a "thud".
Demand stalls, supply surges.
For all the bravado of the "news" headline in the June 23rd article in Business Standard, it is more of a rear view mirror event: of what happened yesterday.
But, in a strange way, it gives a hint of what is likely to happen in the future.
In 2006 and 2007, real estate buyers were in a fix. Property they wished to buy was only available at high prices.
Supply was limited.
And demand for property increased due to higher incomes and the ability to borrow more from banks. The desire of many private banks and many government-owned banks to gain market share and build their retail, home loan portfolio saw this dramatic run-up in the borrowing capacity of buyers.
Sometimes these buyers were genuine buyers, and sometimes they were speculators - in for the "free" ride.
After all it was a guarantee that property prices would increase every day.
Just like the prices of shares increased every day when the stock markets opened.
There was no need to go on a "road show" to UK to sell all the property being built.
But that was in 2006 and 2007.
Today, supply of property is more. The demand for property is lower.
Demand has declined because property prices are no longer affordable. Salaries have increased - but not as much as in the recent past.
Demand has also been hit by the fact that banks are closing down their home loan lending departments. Or raising interest rates for these home loans.
The wealth effect from stock markets - which fuels the buying of second homes and dream homes - has evaporated.
But the supply juggernaut keeps on rolling. And building.
Whenever I ask my colleagues (who advise a real estate fund) their views on how much new construction is planned, they shake their head in disbelief. There are 50 to 70 million square feet of new construction coming up in Bangalore, Calcutta, Hyderabad, and Pune to name a few cities.
Developers who have built maybe a total of 5 million square feet in the past decade have plans to build 50 million square feet in the next 3 years.
India was rising. India was shining.
And a rising and shining India needed a place to live, a place to work, and a place to shop.
Real estate zindabad!
Stock price of real estate companies double zindabad!!
Yes, 700% correct!
All correct, and all true: India needs more property.
A lot of more property. Maybe more than the 700% increase referred to in the Merrill Lynch report.
But, at what price?
And at what profit margin to the developer and their financiers?
And will people buy any junk in any location at any price?
Our view on property has been wrong in timing.
We called the "sell" on property too early.
We did not take into account the stupidity of many banks in lending money so leniently and so cheaply. Or the complete mis-pricing of risk-return by so many come-and-join-the-party property funds.
But we knew the greed of the developers. We had seen them in action in 1993 to 1995. As property prices increased in 1994, they bought more land at higher prices and thought they would sell their end product at even higher profits. Discipline was out of the door. Greed was in.
That property cycle went bust in 1995 - and stayed in bust mode till 2003.
For 8 years it was a buyer’s market. Or a renter’s market.
Supply was far more than demand. No one speculated on property. The actual user’s actions determined the prices.
Not some bank’s desire to gain "market share". Nor the availability of money from international sources due to the desire of a foreign fund to invest in an exotic location for an erotic return.
But demand and supply determine the price of everything.
Though, they don’t tell you the value of anything.
And people confuse the two and use "price" and "value" as inter-changeable words.
They confuse the high price of real estate with the value of that real estate.
Prices have only one way to go, I reiterate: and that is down.
And if real estate declines, so should the share prices of many of the property companies that build, and build, and build. We may shake our heads at the housing bubble in USA. But we built one right here in our own back yard.
In July 2006, at an Equitymaster conference, I made a prediction: Indian property prices will decline by 30% over the next 6 to 12 months.
Boy was I wrong! Property prices in most Indian cities increased by 50% or so between July 2006 and December 2007.
My "prediction" was a bust!
If property prices were 100 in July 2006, they had reached probably 150 in most cities. And my expectation was for a "70". Ouch!
But look around you today and the only place where Indian property is still booming is in the headlines of some newspapers and lead articles on some websites.
Developers and financiers of property projects are desperate to make us believe that property prices are still increasing. They want to hold the "price line". If potential buyers know that the supply of property is large - and sales of apartments are slow - they will wait. They will buy later - or ask for a better price now.
Any reduction in the selling price is a loss of expected profit for the developers and their financiers. Not a good thing.
News or Olds?
We get much of our information from newspapers.
Note the "new" in the word "newspapers".
And what we read shapes our opinions and, eventually, our actions.
But, sometimes, the "newspaper" may be carrying "oldspaper" information that, at one level, creates a false impression in our minds.
And could makes us act in an incorrect manner.
So, contrast these headlines.
Business Standard, in their online version, June 23rd, 2008: writes: "Booming Indian property mkt beckons UK investors".
In this article, there are a few statements of "fact".
Indian property prices, we read, are up some 70% in 2 years. "Merrill Lynch consultants", according to this article, "have predicted a 700 per cent increase in the Indian property market by 2015". Quite a clever statement - its vagueness leaves room for varied interpretation. The article does not say whether this 700 per cent increase is an increase in the amount of square feet being built, or in the prices of real estate. But something to do with real estate is increasing by 700%. The mind takes that "700%" and imagines a bull market in property.
