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.

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Dubai World Crisis Vs US Housing Crisis - Layman's Analysis

(Image courtesy - Wikimedia foundation )

I think this is the following layman's assessment

US Crisis Model -

1) Government Pushes Expansion of Housing as it sits on huge surplus/potential surplus. Keeps interest rates low for borrowers

2) Lenders fresh with bulk funds from investors and low interests push both consumers and constructors. (initially follow all regulations) Steady growth in prices of property

3) Once responsible borrowers have bought houses/property - Greedy Investors, Greedier Realtors push prices higher - and entice borrowers with poor credit history to buy houses. Investments Banks bet on these borrowers defaulting through Credit Default Swaps and Collateralize Debt obligations

4) At the tip of the bubble (mid 2006), the frenzy of buying starts faltering with the irresponsible borrowers (who bought in the 90s) start defaulting. As homeowner defaults increase, demand slumps due to lack of growth in economy, flood of cheap foreclosures in the market push down prices.

5) Even good houses and responsible borrowers start feeling pain as bad borrowers brought down all real estate asset prices. (with many of them also either forsaking the house or short selling for a loss)
- this results in IBs and insurance cos to forcefully pay the CDS and CDO - making them insolvent.- BAIL OUT BAIL OUT


BOTTOM LINE for US market
Borrowers (end users who bought houses) started defaulting because they owed banks more money than the value of the house.


Dubai Crisis Model -

1) Government of Dubai entity/organizations plan grandiose development for the city.
They evaluate the scope and possible returns and borrow money from investors to construct projects via contractors. The entity backs it up saying never decreasing oil prices will make Dubai a productive hub. So the valuation of property is based on increasing oil prices.
Update1 - Someone corrected me saying Dubai does not have oil, but the other emirates do! So Dubai just projected its potential based on the neighbors riches :)

2) Initially some sales of these projects pick up due to marketing etc. But once the credit crunch hits western world potential buyers start declining. Oil prices tumble to a point where Dubai can no longer fund projects with oil money (which it does not have - but was promised by neighboring emirates), so it steps up borrowing hoping for recovery.

3) With no buyers, and stagnant prices, there is no scope of paying back the borrowed investment money to the lenders by the Dubai world, etc entity. Dubai asks for 6 months moratorium on payments.
Companies are worried that even after 6 months, the huge amount of unoccupied real estate in Dubai will simply remain in present stagnant state. (Dubai govt/Dubai World cannot reduce prices as it will cause a downward spiral just like USA and cause present occupiers to forsake their places as nearby locations will become dirt cheap - at the same time, tight money supply is not bringing in new investors to buy Dubai property at current prices)

4) Renegotiation of Debt fails - and the Entity cries default ...


BOTTOMLINE - Dubai
In this type of crisis, there is no end user or home occupier/office lessee involved - the Debt of the constructing entity itself causes the default mess.

There are fears that Malaysia, Shanghai and of course Mumbai are having exact same models of construction - where some entity entices investors and promises huge returns and later finds out no one wants to buy whatever was built.

I am not an expert at all this but is my assessment correct?
Where is India's bubble position wrt these 2 scenarios - all thoughts appreciated

- Outcomes -
1. Global Commercial Real Estate crash - Ruled out - Emerging market Commercial Crash ??
2. Gulf Government Bailout on Oil Bonds - Abu Dhabi is unwilling as the UAE is not really United :P
3. Collapse in oil prices due to surplus from Russia, Nigeria, Venezuela and Iran - Keep checking oil futures
4. Definite yes - cost of insuring against default by High debt nations like Ireland, Bulgaria, Greece, skyrockets

दुबई = डूब-गई

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Investors may have lost one-third investment in real estate

If Deepak Parekh is right investors have lost close to $8 billion dollars. There are numerous purchases made in the Bandra Kurla complex area which will end up as null and void with the buyer forfeiting on the token amount. Jet Airways is a good example where they don't have the cash to pay up 825 crores for the land which could now be worth 600 crores, a drop of 225 crores.  A huge bubble in QIP/HNI/AIM/Hedge fund real estate speculation has ended with a thud. Hirco.L is quoting down 70% from peak. How the mighty have fallen. 

DNAIndia reports

Mumbai: "Investors have pumped in $25 billion into the Indian real estate market over the last three years but with land values having gone down they could have lost a third of the value of their investment,"said Deepak Parekh,chairman,HDFC, in a letter to shareholders.

