Buy your house - next year!!!

Since when did we start seeing these headlines. Now the original prophecy laid out in my original postings of the collapse of WAMU, Wachovia has come true, what do we expect next.
Based on today's 777 point drop in the DOW, I would expect the Sensex to hit 8000 fairly soon. We are at 12500 and the journey to 8000 should be swift and painless. Mumbai as a property market is dead. I think prices can easily drop 50% and rentals down 60-70%. Any apt which is quoting over 5k per sq/ft is not viable. If the developers have paid over 5k as their acquisition cost, they are the sub-prime of India. They have borrowed funds to acquire sub-prime assets and they will have to pay the price. Nobody in the right mind has 1cr to buy an apt in Mumbai, let alone other cities. I think the paradigm "Real estate never goes down in Mumbai" is now dead. Real estate has collapsed under the weight of the Sub-prime and the flow of cheap money, funded by unscruplous bankers. All the I-Bankers buying properties of 4-12 crores better find ways to find their purchases. The party is over, and the drunks are straggeling to get home. The Rahejas and the Hirnandani's now have to go back to the common people who were priced out of the purchase and if they don't drop prices, they can keep their apartments for themselves and their relatives or friends. With the implosion of the US banks, credit is weak. Amercians with retirement plans funded over the past 20 years are now bailing out to the safety of money market funds. How does Mumbai survive this huge gigantic iceberg. The real estate buildings spring up all over Mumbai will collapse like the Titantic and will remain unfinished if they are not sold at below market rates. Witht he media also harping on the slowdown, expect everyone except the diehard optimist, like Realtly rider and Ashish to keep buying properties and these folks deserve to have their money parted for a fool and his money will soon be parted. For the rest, lets keep watching the party unwind. It was a great run and an even greater drop. Gravity rules.
The time for buying in projects breaking ground or just starting has ended. With the collapse of credit, there is no way to know if projects will be completed and bills paid. This happened in the 80's where there were many unfinished buildings since the developer ran out of money. Whenever the time comes to buy, sometime next year and prices have fallen steeply, it is best to buy an property which is ready or almost ready. Project execution risk has too be taken out of the equation. With so many developers folding only the biggest and ones with deep pockets will survive. Everyone else will be road kill. As of now in terms of banks, there are only 4 major banks left in the US, Bank of Amercia, Wells Fargo, JP Morgan Chase and Citigroup. Citigroup had to be bailed out by the Arabs, so what is the guarantee that a company like ABC Constructions will survive in a fastly deteriorating market

DNA India reports.
A survey of brokers shows that enquiries to buy homes have fallen, with Mumbai registering a 90% drop. Brokers expect prices to drop soon.

The word is out on the streets. About 60 per cent of brokers expect prices in the Mumbai island city and up to Borivili to come down in the next year. Pranay Vakil, chairman of Knight Frank, global property, says he is also concerned about the volumes, which currently are 10 per cent of the sales recorded last year in Mumbai alone. “Prices are a function of demand and supply. But if volumes do not sustain, the problem will be greater and will bring the industry to a halt. Currently, only long term investors who have seen the ups and downs in the market are holding on.”

According to a pan-India survey of local brokers on the residential property market carried out by Edelweiss, global research analysts, almost 80 per cent of brokers across India have witnessed a reduction in enquiries over the past month and about 90 per cent of brokers in Mumbai have seen a drop in transactions over the past one month.

Hundred brokers in 20 micro-markets like Bandra-Borivili, Mulund-Thane, Gurgaon, Noida, Whitefield-Marathalli, Annanagar in the cities of Mumbai, Delhi, Bangalore and Chennai were polled.

According to Vakil, in order to increase volumes, developers will now cut down on quality in big projects. “In a total of 10 buildings, two will maintain high quality at a high rate, but in two he might offer low quality tiling in bathrooms and use it as an excuse to reduce his prices,” he says.

According to property experts, volume is driven by sentiment. If a buyer is sure of his ability to retain a job — essential to maintain a bank loan — he will go ahead and borrow money to buy a flat. “The situation is rather flexible. Apart from high property prices, high interest rates have cast a big question on the affordability of a flat purchaser these days,” said an equity analyst.