"Realty promoters pledging shares to raise funds" warns an article in the print version of the Business Standard, dated June 19th, 2008. The article lists 10 listed real estate companies whose share prices had collapsed from their 52-week high by between and -58.2% and -78.1% as of June 18th, 2008.
| SHAKY FOUNDATIONS | ||||
| Company | June 18 price | 52-wk high | 52-wk high date | % change |
| Ansal Infras | 102.85 | 469 | 13-Dec-07 | -78.1 |
| Parsvnath Dev | 168.3 | 598 | 7-Jan-08 | -71.9 |
| Omaxe | 176.95 | 613 | 13-Dec-07 | -71.1 |
| Jaiprakash Asso | 182.1 | 510 | 4-Jan-08 | -64.3 |
| Unitech | 200.25 | 546.8 | 2-Jan-08 | -63.4 |
| Brigade Enterp | 168.5 | 428 | 1-Jan-08 | -60.6 |
| Gammon India | 337.45 | 845 | 4-Jan-08 | -60 |
| DLF | 492.35 | 1225 | 15-Jan-08 | -59.8 |
| HDIL | 590.5 | 1432 | 10-Jan-08 | -58.8 |
| HCC | 116.5 | 278.9 | 2-Jan-08 | -58.2 |
The large shareholder-owners of some of these listed real estate developers have apparently been pledging shares they own to financiers in exchange for loans. With sales not as brisk as in the years 2006 and 2007, cash flows are not as per expectations. And, to add to the woes of the real estate industry, many developers had already committed to larger projects. They now need to pay for this new land and the initial cost of development to get the land into some sort of "build-able" shape.
And another screaming headline, "Cash Crunch" in the Economic Times, June 15th, 2008 states that property developers are borrowing money at interest rates ranging from 35% to 50% per annum. Their "normal" interest rates range from 18% to 24% per annum. The higher borrowing, says the article, is due to the slowdown in sales and larger commitments.
A boom is a bust.
So, what happened between the "old" news of June 18th (the date of the "Realty promoters pledging shares to raise funds" article) and the "new" news of June 23rd (the date of the Booming Indian property mkt beckons UK investors" article)?
The share prices of these realtors, I assume, have declined even further - for what that is worth. The fundamentals of the industry - slow sales and large commitments for new projects - could not have changed. As these share prices decline, the "promoters" of these companies that pledged some shares will need to give more of their shares as a pledge. Additionally, if any loan is not repaid, lenders will sell the pledged shares into the stock market - probably at any price. This could result in a decline in the share prices of the real estate companies - and create a potential downward spiral of wealth destruction for investors in shares of real estate companies.
From a "buying-power" perspective, the news on inflation is worse than expected, so interest rates are likely to increase. And, under that higher interest rate scenario, the cost of borrowing money for buying a home will only increase. Not good for demand. And if demand slows down still further, sales of property will get worse and prices will decline even more.
Uh, oh - does not sound like a "boom".
Sounds more like a "thud".
Demand stalls, supply surges.
For all the bravado of the "news" headline in the June 23rd article in Business Standard, it is more of a rear view mirror event: of what happened yesterday.
But, in a strange way, it gives a hint of what is likely to happen in the future.
In 2006 and 2007, real estate buyers were in a fix. Property they wished to buy was only available at high prices.
Supply was limited.
And demand for property increased due to higher incomes and the ability to borrow more from banks. The desire of many private banks and many government-owned banks to gain market share and build their retail, home loan portfolio saw this dramatic run-up in the borrowing capacity of buyers.
Sometimes these buyers were genuine buyers, and sometimes they were speculators - in for the "free" ride.
After all it was a guarantee that property prices would increase every day.
Just like the prices of shares increased every day when the stock markets opened.
There was no need to go on a "road show" to UK to sell all the property being built.
But that was in 2006 and 2007.
Today, supply of property is more. The demand for property is lower.
Demand has declined because property prices are no longer affordable. Salaries have increased - but not as much as in the recent past.
Demand has also been hit by the fact that banks are closing down their home loan lending departments. Or raising interest rates for these home loans.
The wealth effect from stock markets - which fuels the buying of second homes and dream homes - has evaporated.
But the supply juggernaut keeps on rolling. And building.
Whenever I ask my colleagues (who advise a real estate fund) their views on how much new construction is planned, they shake their head in disbelief. There are 50 to 70 million square feet of new construction coming up in Bangalore, Calcutta, Hyderabad, and Pune to name a few cities.
Developers who have built maybe a total of 5 million square feet in the past decade have plans to build 50 million square feet in the next 3 years.
India was rising. India was shining.
And a rising and shining India needed a place to live, a place to work, and a place to shop.
Real estate zindabad!
Stock price of real estate companies double zindabad!!
Yes, 700% correct!
All correct, and all true: India needs more property.
A lot of more property. Maybe more than the 700% increase referred to in the Merrill Lynch report.
But, at what price?
And at what profit margin to the developer and their financiers?
And will people buy any junk in any location at any price?
Our view on property has been wrong in timing.
We called the "sell" on property too early.
We did not take into account the stupidity of many banks in lending money so leniently and so cheaply. Or the complete mis-pricing of risk-return by so many come-and-join-the-party property funds.
But we knew the greed of the developers. We had seen them in action in 1993 to 1995. As property prices increased in 1994, they bought more land at higher prices and thought they would sell their end product at even higher profits. Discipline was out of the door. Greed was in.
That property cycle went bust in 1995 - and stayed in bust mode till 2003.
For 8 years it was a buyer’s market. Or a renter’s market.
Supply was far more than demand. No one speculated on property. The actual user’s actions determined the prices.
Not some bank’s desire to gain "market share". Nor the availability of money from international sources due to the desire of a foreign fund to invest in an exotic location for an erotic return.