Parekh said that the $25 billion are invested through IPOs, QIPs (qualified institutional placements), AIM listing (alternate investment market) and foreign direct investment. A large part of these funds were used for buying land at exorbitant prices.

"With land values having come down, my estimate is that investors could have lost a third of the value of their investment," he said. Advocating caution, Parekh said investors in real estate have to be more discerning. They should be more realistic on valuation expectations and not throw caution to the wind, he said. He also criticised the recent trend where housing loans are offered at attractive interest rates in initial years.

"We are seeing some variations of teaser type housing loans being offered. The lure of low interest rate at the start of taking a housing loan is enticing. But are customers being made aware of future implications," he asked.

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ICICI CEO and DLF talk price corrections

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

Reuters reporting.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Five More Years

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

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

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

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

Back to 1997

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

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

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

‘No Accident’

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

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

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

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

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

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Housing bubble comparisons - US vs India

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

The lending scenario in India - Bankbazaar.com

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

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

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

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

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

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Satyam land scam

Leverage gone bad. As I had said, black money operators have been "sub-primed". Expect more of the same as the unwinding continues.

Economic Times reports.
Thanks to Observer for the link

Politics-property combo may have trapped Raju

MUMBAI/BANGALORE: An audacious real estate play is seen as the backdrop for the 54-year-old B Ramalinga Raju’s sudden exit from Satyam Computer
Services, India’s fourth-largest IT company.

The Raju family, said real estate industry sources, might figure among India’s top 10 landlords as it had embarked on a massive land-buying strategy to cash in on the real estate boom in recent years. While the family holds over 6,500 acres through Maytas Properties, the individual members in their personal capacity have significant holdings of agricultural land across south and western India, industry officials said.

Industry and banking sources said the Rajus leveraged their ownership of Satyam, both in terms of shareholding and management control, to fuel other businesses. In fact, one banking source surmised that a key reason for cooking the books could have been to leverage the bull run in the Satyam stock before the market meltdown in the second half of 2008.

The promoters may have needed cash for land acquisitions, particularly around their infrastructure projects that were won on the back of ‘goodwill’, according to these sources.

So how did the Rajus land up with a severe liquidity crunch? One of the theories doing the rounds suggests they were trapped by a murky cocktail of political developments and a real estate crash. In the recent past, Maytas Properties and Maytas Infrastructure had won a number of prestigious projects.

These include the Hyderabad Metro Rail project, Machilipatnam port project and airport projects in Andhra Pradesh and Karnataka. In return, prime land near some of these projects had to be ‘offered’ to the supportive establishment. Several real estate sources claimed there were some instances of Maytas being awarded road projects even without proper bidding. However, ET could not confirm all this independently at the time of going to press.

With the real estate story turning sour, political circles were said to have demanded funds from the family instead of land. “Upcoming elections may have also forced members of the establishment to change their preference from land to money which put them in a fix,” said a Hyderabad-based developer.

Observers said Raju’s sudden admission of fraud had compelling reasons, and was probably done under external pressure to thwart bigger revelations.

In this context, it must be mentioned that Delhi Metro managing director E Sreedharan had called Hyderabad Metro Rail project a “future political scam”. He had objected to the way the government allowed the private consortium to develop land commercially.
Some other rumours floating in Hyderabad claim Satyam’s promoters raised huge funds from tobacco traders in Rayalseema district by pledging Satyam shares. The promoters may have assumed that they would be able to raise funds to recover the pledged shares through an IPO of Maytas Properties. But the downturn in the real estate market derailed Maytas’ IPO plans leading to the promoters being unable to meet margin calls on Satyam shares.

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How India Avoided a Crisis

NYTimes article on what could have been a super inflated bubble in real estate. The article reproter fails to mention that black money and corruption was responsible for the spike in prices. Reddy left the private equity folks, hedge funds and "Black Money" to take the risk of escalating land prices. These folks are the sub-prime of India. Not the bank.

“What has taken a number of us by surprise is the lack of adequate supervision and regulation,” Rana Kapoor was saying the other day. “This was despite the fact that Enron had happened and you passed Sarbanes-Oxley. We don’t understand it. Maybe it’s because we sit in a more controlled economy but ....” He smiled sweetly as his voice trailed off, as if to take the sting off his comments. But they stung nonetheless.