That the lack of demand and growing liquidity crises has developers worried was obvious at an informal meeting of 35-odd developers at a suburban five-star in Mumbai recently. With banks like Bank of Baroda, Bank of India recently announcing that they will not lend money against property, developers are worried about how to source funds for their projects. “The tightening money market has made IPOs redundant.

Venture capital funds have stopped lending and developers do not want to go to money lenders because of high interest rates of about 25 to 30 per cent. So, the only option is to either start selling faster by reducing rates (something they do not want to do) or curtail production which many of them have already started doing,” said a property consultant with a global real estate major.
According to Anuj Puri, managing director of Jones Lang Lasalle Meghraj, a global real estate firm, “Developers will have to reduce their prices if they have to beef up their quantum. I believe there is still a lot of depth in the market but at the right price. The faster the developers understand it, the better it will be for all concerned.”

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Lehman bankruptcy hits Indian developers

DNA reports
Unitech’ll miss crucial cash
MUMBAI: The collapse of Lehman Brothers, the world’s fourth-largest investment bank, has left some Indian real estate developers gasping.

Unitech Ltd, India’s second-largest developer by market capitalisation, had received Rs 740 crore from Lehman Brothers Real Estate Partners (REP) for its mixed use development project at Santacruz in Mumbai just two months ago on July 17.
That day, Unitech said Lehman will invest about $175 million (Rs 740 crore) and will acquire a 50% stake in the initial phase of a project on the Western Express Highway in Mumbai.
This initial phase entails development of 1 million sq ft of office space out of a total developable area of 18 million sq ft.
“Lehman and the Western Express JV will each contribute 50% of the construction costs,” Unitech said.
The Western Express JV meant Unitech and its local partner Rohan Developers.
A Unitech spokesperson said the company “has already received the $175 million in July, so there is no problem”.
The construction cost for the first phase of the project is pegged at Rs 300 crore.
As per their stake equation, Lehman has to invest Rs 150 crore but hasn’t to date, according to sources familiar with the development.
Also Unitech was expecting further investments from Lehman Bros for the same project and its Worli project also.
Unitech was expecting an additional Rs 500 crore from Lehman including for the Worli project.

The Ashok Piramal-backed Mumbai-based realty major, Peninsula Land Ltd, had signed a memorandum of understanding (MoU) with Lehman whereby the US-based company was to invest $125 million or Rs 576 crore in its projects for minority stakes.
The first tranche had to come for the Hyderabad project where Peninsula is developing an integrated township and IT Park on a 31-acre plot bought from Rallis India.
To a query by DNA Money on the investment status, Peninsula said: “The investment for Hyderabad would come once we start the construction … which would begin in the third quarter this year.”
The company said it would not be affected because most of the money was raised from non-Lehman sources.
Peninsula Land has earmarked Rs 2,500-3,000 crore for land acquisition in the next three to five years.
The investment was to come from Lehman and some of Peninsula’s domestic and offshore funds. But DLF, India’s largest developer, may be thanking its stars.
That’s because Lehman has already paid $200 million or Rs 921 crore to DLF Assets Ltd, a subsidiary.
“We have already received the payments so we are not facing any trouble,” a DLF spokesperson told DNA Money.

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Lehman fall may deepen Indian realtors' credit woes

Enuff said

NEW DELHI/MUMBAI: Lehman Brothers’ bankruptcy is likely to cost Indian real estate dear. It may impact the financial major’s existing investments worth $500 million in realty firms, including DLF and Unitech, besides drying up another $500-million worth of potential investment which was expected to flow into Unitech’s Mumbai projects.

The news of Lehman’s collapse brought the BSE realty index down by 7.65% on Monday, while the benchmark Sensex declined 3.35%. Both DLF and Unitech fell 7.5%.

Lehman’s fall signals a deepening of credit crisis for Indian developers, who have lately been battling falling sales, rising cost of construction and tightening credit. It is expected that the US-based firm is likely to go for a fire sale of its assets.

The financial services major was very bullish on India and was among the active investors in Indian real estate. Early this year, it had leased out an office space in Mumbai paying Rs 1 crore per month as rental. This would divert a part of fresh funds seeking to invest in Indian realty.


This is because global fund houses have country-allocations. And as they buyout Lehman’s stake in some of the Indian assets, they will end up diverting some of the fresh funds-in-hand to existing assets rather than investing in new projects.