But demand and supply determine the price of everything.
Though, they don’t tell you the value of anything.
And people confuse the two and use "price" and "value" as inter-changeable words.
They confuse the high price of real estate with the value of that real estate.
Prices have only one way to go, I reiterate: and that is down.
And if real estate declines, so should the share prices of many of the property companies that build, and build, and build. We may shake our heads at the housing bubble in USA. But we built one right here in our own back yard.
Sunday, 15 June 2008
Add some more bubbles to the list.
Religious tourism: Spirituality propels Haridwar realty boom
HARIDWAR: Instant karma has emerged as the driving force behind the state's multimillion-dollar realty industry, with religious tourism turning the twin towns of Haridwar-Rishikesh into hot spots for developers, industry trackers say.
With the two holy cities being located some 200 kilometres from the national capital, Haridwar and Rishikesh are fast becoming a favourite with residents of Delhi and its adjoining areas looking for a bit of quick spiritualism.
Subsequently, these places have become almost an extension of Delhi-Gurgaon for spending the weekend.
"Most of our flats are purchased by the residents of Noida-Gurgaon who visit a couple of times in a year to get a taste of spirituality," says the manager of Gayatrilok Apartments on the Haridwar-Roorkee highway.
Today, it is not only the local developers who are reaping benefits but also big players such as Super Tech, DLF and Sahara, who have now forayed into construction of shopping malls. For instance, the Deep Ganga group of Delhi has already tapped 75 percent of projects.
Real estate major Vardhman group and velvet exporter Rishabh Veleveleen are investing Rs.4 billion to develop a new township Vardhmanpuram, which will have customised villas and interior decorations of the buyers' choice.
"Hardwar, being an important religious place on the world map, has good growth prospects. Statistical figures show that religious towns of India at large are witnessing more than 45 percent annual rise in property prices against the average 25 to 30 percent in tier-II cities," says Vardhman chairman U.C. Jain.
The township proposes to “blend” spiritual living with modern features like open-air theatres, swimming pools, spas, healthcare centres, and shopping plazas with large expanses of greens thrown in.
People at the top corporate management levels, who relocate themselves from big cities, are adding to the shortage, which is being tapped to the hilt by residents of developed neighbourhoods like Shivalik Nagar.
Says Shivalik resident K. Ghai, a retired BHEL executive: "My one-room set here fetches me more monthly rental than the one near Chandigarh, which has more covered area and is located in a newly-built township."
Development is concentrated in Haridwar and Rishikesh, as 90 percent of the state is part of the Ganges and the Grand Himalayas, and the only available land for housing and infrastructure developments is available here.
"There is a huge demand for good housing from foreigners and NRIs who wish to invest here as post-retirement options," says Manoj Gupta, a local real estate developer.
Adding to the demand are forthcoming events like the residential yoga camps and festivals by religious organisations and the Uttaranchal Tourism Board, as well as the Kumbh Mela in 2010.
Growing industrialisation, driven first by hydel projects at Tehri, Maneri and Joshimath, is now doing its bit.
The industrial development area in Haridwar has been declared an “excise free zone”, and companies like Hero Honda, Hindustan Lever, Mahindras, and ITC apart from a clutch of pharma and cosmetic companies are setting up facilities in Haridwar.
The upshot: there's going to be more shortage in Haridwar and Rishikesh. As builders say, these are “the next destination” spots.
Religious tourism: Spirituality propels Haridwar realty boom
HARIDWAR: Instant karma has emerged as the driving force behind the state's multimillion-dollar realty industry, with religious tourism turning the twin towns of Haridwar-Rishikesh into hot spots for developers, industry trackers say.
With the two holy cities being located some 200 kilometres from the national capital, Haridwar and Rishikesh are fast becoming a favourite with residents of Delhi and its adjoining areas looking for a bit of quick spiritualism.
Subsequently, these places have become almost an extension of Delhi-Gurgaon for spending the weekend.
"Most of our flats are purchased by the residents of Noida-Gurgaon who visit a couple of times in a year to get a taste of spirituality," says the manager of Gayatrilok Apartments on the Haridwar-Roorkee highway.
Today, it is not only the local developers who are reaping benefits but also big players such as Super Tech, DLF and Sahara, who have now forayed into construction of shopping malls. For instance, the Deep Ganga group of Delhi has already tapped 75 percent of projects.
Real estate major Vardhman group and velvet exporter Rishabh Veleveleen are investing Rs.4 billion to develop a new township Vardhmanpuram, which will have customised villas and interior decorations of the buyers' choice.
"Hardwar, being an important religious place on the world map, has good growth prospects. Statistical figures show that religious towns of India at large are witnessing more than 45 percent annual rise in property prices against the average 25 to 30 percent in tier-II cities," says Vardhman chairman U.C. Jain.
The township proposes to “blend” spiritual living with modern features like open-air theatres, swimming pools, spas, healthcare centres, and shopping plazas with large expanses of greens thrown in.
People at the top corporate management levels, who relocate themselves from big cities, are adding to the shortage, which is being tapped to the hilt by residents of developed neighbourhoods like Shivalik Nagar.
Says Shivalik resident K. Ghai, a retired BHEL executive: "My one-room set here fetches me more monthly rental than the one near Chandigarh, which has more covered area and is located in a newly-built township."
Development is concentrated in Haridwar and Rishikesh, as 90 percent of the state is part of the Ganges and the Grand Himalayas, and the only available land for housing and infrastructure developments is available here.