Mr. Kapoor is an Indian banker, a former longtime Bank of America executive with a Rutgers M.B.A. who, along with his business partner and brother-in-law, Ashok Kapur, was granted government permission four years ago to start a private bank, which they called Yes Bank. In the United States, Yes Bank is the kind of name a go-go banker might give to, say, a high-flying mortgage lender in the middle of a bubble. (You can even imagine the slogan: “Yes is part of our name!”) But Yes Bank is not exactly the Washington Mutual of India. One news release it hands out to reporters who come calling is an excerpt from a 2007 survey by The Financial Express: “#1 on Credit Quality amongst 56 Banks in India,” reads the headline.

I arrived in Mumbai three weeks after the terrorist attacks that killed 200 people — including, tragically, Yes Bank’s co-founder Mr. Kapur, who had served as the company’s nonexecutive chairman and was gunned down while having dinner at the Oberoi Hotel. (His wife and two dinner companions miraculously escaped.)

My hope in traveling to Mumbai was to learn about the current state of Indian business in the wake of both the credit crisis and the attacks. But in my first few days in this grand, sprawling, chaotic city, what I mainly heard, especially talking to bankers, was about America, not India. How could we have brought so much trouble on ourselves, and the rest of the world, by acting in such an obviously foolhardy manner? Didn’t we understand that you can’t lend money to people who lack the means to pay it back? The questions were asked with a sense of bewilderment — and an occasional hint of scorn. Like most Americans, I didn’t have any good answers. It was a bubble, I would respond with a sheepish shrug, as if that were an adequate explanation. It isn’t, of course.

“In India, we never had anything close to the subprime loan,” said Chandra Kochhar, the chief financial officer of India’s largest private bank, Icici. (A few days after I spoke to her, Ms. Kochhar was named the bank’s new chief executive, in a move that had long been anticipated.) “All lending to individuals is based on their income. That is a big difference between your banking system and ours.” She continued: “Indian banks are not levered like American banks. Capital ratios are 12 and 13 percent, instead of 7 or 8 percent. All those exotic structures like C.D.O. and securitizations are a very tiny part of our banking system. So a lot of the temptations didn’t exist.”

And when I went to see Deepak Parekh, the chief executive of HDFC, which was founded in 1977 as the country’s first specialized mortgage bank, practically the first words out of his mouth were these: “We don’t do interest-only or subprime loans. When the bubble was going on, we did not change any of our policies. We did not change any of our systems. We did not change our thought process. We never gave more money to a borrower because the value of the house had gone up. Citibank has a few home equity loans, but most banks in India don’t make those kinds of loans. Our nonperforming loans are less than 1 percent.”

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Get Real : Times of India editorial

The newspaper which prints "Property Times" and subtly promotes real estate bulders through carefully planted advertorials is now playing to the public sentiment. Alas we know TOI is the wolf in the lamb's clothing. As soon as prices drop 10% they will be back with articles promoting how people are lapping up properties by the dozens. Whether it is in god-forsaken places is another matter. What they care about is advertisements from builders. In a city of 20 Million like Mumbai, if 200 people buy an apt in Khandeshwar, Karjat or Panvel, far flung exhurbs in Mumbai it makes front page news. So much for the grand old lady of the Bori Bunder.

Real estate is one boom-gone-bust that's proving hard to tackle. At the government's prodding, public sector banks recently offered concessional
interest rates on new home loans up to Rs 5 lakh and between Rs 5 lakh and Rs 20 lakh. This was welcome, save that discretionary lending could still thwart loan aspirants. Also, the rates weren't retrospective, giving existing borrowers cause to grumble. As a palliative, the government appealed for lower floating interest rates. Its efforts paid off. State Bank of India, the country's largest bank, is to offer cheaper loans. Earlier, HDFC, India's largest private mortgage player, announced cuts in home loan rates for both new and existing borrowers. ICICI also hinted at reductions. So the soft rate trend is emerging in major private loan disbursing institutions as well. Reportedly, other realty-boosters under the government's consideration are an external commercial borrowing window, a service tax cut and rationalisation of stamp duty on property deals.

Realtors must accept that their big margin-driven boom-time is over for now. Much of their woes are their own doing. They overbuilt assets, riding on a bubble. With depressed demand, they continued to expect unrealistic profit margins. And now they're resisting top-end price corrections. Inflated asset prices are such that even the moneyed are sweating over purchases in tier-I and tier-II cities. Shifting gear from luxury and high-end to mid-level and affordable housing is required. Demand for low-cost housing is massively unmet; the potential for investment here goes beyond the context of today's economic downturn. India's young demographic profile, rapid urbanisation and high savings rate can keep propping up the property market. But housing prices in some segments need to fall by as much as 30 per cent to match affordability.