“Lehman’s departure will impact future cash flows of real estate companies. In a market situation like today’s, it will be all the more difficult for the firms to raise funds,” says Karvy Stock Broking vice-president Ambareesh Baliga.

Lehman invested $200 million in DLF promoter group company DLF Assets last year and bought 50% stake in Unitech’s Mumbai project for $175 million a few months ago. It had also invested $80 million in Bangalore-based SEZ Gandhi City and was likely to hike its share to $300 million.

Lehman’s other investments include a 40% stake in an IT park project of Peninsula Land in Hyderabad for an initial investment of Rs 50 crore. It had also teamed up with Mumbai-based developer HDIL to bid for the redevelopment of Asia’s largest slum Dharavi.

Wherever the developers had received fund, they are safe. But where the funds are yet to come, the developers could get stuck. Some analysts say a distress sale by Lehman will impact the valuation of existing projects.

DLF CFO Ramesh Sanka had earlier told ET that Lehman’s sale of investments in DAL would not impact DAL’s valuation. Unitech MD Sanjay Chandra said that his company had already received funds. So, the company won’t get impacted by Lehman’s bankruptcy.

Some industry executives say that FDI norms of a three-year lock-in period may prevent Lehman from making an immediate sale. But analysts argue that the lock-in period in case of bankruptcy may not hold.

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Real estate developers caught in downturn

DNA has a article on the pithfalls of the use of leverage in the real estate business. Expect rapid unwinding in Mumbai and land prices in developing areas of all cities in Mumbai. The wind below the PE wings have been taken out. With the collapse of Lehman, Fannie, Freedie and impending doom of Washington Mutual and Wachovia, we are in a very deep downturn. I think Mumbai prices will collapse 50% under these circumstances. Antything over 5-6k per sq/ft is not capable of being repaid using a loan based on Indian salaries. so prices have to drop to these levels whether funded by black, white or yellow money. If prices don't drop there will be zero buyers for all expensive properties owned by builders. They can keep it and rent it out for 20-30k a month. If the PE guy comes callingthey better have a good way to repay their debt, maybe by raising money on the black market at 4% a month

Increase in interest rates, private equity players’ demand for assured returns hit realtors, delay project launch
MUMBAI: Increase in interest rates and demand from private equity firms for assured returns have landed a double whammy on realtors: a severe liquidity crunch that’s delaying projects and launches; and, two, narrowed fund-raising avenues.

Till some time back, developers preferred to invest money in one project at a time. So, if a realtor injected Rs 1,000 crore into a project, he would wait for free cash flows to come in before announcing the next project.

But the realty boom of the last two years saw many developers aggressively announcing multiple projects.

As a result, over 1,000 million sq ft was earmarked for development with a fund requirement of Rs 205,400 crore over five years.

Spurring their aggression was the entry of private equity investors, who invested heavily discounting the risks.

When the market slumped this year, PEs turned chary of investing so started demanding assured returns.

For realtors, this meant funds wouldn’t come as easily as they used to.
Pankaj Jaju, head of the real estate practice at Enam Securities, said deferred cash flows are affecting the rate of return on projects.
“And there is more pain in store as capital values are expected to correct across markets and input costs have increased, which would lead to contracted margins of the developers,” Jaju said.
Another action that lead to funds crunch is that developers who had easy access to liquidity started jumping the gun when it came to projects.
In a recent report, Enam elucidated how this happened and who is paying for the sins.

Earlier, if a realtor had two projects in hand —- say A and B —- worth Rs 1,000 crore under development, he would invest the entire amount in the first project, complete it and after getting returns on A, and then invest in B.

With PEs coming in, builders began splitting the Rs 1,000 crore into two equal chunks, investing in both A and B at the same time and expecting PEs to contribute 50% of the net asset value (NAV) of the project (or half of Rs 1,500 crore).
The real estate company having Projects A and B first starts executing Project A by investing Rs 500 crore in a special purpose vehicle (SPV).
The PE investor brings in 50% of the project NAV - Rs 750 crore, into the company, taking the total equity capital to Rs 1,250 crore.
A debt to equity ratio of 1:1 meant the builder is able to raise debt worth Rs 1,250 crore. Thus the total investment in the project becomes Rs 2,500 crore.
With the project cost at Rs 2,000 crore, the company’s estimated free cash flow stands at Rs 500 crore at the end of the first project.
This Rs 500 crore is invested in Project B, which is a bigger project with a bigger project NAV. The same procedure of bringing in a PE investor etc is again followed with Project B. The real estate company thus ends up with an estimated free cash flow of Rs 1,000 crore.