"There is a huge demand for good housing from foreigners and NRIs who wish to invest here as post-retirement options," says Manoj Gupta, a local real estate developer.
Adding to the demand are forthcoming events like the residential yoga camps and festivals by religious organisations and the Uttaranchal Tourism Board, as well as the Kumbh Mela in 2010.
Growing industrialisation, driven first by hydel projects at Tehri, Maneri and Joshimath, is now doing its bit.
The industrial development area in Haridwar has been declared an “excise free zone”, and companies like Hero Honda, Hindustan Lever, Mahindras, and ITC apart from a clutch of pharma and cosmetic companies are setting up facilities in Haridwar.
The upshot: there's going to be more shortage in Haridwar and Rishikesh. As builders say, these are “the next destination” spots.
The recent bloodbath in the real estate sector has started taking a toll. Almost all large developers are now facing a severe cash crunch and finding it difficult to complete their ongoing projects. In fact, the situation is so bad that most of them have reported a 50-70% cash shortfall. Industry sources told SundayET that the liquidity crunch has forced many developers to pick up cash from the unorganised market at interest rates as high as 35% to 50% annually. The lending rate of banks is between 18% and 20%.
The grade A developers which are facing crash crunch include DLF, MGF Emaar, Shobha Developers, Unitech, Omaxe, Parsvnath Developers, Hiranandani Group, Ansal API, BPTP Developers and TDI Group.
As a result of the crash crunch many developers have started going slow or even stopped construction of projects which are either in their initial stages of development or which would not affect their bottomline in the near future. While most developers that SundayET spoke to, agreed with the problem at hand, none of them were ready to be quoted on how it had affected them.
“There are visible signs that the global liquidity crunch has started to impact real estate companies in India. It is becoming extremely difficult for both small and large realty companies to organise financing, given the global liquidity crisis. The recent slowdown in demand, high interest rates, rising input costs and meltdown of realty stocks have only added to their problems. The real estate companies are in dire need for credit and other sources of capital to complete projects at hand and also to sustain their expansion plans. Some companies are able to access capital, albeit at very high costs, which in the long run may not be a sustainable solution, especially given the size of the market and consequent need for large chunks of capital,” says Cushman & Wakefield executive MD (South Asia) Sanjay Verma.
Many in the industry feel that notwithstanding the final verdict on the extent of global economic slowdown and recovery of financial institutions, real estate players in India may continue to face liquidity problems in the near future due to global credit crunch and unfavourable stock market conditions for raising capital.
What’s more, bankers say they may now get more cautious towards lending to real estate developers. “Real estate companies have many projects at hand and the sales have been constantly dwindling. Analysing these sentiments, any financial institution will be cautious. Remember, during monsoons, housing sales come down and banks may have to consider increasing interest rates further in future,” says HDFC Bank chairman Deepak Parekh. State Bank of India (SBI) is no different. It is also contemplating similar measures. “We are not sure for how long the current volatility will exist in the realty market. Also, banks need to maintain their reach among their clients. However, it is possible that all banks may sanction loans to only those developers with whom they have had a long relationship,” says a top SBI official.
Industry experts feel the only avenue available for raising capital in the current situation is at the project SPV level and by way of private equity or similar sources, which is generally the most expensive method of raising capital and has limitations on the over all extent of financing that is required. “Concerns about liquidity will continue to plague the market since debt will not be easily available. Real estate players had traditionally raised money from debt funds via corporate deposits and commercial paper. However, debt funds are currently not eager for more exposure in real estate and are continuously rolling over the debt advanced to these players. The primary source for institutional funding will, therefore, now be private equity,” says JLLM chairman & country head Anuj Puri.
The grade A developers which are facing crash crunch include DLF, MGF Emaar, Shobha Developers, Unitech, Omaxe, Parsvnath Developers, Hiranandani Group, Ansal API, BPTP Developers and TDI Group.
As a result of the crash crunch many developers have started going slow or even stopped construction of projects which are either in their initial stages of development or which would not affect their bottomline in the near future. While most developers that SundayET spoke to, agreed with the problem at hand, none of them were ready to be quoted on how it had affected them.
“There are visible signs that the global liquidity crunch has started to impact real estate companies in India. It is becoming extremely difficult for both small and large realty companies to organise financing, given the global liquidity crisis. The recent slowdown in demand, high interest rates, rising input costs and meltdown of realty stocks have only added to their problems. The real estate companies are in dire need for credit and other sources of capital to complete projects at hand and also to sustain their expansion plans. Some companies are able to access capital, albeit at very high costs, which in the long run may not be a sustainable solution, especially given the size of the market and consequent need for large chunks of capital,” says Cushman & Wakefield executive MD (South Asia) Sanjay Verma.
Many in the industry feel that notwithstanding the final verdict on the extent of global economic slowdown and recovery of financial institutions, real estate players in India may continue to face liquidity problems in the near future due to global credit crunch and unfavourable stock market conditions for raising capital.
What’s more, bankers say they may now get more cautious towards lending to real estate developers. “Real estate companies have many projects at hand and the sales have been constantly dwindling. Analysing these sentiments, any financial institution will be cautious. Remember, during monsoons, housing sales come down and banks may have to consider increasing interest rates further in future,” says HDFC Bank chairman Deepak Parekh. State Bank of India (SBI) is no different. It is also contemplating similar measures. “We are not sure for how long the current volatility will exist in the realty market. Also, banks need to maintain their reach among their clients. However, it is possible that all banks may sanction loans to only those developers with whom they have had a long relationship,” says a top SBI official.