However, difficult bank financing can hobble low-cost housing projects. Banks need to ease lending, for which they may have to lower deposit rates. Further rate cuts from the RBI would help. Also, apart from builders' pricing, the issue of artificial land shortage keeping prices up needs addressing. Some of realty's demands converting short-term bank loans to long term and rate cuts on home loans of all categories have grounds. Others are mad-hatter expectations, such as wanting a government buyout of unsold assets at current market rates. Realtors have sensibly refrained from formally soliciting any such morally hazardous bailout.

The health of real estate has strong macroeconomic multiplier effects, both in terms of contribution to GDP and employment generation. The more the sector is stimulated, the faster India's economic turnaround will be. The real estate sector has to get real about the changed market environment, doing itself, consumers and the economy a favour.

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GOING, GOING, GONE

DNAIndia reports from Bangalore.

As techies default on EMIs, banks are reclaiming their homes

N Raghuraman. Bangalore
If you are a code jock or call centre employee, watch out. Your dream home is about to become a nightmare. Worried about your ability to repay, banks are in overdrive to repossess your property if you have not been paying your equated monthly instalments (EMIs) for more than three months.

Over the last few days, nationalised and private sector banks have issued a rash of repossession notices in newspapers to recover properties from borrowers who have been defaulting on EMIs. Industry insiders say that one out of every 10 homes bought with loans is in default in Bangalore city, most of it from the technology and BPO sectors. The houses being reposssessed are spread out across the city, from HAL Stage III to Kumara Swamy Layout and from Vignana Nagar to RT Nagar.

"The IT sector is one of the main contributing factors for the repossession drive that banks are undertaking in Bangalore. Several IT companies have laid off employees and the bonuses of several others have been cut, which has resulted in defaults in home loans," admits BR Bhat, general manager, Corporation Bank. The bank has a Rs 1,000 crore home loan portfolio in the city and the share of IT staffers is nearly half of that.
According to banking industry insiders, almost all banks in the city have registered a 20% increase in loan defaults, and thousands of properties are being recovered under a stringent law called Sarfaesi – or the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act, 2002.

The Act empowers banks and housing finance companies to recover their dues in case of defaults within a specified timeframe. Earlier, banks had to file civil suits against defaulters, which could take more than 20 years to settle cases.

In the first half of this month alone, the recovery process has been initiated on various flats and independent houses worth Rs 80.23 crore. The number will surely bloat as this is only the tip of the iceberg, and banks are worried about the impact of these defaults on their bottomlines.
"It would be foolish to live in denial that there will be no impact of the (global) slowdown on our books. This will be reflected in our books in the coming quarters. In Bangalore, there might be more home loan defaults under the current circumstances. But things are not out of control," says Syndicate Bank chairman and MD George Joseph.

At least 15 nationalised and old private sector banks have initiated recovery proceedings and they are in various stages of execution. The list includes Vijaya Bank, Andhra Bank, Syndicate Bank, SBI, State Bank of Mysore, the Bangalore City Cooperative Bank, Corporation Bank, Canara Bank, Federal Bank, Bank of India, Karnataka Bank, Karnataka State Financial Corporation, Citibank and Indian Bank.

If one goes by the printed notices, Canara Bank, Vijaya Bank and State Bank of Mysore seem to be worst affected with their non-performing assets (or bad loans) contributing 80% of the dues which are under process.

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The Sound Of Crashing Real Estate (Goldman Sachs)

Ex_Realtor,

You mentioned that you were recently laid off from a big construction house. What is your experience like for working for these folks ? What are the inside secrets which you could share for the benefit of all readers.

Vik.

Goldman Sachs
India: The Sound Of Crashing Real Estate India's property market is poised for a deep correction. This will bring on sizeable knock down effects, with India GDP expect to slide down to a growth of 5.8 per cent in FY10. We estimate prices may need to fall by up to 30% from current levels, with significant knock on effects on the economy.

In particular, it will slow construction activity, which directly accounts for 7.3% of GDP, but has sector linkages which we estimate to be 14% of GDP.
After India's last housing bust in 1996, real property prices fell some 40% over three years, negatively affecting consumption and investment demand.