But trouble came when the estimated free cash flow didn’t arrive because construction work started getting delayed, land acquisition became a problem and costs shot up by more than 50% of estimates.
The crunch is affecting realtors who have stretched their balance sheets thus, and did not achieve financial closure for projects.
The exit of investors, who were one of the biggest sources of working capital for realtors, landed another blow.

Realtors therefore sought quicker rotation of capital by putting money into high-earning activities of land banking, which left many a developer in the lurch.
Things have come to such a pass, says the Enam presentation, that developers are pitching projects against each other at lower costs to gain sales volumes and earn much-required cash to resolve working capital issues.
“No heed was paid to real estate cyclicality, slowing demand or aggressive execution,” the report said.

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Battle for Mumbai's skies set to begin

Times of India reports

Mumbai: The skyline of congested areas in Mumbai like Girgaum, Grant Road, Bhuleshwar Nagpada and Parel could soon be filled with thousands of skyscrapers sprouting from every nook and corner, thanks to Thursday’s supreme court ruling.
The order comes as a major bonanza for builders because it once again allows them virtually unlimited floor space index (FSI) for redeveloping old, mainly pre-1940 cessed buildings in the island city. In 2005, the Bombay high court, which had admitted a PIL filed by some prominent Mumbaikars, had restricted this use of unlimited FSI on the grounds that it was leading to haphazard and unabated construction activity. The high court had observed that this rule had led to ‘subversion of urban planning’.
“Although the supreme court ruling will facilitate redevelopment of old and dilapidated cessed buildings, it will put pressure on civic infrastructure,” said a worried municipal commissioner Jairaj Phatak. However, he was confident that the island city will be able to cope up with this construction spree if the redevelopment is carried out in a proper manner.
When old buildings are torn down and rebuilt into towers, the space between two skyscrapers could be as little as five feet or even less. Mumbai’s development control rule 33 (7), which pertains to the redevelopment of cessed properties, gives sweeping powers to the municipal commissioner to relax the mandatory open spaces surrounding a building to five feet.
In congested Girgaum, opposite the Harkisondas hospital, a 38-storey tower is virtually kissing another 22-storey high rise next to it. In Nana Chowk, a pencil thin skyscraper has cropped up almost touching the adjacent building.
Over the past decade, many such residential towers as high as 30-40 floors have started springing up in areas like Girgaum, Nana Chowk and Grant Road where the civic infrastructure is already in poor shape. In fact, Mumbai’s tallest residential building, the 45-storey Shreepati Arcade at Nana Chowk, was redeveloped under rule 33 (7).
On Thursday, property redeveloper Pujit Agarwal of Orbit Corporation was ecstatic as several hundred redevelopment projects were in a limbo ever since the PIL was filed in 2004. “The Supreme court judgment has come as a relief for the entire island city, especially the two million tenants living in such buildings. Over the past eight years, we have all undergone a learning curve,” he said.
Rajesh Vardhan of Vardhaman Developers said the judgment has come at a time when several dilapidated buildings were crumbling, leading to loss of life. “Hopefully, today’s ruling will lead to systematic development,” he said.
Agarwal said that henceforth the BMC should ensure it does not condone the compulsory open spaces and in only exceptional cases, should it relax it to five feet. “The state housing authority, MHADA, should carry out due diligence to ensure that the list of tenants is not inflated by any builder in order to get more FSI. Thirdly, developers must be encouraged to go in for cluster redevelopment,” he added.
The Property Redevelopers Association said more than 500 proposals for redevelopment of cessed properties are pending with Mhada and BMC. “The pace of rehabilitation will now increase,” it said.
Four years ago, in a PIL filed by the late J B D’souza, urban planner Shirish Patel and civic activist Cyrus Guzder against the “misuse” of 33 (7), they pointed out how some builders inflated the number of tenants to avail extra FSI.

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