Industry experts feel the only avenue available for raising capital in the current situation is at the project SPV level and by way of private equity or similar sources, which is generally the most expensive method of raising capital and has limitations on the over all extent of financing that is required. “Concerns about liquidity will continue to plague the market since debt will not be easily available. Real estate players had traditionally raised money from debt funds via corporate deposits and commercial paper. However, debt funds are currently not eager for more exposure in real estate and are continuously rolling over the debt advanced to these players. The primary source for institutional funding will, therefore, now be private equity,” says JLLM chairman & country head Anuj Puri.
CHENNAI: Promoters of ongoing real estate projects, worth over Rs 4000 crore, are reworking their pricing strategies as rising inflation and the fuel price hike have pushed up input costs.
Steel prices, already northbound, has shot up by over 30 per cent since fuel costs went up, Builders Association of India office-bearer MK Sundaram told reporters.
Transportation has become more expensive with petrol costing Rs 5 more per litre, and diesel Rs 3 more. Other items like sand are dearer by nearly 40 per cent, he said.
The situation has been trickier for promoters by the 8.24 per cent inflation that many had not factored into their contracts.
Subsequently, cost overruns have become common, and several projects have become unviable. With contractors beginning to lose money, Sundaram said some projects have had to be deferred and labour laid off.
"Who will buy a flat pegged at Rs 2,500 a sq ft at double the price when the cost of funds also go up while salaries don't?" Sundaram asked. "The price hikes have hit the industry hard."
Construction major HIRCO, which has a huge project under way in Chennai's southern suburbs, is likely to rework prices for sales of completed projects by at least 20 per cent, company officials said on condition of anonymity.
"We will have to assess the sentiments of buyers, especially in the light of rising cost of funds and several other fiscal parameters," a HIRCO official said.
While the HIRCO project, spread over 500 acres is expected to have a total outlay of at least Rs 800 crore, Puravankara, another construction major, has at stake a project worth Rs 3 crore at current prices, according to independent estimates.
Other construction projects - Chennai's version of London's Tube and flyovers - may also suffer due to huge cost overruns, industry sources said.
Chennai Metro Rail Limited - a public sector company owned by the state government - has worked its cost at a little under Rs 1000 crore at current prices. This could go up by at least 50 percent when work begins in 2009.
And, by the time it's completed in 2014, the cost may have escalated 300 percent, sources at Larsen and Toubro, another construction major said.
The reasons are not difficult to fathom.
The Tamil Nadu government's takeover of sand quarrying, citing profiteering by private contractors, resulted in a temporary shortage, sending prices higher by almost 45% within a span of two months.
The fuel price hike has only worsened matters.
Present indications of a further fuel price hike may render several projects financially unviable, said non-resident Indian financial expert R Rao, currently on a visit to India from the US.
"We seem to be planning for day before yesterday. Lack of infrastructure and short-sighted planning render whatever is created financially unviable," Rao told IANS. "Consumers do not get their money's worth."
Steel prices, already northbound, has shot up by over 30 per cent since fuel costs went up, Builders Association of India office-bearer MK Sundaram told reporters.
Transportation has become more expensive with petrol costing Rs 5 more per litre, and diesel Rs 3 more. Other items like sand are dearer by nearly 40 per cent, he said.
The situation has been trickier for promoters by the 8.24 per cent inflation that many had not factored into their contracts.
Subsequently, cost overruns have become common, and several projects have become unviable. With contractors beginning to lose money, Sundaram said some projects have had to be deferred and labour laid off.
"Who will buy a flat pegged at Rs 2,500 a sq ft at double the price when the cost of funds also go up while salaries don't?" Sundaram asked. "The price hikes have hit the industry hard."
Construction major HIRCO, which has a huge project under way in Chennai's southern suburbs, is likely to rework prices for sales of completed projects by at least 20 per cent, company officials said on condition of anonymity.
"We will have to assess the sentiments of buyers, especially in the light of rising cost of funds and several other fiscal parameters," a HIRCO official said.
While the HIRCO project, spread over 500 acres is expected to have a total outlay of at least Rs 800 crore, Puravankara, another construction major, has at stake a project worth Rs 3 crore at current prices, according to independent estimates.
Other construction projects - Chennai's version of London's Tube and flyovers - may also suffer due to huge cost overruns, industry sources said.
Chennai Metro Rail Limited - a public sector company owned by the state government - has worked its cost at a little under Rs 1000 crore at current prices. This could go up by at least 50 percent when work begins in 2009.
And, by the time it's completed in 2014, the cost may have escalated 300 percent, sources at Larsen and Toubro, another construction major said.
The reasons are not difficult to fathom.
The Tamil Nadu government's takeover of sand quarrying, citing profiteering by private contractors, resulted in a temporary shortage, sending prices higher by almost 45% within a span of two months.
The fuel price hike has only worsened matters.
Present indications of a further fuel price hike may render several projects financially unviable, said non-resident Indian financial expert R Rao, currently on a visit to India from the US.
"We seem to be planning for day before yesterday. Lack of infrastructure and short-sighted planning render whatever is created financially unviable," Rao told IANS. "Consumers do not get their money's worth."