Mitigating factors-favorable demographics, low mortgage penetration, ongoing infrastructure demand.
India's property market is poised for a deep correction. Property prices have risen dramatically over the past three years, supply exceeds demand in most geographies, and affordability lags prices. Our India Real Estate Team believes that residential property prices in some geographies may need to fall by up to 30% from current levels for affordability to catch up. As elsewhere globally, we think this will have negative effects on the economy.

The imminent slowdown in construction activity can potentially have a big impact on the economy. By using an input-output matrix, we estimate that although the sector directly accounts for 7.3% of GDP, its backward linkages in terms of the sector's usage of iron, steel, cement etc., and forward linkages to other sectors, impacts an estimated 14% of GDP.
Therefore, a slowdown in the construction sector can potentially have large knock-on effects on the economy.
From the demand side, a property downturn, we think, will have negative effects on consumption and investment. As housing forms the largest component of household wealth, consumer demand will be impacted. The fall in collateral will also hurt firms' balance sheets, increase their funding costs, hurt confidence, and reduce investment demand. However,
the impact on demand will be lower than in developed countries.

Lessons from previous housing busts suggest that they tend to be prolonged episodes with considerable macro consequences. After India's last housing bust in 1996, real property prices fell some 40% over three years, and did not recover to their previous peaks for a decade.

Consumption and investment demand were both negatively affected, and growth slowed from an average of 6.8% in the four years prior to the bust to 5.4% in the four years after it. Typically, housing busts in OECD countries have lasted six years with a 30% decline in prices and substantial negative implications for the economy.

Mitigating factors, such as India's favorable demographics, low mortgage penetration, falling interest rates, and ongoing infrastructure demand, in our view, will keep the property downturn from being protracted. However, we believe a sharp slowdown is imminent. We therefore remain negative on the real estate sector, and its supplier industries such as cement, iron, and steel, and reiterate our below consensus estimate of
5.8% GDP growth in FY10.

Safe Harbor Statement:
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations,
tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

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Builders in fix as bhais want money back

Shailesh sent this link in the comments sections which deserves to the highlighted. In the past the builders were the target of the Bhai's for exotortion. Now the bhai's help the builders to milk the middle class with the help of the banks. The poor middle class owner who has bought a 50L 1 bed apt at 10,000 rs is paying a handsome profit to the builder, the politician,the Bhai and the bank. Ofcourse now the ponzi scheme is up and the guys with guns are asking for their money back. Money back guarantee scheme of Mantri builders from Mumbai, is now played with a different twist. Now people can appreciate the deep influence of the underworld on the pricy world of real estate. We have times reporters who know about dealings but the police are busy chasing drunk drivers on the streets. The builders are the sub-prime of India.
MUMBAI: Several builders are in deep trouble with the underworld which had invested heavily in their projects now demanding their money back.
Dawood Ibrahim, Chhota Rajan and other dons are known to have invested in real estate projects hoping to make a quick buck. "But with the downturn in the market they are not getting the returns they expected and are asking the builders concerned to return their monies immediately,'' sources in the industry told TOI on Wednesday. The builders' problem is that they have already invested these funds in buying land and old buildings for redevelopment and have no liquidity to meet the demands of the gangsters. But the mafiosi is not known to take "no'' for an answer and is turning the heat on the builders. One of the builders in the western suburbs is reported to have returned a whopping Rs 750 crore to a big-time gangster. Another big player in the real estate market is receiving calls from a Malaysia-based don to give back his money and he simply does not known how to do that. "None of these builders have approached the police since their financial partnerships with the gangs would be exposed,'' sources added. "We are already saddled with unsold stocks. Where are we going to get the money to repay the `bhais?' They are not interested in taking over the unsold flats since it is a dead investment for them,'' a builder observed. For the past several years, many of the builders are known to accept investments from the gangs since the latter are able to give big volumes of cold cash and that too at a short notice. Since there was boom in the market there was no problem in giving the `bhais' good returns on their investments, but the scenario is totally different now. Incidentally, it is not only the underworld which has been financing the real estate boom. Several top bureaucrats and senior police officers too are known to have parked their black money with builders. These persons have also become jittery and are pressing for the return of their money. At least with these type of investors
the builders are not facing much problem because they are privy to details of the ill-gotten wealth of the babus and cops. But with the gangsters it is a different ball game altogether.

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Time reports on the Indian realty meltdown

I guess to all the ostriches, this article is one more nail in the coffin. Drop prices 30-40% or go bankrupt, seems to the mantra come Janurary. The only hope is the centuries old tradition of praying to Goddess Lakshmi for wealth and prosperity. In the Indian secnario, the developers who are leveraged to the hilt are the sub-prime of India.