Friday, 13 June 2008
Finally the bubble bursts. I expect atleast a 25-30% correction in the market as people begin to walk away from their highly priced apartments.
MUMBAI: After raking in phenomenal profits since 2004, builders, including some top guns in the industry, could be headed for serious trouble with the real estate market sliding rapidly.
Sources in the construction industry, financial institutions and individual investors have told TOI that several builders have started defaulting on interest payments and some of them have backed out of commitments to purchase land. Many builders are facing a liquidity crunch as sales of apartments are in a state of virtual stagnation. Moreover, politicians who had parked their slush funds with builders are now asking for their money back.
Information gleaned through these sources points to a dismal scenario set to unfold in the coming months. As one property expert who tracks the market minutely put it, “The real estate market has now moved from being under stress to a completely distressed condition.’’
A plethora of recent cases seems to back up this claim.
A leading Mumbai-based developer who belongs to one of the country’s leading construction families has backed out after offering Rs 700 crore to purchase the 18-acre Hindustan Composite land at LBS Marg in Ghatkopar. It’s learnt that the same builder has also walked away from buying 3.5 lakh sq ft of the Pramanik Landmark land in Goregaon after having made an initial payment of Rs 40 crore.
This builder, who has constructed landmark buildings at Colaba, Peddar Road, Prabhadevi and the far-off western suburbs, is believed to have overstretched himself with an exposure of Rs 1,200 crore in the form of loans taken from banks and private individuals.
TOI has also learnt that a Delhi-based construction giant which was in negotiations for a 100-acre chunk of land at Kanjurmarg for about Rs 1,000 crore has suddenly turned around and said that it’s no longer interested.
Another Delhi-based developer, currently undertaking a massive redevelopment project near the western express highway and also redeveloping a BEST bus depot, is facing difficulty in servicing its loans. “This company has started defaulting on interest payments to its bond holders,’’ a source said.
A Mumbai-based developer, who recently purchased a plot in the Bandra-Kurla Complex for a phenomenal price, may also end up burning his fingers, say market sources. A confidential report prepared by a private bank, which was accessed by this newspaper, shows that this builder has a total loan exposure of almost Rs 3,000 crore. “He is finding it difficult to find tenants for his buildings. Even if he were to sell office space outright, he would have to sell it at a minimum rate of Rs 54,000 a sq ft. This is not possible because the record price in BKC today has not surpassed Rs 35,000 a sq ft,’’ said an industry source.
Another construction company that may have overstretched itself is a south Mumbai property redeveloper, said a market insider. “His permissions are coming in very slow and he is faced with huge overheads,’’ he added.
MUMBAI: After raking in phenomenal profits since 2004, builders, including some top guns in the industry, could be headed for serious trouble with the real estate market sliding rapidly.
Sources in the construction industry, financial institutions and individual investors have told TOI that several builders have started defaulting on interest payments and some of them have backed out of commitments to purchase land. Many builders are facing a liquidity crunch as sales of apartments are in a state of virtual stagnation. Moreover, politicians who had parked their slush funds with builders are now asking for their money back.
Information gleaned through these sources points to a dismal scenario set to unfold in the coming months. As one property expert who tracks the market minutely put it, “The real estate market has now moved from being under stress to a completely distressed condition.’’
A plethora of recent cases seems to back up this claim.
A leading Mumbai-based developer who belongs to one of the country’s leading construction families has backed out after offering Rs 700 crore to purchase the 18-acre Hindustan Composite land at LBS Marg in Ghatkopar. It’s learnt that the same builder has also walked away from buying 3.5 lakh sq ft of the Pramanik Landmark land in Goregaon after having made an initial payment of Rs 40 crore.
This builder, who has constructed landmark buildings at Colaba, Peddar Road, Prabhadevi and the far-off western suburbs, is believed to have overstretched himself with an exposure of Rs 1,200 crore in the form of loans taken from banks and private individuals.
TOI has also learnt that a Delhi-based construction giant which was in negotiations for a 100-acre chunk of land at Kanjurmarg for about Rs 1,000 crore has suddenly turned around and said that it’s no longer interested.
Another Delhi-based developer, currently undertaking a massive redevelopment project near the western express highway and also redeveloping a BEST bus depot, is facing difficulty in servicing its loans. “This company has started defaulting on interest payments to its bond holders,’’ a source said.
A Mumbai-based developer, who recently purchased a plot in the Bandra-Kurla Complex for a phenomenal price, may also end up burning his fingers, say market sources. A confidential report prepared by a private bank, which was accessed by this newspaper, shows that this builder has a total loan exposure of almost Rs 3,000 crore. “He is finding it difficult to find tenants for his buildings. Even if he were to sell office space outright, he would have to sell it at a minimum rate of Rs 54,000 a sq ft. This is not possible because the record price in BKC today has not surpassed Rs 35,000 a sq ft,’’ said an industry source.
Another construction company that may have overstretched itself is a south Mumbai property redeveloper, said a market insider. “His permissions are coming in very slow and he is faced with huge overheads,’’ he added.
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Write to usIt happens only in Mumbai: 2 hours to cover 20 km!
June 13, 2008It may be the country's richest city, and toasted as its commercial capital, but the cold fact remains that it is a city that is unable to build roads that can withstand its annual date with the monsoons.
Mumbai's municipal corporation boasts of a budget that is said to outstrip that of many smaller states, but no amount of money, it seems, can ensure roads that won't fail in the first showers of the season.
It's an annual tradition, Mumbai-kars know, for their civic bosses to reel off statistics to show that this time round they are better prepared for the rains, the roads will hold, there will be no flooding etc. Every year these tall claims unfailingly get washed away in the rains.
But rather than expend words to portray the agony of Mumbai's road commuters, Rediff.com's Rajesh Karkera and Saisuresh Sivaswamy decided to videograph their journey from home to work, a distance of around 20 km which, in any other city, would take around 30 minutes. On a 'normal' day they are happy if they cover the distance in one hour; now that the rains are here, the journey has taken them even 3 hours.
On Wednesday the duo set out as usual in the morning with a video camera, and this is their record.
Monday, 2 June 2008
The real question is which segments of the market have seen a slowdown. Is it the 5k segment, the 10k segment or > 10 segment. My guess is that the big number of registrations are in the 2k-5k segment and there on the curve is trending down towards the right as the price per sq/ft drops. Indian Express reports
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MUMBAI, JUNE 1: Mumbai’s realty market, which in recent years witnessed an astronomical price increase bringing it in the league of the world’s most expensive cites, is finally taking a beating. Property sales that have been growing at a clip of about 20% every year have plummeted by 17% in 2007-08, the first time in six years.
Though the property market in the country’s financial capital has been rife with talk of a slump for some time now, this is the first time figures prove the extent of the slowdown. Information about residential and commercial property sales from the stamp duty registration office show almost 12,000 fewer transactions during the last financial year compared to the year before. From April 2007 to March 2008, 62,595 flats were purchased in Mumbai as against 74,555 in 2006-07.
Analysts said this could be just the tip of the iceberg as stamp duty registration figures indicate the trend only among genuine homebuyers. There could be more of a downswing in real estate investments as people are backing off from the sector in large numbers.
Sanjay Dutt, joint managing director of Cushman and Wakefield, said that annually there has been a 20-25% increase in transactions since 2001. “The market peaked in 2007. There were glimpses of market correction in certain cities by the end of 2007. But it was only in 2008 that realisation on the investors’ part and the stagnation that was until now only a perception became a reality,” he said.
Realty analysts say sales volumes are expected to dive further south as developers persist on holding on to their steep prices and buyers anticipate a further fall with current rates being beyond reach. According to Akshay Kumar, managing director of Parklane Property Advisors, the market is in a corrective mode and the downward drift will continue for another 12 months.
“Between 1992-96, the market ran up the same way it did during 2003-07. Post-’96, the volumes dropped by 50%. This time again it is expected to drop substantially though not so steeply. The demand is now extremely sluggish and customers do not want to stick out their necks and transact at prevailing rates,” he said.
In fact, comparative figures for the month of April since 2006-07 show that there has been a drastic 30% drop in transactions this year as compared to three years ago. There were only 5,289 transactions last month as compared to 7,471 in April 2006-07.
Signs of the sluggish market were visible when a recent auction of plots at the Bandra-Kurla Complex turned out to be a damp squib. Just a year ago, a plot of land in the same place had become the national indicator of the euphoric real estate scenario.
“Developers who are not able to sustain for another six months will set the valuation. Prices have peaked too fast over the last six years, so a correction was inevitable. Besides peaking of values, when global factors showed signs of stress even the investors’ segment started withdrawing towards the end of 2007,” said Dutt.
The government, Dutt said, has now started sending signals to an overheated market by taking measures to curtail liquidity in the market and speculation in real estate. “These include controlling the Foreign Direct Investment in the sector as well as imposing higher interest rates. When the market recovers this time, there will be a more healthy and steady growth than the quantum leaps we saw until now,” he said.
My gut feeling is that the new BJP government will come down harshly on BIAL and open the HAL airport for domestic flights. I don't see Y'Appa, Advani and Narayan Murthy making 3 journeys to the airport every week. With the decline of Deve Gowda's influence in Bengaluru Devanhalli will lose its lustre as the next hot investment destination inspite of all the rosy news being planted by the land lobby in various news papers, the Times of India being the most prominent of the lot.
Commentary by Andy Mukherjee
June 2 (Bloomberg) -- What should have been a moment of fulfillment for India, after 17 years of false starts, delays and disappointments, is rapidly turning into a farce.
It has been less than a week since a brand-new airport opened in Bangalore, India's computer-software capital, and already there is a big question mark over whether the Indian government will be able to keep a key promise it made to private investors to get them to build the airfield.
The $618 million project, partly owned by Siemens Project Ventures GmbH and Unique Zurich Airport, is embroiled in a law suit initiated by Bangalore City Connect.
The citizens advocacy group is contesting the government's 2004 commitment to Bangalore International Airport Ltd. -- which owns and operates the new facility -- to close down the city's rickety, old, state-managed airbase, which was built in 1964 to test military planes and was later pushed into civilian service.
In granting monopoly rights to the new company, public interest has been neglected, City Connect says in its petition.
One objection is that the new airport is too small because planners underestimated demand.
As a result, it will be operating at full capacity in its very first year with traffic growing 30 percent annually. To close down the existing airfield, situated inside the city, and direct all travelers to a new one at Devanahalli, 40 kilometers (25 miles) from the city center, is madness, the critics say.