Mirroring the US, India's Real Estate Sector Melts Down
By Madhur Singh / New Delhi Monday, Oct. 20, 2008
The new moon of the lunar month of Kartika marks Diwali, the Indian festival of lights, when Hindus across the country worship the goddess of wealth, Lakshmi. But divinities know full well the laws that govern finance and Lakshmi may not be a little tight-fisted about circulating her riches amid the ongoing global credit crunch.
Indian tradition decrees that it is auspicious to make purchases during the days leading up to Diwali — which falls in October or November. With faith meshing so effortlessly with commerce, the season sees sellers, advertisers and marketers urging the devout to spend money with a religious fervor, hawking everything from chocolates and consumer durables to gold and houses. Buying a home is considered especially propitious. What better way to welcome the goddess of wealth into one's life than by inviting Lakshmi into one's new abode? So much so that the period from just before Diwali through March is usually a bonanza for the real estate industry: usually 70% of the annual business is conducted at this time.
Not this year. With just about a week to go until Diwali, the mood is decidedly downbeat. The demon of impending economic doom refuses to die, and as tightened liquidity makes people put off larger purchases, the real estate sector is facing the worst attack. "This time last year, I was selling 10 to 12 properties every day," says Alok Gupta, who runs Advanced Real Estate in the New Delhi suburb of Noida. "This time, I haven't sold a single property all month!"
Considered the barometer of economic growth, the real estate sector in India has grown 30% to 35% during the last five years, reflecting the rapidly-increasing demand for office, commercial and industrial space, as well as bigger homes now considered within the range of India's prospering working classes. But the economic juggernaut has been slowing since earlier this year due to double-digit inflation, a severe liquidity crunch as a fallout of the U.S. sub-prime crisis, and now, the possibility of economic activity shrinking as part of a global slowdown. The country's growth estimates of 9% at the beginning of the year have been revised to well below 7%, and the effect is directly visible on the realty sector. "No one's buying any more," says Ashwani Shukla of New Delhi-based Triveni Associates, "Two years ago, 25-year-olds earning fat pay packets from [multinational corporations] were buying high-end apartments. Now, there are no takers for flats selling at 20% markdowns. Estate agents are finding it difficult to even meet daily overheads."
Shukla himself has branched out of real estate and started selling insurance six months back, "to pay the bills." According to various estimates, sales in cities like Mumbai and Chennai are down 30% to 40%. Hoping to induce buyers at Diwali, realtors are advertising cash discounts of 5% to 10% for down payments, and as much as 25% discounts if buyers are willing to wait two to three years before taking possession of the property. "But there is no liquidity with the end user," says Arvind Nandan, director of consultancy at real-estate consultants Cushman & Wakefield India, "Home-loan rates have hit the roof, and people's investments have lost value at the stock market. No one has the money to buy."
Shukla says if the situation does not improve, there could be distress sales within the next six months. The realty sector was heading for a cyclical slowdown even before the current economic slump. Over the last few years, increasing demand had pushed up prices, with speculators jumping in to further inflate the market. Eventually inventory piled up when buyers refused to pay unrealistically high prices. "So many transactions were taking place between speculators and investors that no one bothered to find out what the end-user, the family who would eventually live in the house, would be willing and able to pay," Shukla says. And those prospective home owners are the biggest target of India's real estate industry: almost 80% of real estate developed in the country is residential space.
This all comes at the worst possible time. Even as buyers refused to bite, inflation passed into double digits in June this year, raising prices of construction material. Realtors overran their budgets and projects stalled, leaving skeletal structures dotting the landscape across big and small cities all over the country. Then came the liquidity squeeze as the government sponged away cash from the system to control inflation. Home loan rates went from about 7% to over 12%. People who bought struggled to pay, and potential buyers kept away.
Realtors like Shukla and Gupta may have little reason to light firecrackers this Diwali, but their prayers to Lakshmi, the Goddess of Wealth, will definitely be more fervent, especially as experts predict things will get worse before they get any better. "This was a much-needed correction," says Nandan of Cushman & Wakefield India, "And it isn't complete yet. I expect the market to go down further, and it's hard to say when the recovery will begin."
Yet, no one is entirely pessimistic. Experts and industry insiders believe once the storm blows over, demand is bound to rise back up for the same reasons it did last time — a large, young workforce; gradual but consistent liberalization reforms; and a high rate of consumer and private sector savings. "The silver lining is that once this phase ends, land and property prices will be corrected to rational levels, speculators will be out, and the sector will have stronger fundamentals," says Shukla. If everyone's prayers go right, the goddess will eventually be propitiated and her blessings will issue forth once more.

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Revisiting the first post of this blog

Rewiding almost 3 years into the past, I found my original post. Most of the observations made then have been vindicated by the turn of events. Three years later, the stock market is up 10% and looks very likely to go below 9k in the following weeks, thereby wiping gains for 3 years. The FII's have taken the Indian investor for a ride down a a tunnel of hell. As everyone reads the bad news, I'm thinking of what could be good prices to pay for apts in the year ahead ? Anything over 3000 is steep by any standards. Black money can chase other black money, however loans are in short supply so they cannot chase other loans. If a black money operator buys an apt paying 1cr, immediately the Income Tax folks will get alerted and will be on his case. The only place where they can hide money is to buy land/plots where there is a substantial portion in black. As state governments keep raising gudiance value, this avenue is closing as well. In Chennai the guidance of OMR road is up 10 times over the past 3 years. Hence speculation here attracts the Income tax bugs. The only avenue black money folks have is to fund builders, however given the state of the loan market, they will be unwilling to do so. The goal of every black money operator is to convert the black to white, but as avenues for the conversion evaporate due to increasing risk, storing black money under the matteress or in hidden cabinets seems to the only way. Any builder who is looking for money is paying 30% interest, this used to be the case in 2003. So the market is dull, people have lost money in the market upto 80% in many cases. How long can 10000 per sq/ft hold ?
and I just got this in the mail and couldn't come at a better time. A drop of 40% from the existing rates, However to take the risk of execution during a time of financial crisis is foolhardy. We will see these prices for ready to occupy apts soon.

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Friday, December 09, 2005
Asset Bubble or not ?
As the Indian economy grew by 8% as stated by the finance minster(12/9/2005), the sensex hit an all time high of 9057 and housing prices have continued to skyrocket in major metro areas.

One of the worrisome aspects of this growth is that low interest rates have helped companies in BIFR(chapter 11 for India) to come back with healthy balance sheets specifically due to debt-refinancing. (18% to 11%). The productivity growth or job growth is not wholly responsible for the growth. Also many of these restructured companies might pay themselves dividends or buy back shares thereby increasing the wealth of the directors, and owners and thus balloning the stock market beyond fundamental basis.

The white collar worker has to deal with the consequences of this semi-illusionary growth in the form of increasing property prices (10-20% year-over-year) and is borrowing heavily thanks to low interest rates.

As property prices push higher, the risk of default of these small apt buyers increases as global interest rates rise, energy prices push higher , inflation increases and the rupee devalues as the external debt mounts rapidly

Most Indians in the market for a apartment now have never experienced a downturn in the economy so they might find themselves highly shafted if they over-leverage themselves on the loans as well as the floating interest rates.

Unfortunately unlike the developed west , India has no reliable source of data available for real estate prices and transactions and most prices are rigged by a cartel of builders. I'm also skeptical of the media in reporting the truth since they too dont have any reliable data to go from and finally real estate agents, the less said about them the better.

This blog attempts to understand area development and price movements and if people contribute uncover hidden unsold inventory. I'll post information about Mumbai/Pune/Bangalore over which I can get anecdotal evidence or as I browse the news papers and talk to real-estate agents and builders. All articles and comments are welcome. I'll be the moderator of the comments so that the spammers dont take over.

This blog is inspired from a similar blog http://thehousingbubbleblog.com/ which is now a reliable source of data for various US housing markets.

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Run on FMP's causing panic

This could be India's subprime and credit crisis which will affect the realty industry the most.

Sucheta Dalal & Debashis Basu say that withdrawals from Fixed Maturity Plans can turn into a huge problem

A full blown panic in the real estate and financial services sectors has led to the withdrawal of nearly Rs 30,000 crore from Fixed Maturity Plans of Mutual Funds in the past week alone. These funds are meeting all redemption demands by borrowing money at high rates of 20% to 24%. This may end up destroying parts of their corpus and may lead to losses for retail investors. Retail investors have (as usual) foolishly remained invested in FMPs lured by their pitch which touted them ‘safer than fixed deposits and offering higher returns and lower taxes’, on the assurance of ‘indicative’ returns, although MoneyLIFE magazine (FMPs Lose Shine) had repeatedly pointed out that the risks of FDs and FMPs are so vastly different that comparing them are like comparing oranges and apples. FMPs may end up being like the unregulated Overseas Corporate Bodies of the previous market decline. Someone needs to urgently look at what is going on inside them. Unfortunately, SEBI does not even gather data about the FMPs issued by mutual funds or the quality of securities in them.