``All over the world wherever a private monopoly is created, public interest predominates,'' says T.V. Mohandas Pai, a member of the citizens group and a director of Infosys Technologies Ltd., India's second-largest computer-software developer.
Monopoly Rights
``Government has given a monopoly and it was done in circumstances that existed five years ago,'' says Pai. ``Things were totally different, there wasn't much traffic and growth was slow. Bangalore wanted an international airport.''
Albert Brunner, chief executive officer of the new airport, disputes that assessment. The existing runway can handle 20 million passengers a year, he says, compared with the 12.5 million expected in the first year of operations.
Besides, there's a plan to build a second runway, he says. But what he can't do anything about -- and what I suspect is the real issue here -- is ground transportation.
It has been eight years since the location of the new airport has been known; in all that time the state government of Karnataka state -- of which Bangalore is the capital -- didn't bother to build an expressway.
$488 Billion
The net result is this: A software engineer working in Electronic City on Bangalore's outskirts may end up spending three hours on the road to catch a one-hour flight to another destination within India.
That, more than anything else, is why frequent fliers of Bangalore are feeling cheated with an airport they have eagerly awaited for so many years.
The new airport is spread over 4,000 acres, has eight aerobridges, nine remote bays, 53 check-in counters and parking space for 2,000 cars. The old airport didn't even have a lounge for international business-class passengers.
India can't allow the Bangalore airport to become a public- relations disaster.
At stake is $488 billion in capital that the government estimates it would need to ease shortages in infrastructure: roads, ports, airports and power stations.
Independent Regulator
In the future, the national government has to view every project in its totality by making an inventory of amenities that a state or a municipal authority is expected to provide. The fees, tolls and levies accruing to sub-national governments from any project must be linked to these milestones.
And when the rules of the game have to be tweaked midway -- as at times they must be -- it helps to have these judgments come from independent regulators who have the expertise to make nuanced, data-based decisions that may be acceptable to all stakeholders.
Finally, demand estimation is too important to be left entirely to experts.
Companies such as Google Inc. are harnessing the power of prediction markets -- which gather information from a large number of participants -- to generate useful forecasts.
There's no reason why governments can't do the same.
Commentary by Andy Mukherjee
June 2 (Bloomberg) -- What should have been a moment of fulfillment for India, after 17 years of false starts, delays and disappointments, is rapidly turning into a farce.
It has been less than a week since a brand-new airport opened in Bangalore, India's computer-software capital, and already there is a big question mark over whether the Indian government will be able to keep a key promise it made to private investors to get them to build the airfield.
The $618 million project, partly owned by Siemens Project Ventures GmbH and Unique Zurich Airport, is embroiled in a law suit initiated by Bangalore City Connect.
The citizens advocacy group is contesting the government's 2004 commitment to Bangalore International Airport Ltd. -- which owns and operates the new facility -- to close down the city's rickety, old, state-managed airbase, which was built in 1964 to test military planes and was later pushed into civilian service.
In granting monopoly rights to the new company, public interest has been neglected, City Connect says in its petition.
One objection is that the new airport is too small because planners underestimated demand.
As a result, it will be operating at full capacity in its very first year with traffic growing 30 percent annually. To close down the existing airfield, situated inside the city, and direct all travelers to a new one at Devanahalli, 40 kilometers (25 miles) from the city center, is madness, the critics say.
``All over the world wherever a private monopoly is created, public interest predominates,'' says T.V. Mohandas Pai, a member of the citizens group and a director of Infosys Technologies Ltd., India's second-largest computer-software developer.
Monopoly Rights
``Government has given a monopoly and it was done in circumstances that existed five years ago,'' says Pai. ``Things were totally different, there wasn't much traffic and growth was slow. Bangalore wanted an international airport.''
Albert Brunner, chief executive officer of the new airport, disputes that assessment. The existing runway can handle 20 million passengers a year, he says, compared with the 12.5 million expected in the first year of operations.
Besides, there's a plan to build a second runway, he says. But what he can't do anything about -- and what I suspect is the real issue here -- is ground transportation.
It has been eight years since the location of the new airport has been known; in all that time the state government of Karnataka state -- of which Bangalore is the capital -- didn't bother to build an expressway.
$488 Billion
The net result is this: A software engineer working in Electronic City on Bangalore's outskirts may end up spending three hours on the road to catch a one-hour flight to another destination within India.
That, more than anything else, is why frequent fliers of Bangalore are feeling cheated with an airport they have eagerly awaited for so many years.
The new airport is spread over 4,000 acres, has eight aerobridges, nine remote bays, 53 check-in counters and parking space for 2,000 cars. The old airport didn't even have a lounge for international business-class passengers.
India can't allow the Bangalore airport to become a public- relations disaster.
At stake is $488 billion in capital that the government estimates it would need to ease shortages in infrastructure: roads, ports, airports and power stations.
Independent Regulator
In the future, the national government has to view every project in its totality by making an inventory of amenities that a state or a municipal authority is expected to provide. The fees, tolls and levies accruing to sub-national governments from any project must be linked to these milestones.
And when the rules of the game have to be tweaked midway -- as at times they must be -- it helps to have these judgments come from independent regulators who have the expertise to make nuanced, data-based decisions that may be acceptable to all stakeholders.
Finally, demand estimation is too important to be left entirely to experts.
Companies such as Google Inc. are harnessing the power of prediction markets -- which gather information from a large number of participants -- to generate useful forecasts.
There's no reason why governments can't do the same.
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