The other problem today is super-liquid schemes that invest in the call money market. There was no regulatory oversight on these schemes and they have been allowed not to mark their investment to market and could claim to hold them to maturity even when it was a one-year paper. This has created a very dangerous situation today.

Finance and realty companies are the weakest link in the chain. Many FMPs have subscribed to short term AAA rated paper of finance and realty companies. The credit rating of these papers now looks doubtful. One finance company (belonging to the bluest of the blue chip business house whose previous finance arm was deeply involved in the 2001 scam), has also renewed its paper at an exorbitant rate of 32%.

The smarter, corporate investors are taking no chances and pulling out funds and exacerbating the salutation leading to panic. No regulator has bothered to collect data on the investment pattern of FMPs and liquid schemes and keep tabs on it. As result, the systemic risk posed by the redemption runs on these schemes and the shaky underlying debt securities in their portfolio is suddenly upon us and nobody knows whether the RBI should look into it or SEBI or both. Mutual funds that are borrowing to meet redemption are refusing to utilise their bank credit for this emergency, because they feel that it will only put information in the public domain and cause a run on the fund.

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Home loan borrowers look panic-stricken now

Life comes full circle. 3 years ago people will buying flats like bread and cake. Now the same people are panicking and paying off debt by their bonuses and whichever means they can. The wide-grin of leverage is now bleeding them every month. Singh is King Manmmomhan anmd Montek should be congratulated for allowing the transfer of wealth from the consumers to the builders and banks.

Home loan borrowers look panic-stricken now
ET Bureau[ Aman Dhall & Raja Awasthi ]

NEW DELHI: The fear is palpable. Indian home loan borrowers, who till recently were fuelling a growth story across banking, real estate and other allied sectors, look panic-stricken now. In fact, just two weeks after the Reserve Bank of India hiked the cash reserve ratio (CRR) from 8.75% to 9%, there has been a quantum jump in the number of home loan borrowers approaching banks for foreclosures and partial repayments.

According to industry estimates, the number of home loan borrowers making foreclosures and partial repayments has almost shot up by 20-25% during the past few weeks.

In the last two months since the home loan rates started their northbound journey, all home loan financing companies’ repayments and foreclosures teams have been actively engaged in counselling their customers, making them understand the pros and cons of the decision to forego or go for partial repayment of loans. It may be mentioned that the Central bank’s latest CRR hike has sucked out about Rs 8,500 crore from the banking system.

Uday Sareen, country head, retail banking, ING Vysya Bank, told SundayET that the bank has seen a considerable increase in the number of queries for foreclosures and partial repayments. “In fact, the foreclosures have seen an increase of almost 10% over the previous quarter.



One, however, needs to understand that it’s not a simple black and white decision. Over the last 60 days, our teams have been continuously engaged with customers to explain them the merits and demerits of their decision. We are educating them how it can hurt their liquidity in the short to medium term, if they decide to foreclose their home loan accounts or make partial repayments,” he said.

Deepak Parekh, chairman of HDFC, the country’s largest housing finance company agrees. According to Mr Parekh, they too have witnessed a rush by home loan borrowers to make partial repayments.

“They are trying to reduce the term of their loans, which have increased due to recent interest rate hikes. These borrowers are typically the ones who have taken floating loans in the last 12-18 months and are now trying to make balloon payments through their salary bonuses,” he said. Floating rates account for 90 % of the bank’s home loan portfolio.

Developers across the board too confirmed to SundayET that there has been a spurt in home buyers returning or off-loading some of their home loan. With interest rates on home loans rising in the last one year, consumers are now looking at other options to acquire funds for their investments. Many also feel this will deter speculators from the real estate market.

Says Rohtas Goel, CMD, Omaxe Group: “The hike in repo and CRR rate hasn’t been a good news for the real estate sector and the home loan market. It is certainly a matter of concern for consumers, as even small upward changes in the monthly EMIs can play havoc with their personal finances.

The interest rate trend over the next few months is expected to be northwards, across industry. On the flip side, this may actually prove beneficial for actual users as it will deter speculators from over leveraging themselves and cornering and hoarding housing flats for speculative gains.”

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