Dark Diwali: Pink slips, pay cuts await realty staff

Observer,
Here is the post following up on your comment about the reality layoffs. Some of your other comments have some good advice which I will collate and post as a new article.
For Anil and other realty touts, this is the writing on the wall. Your jobs are no more secure then the IT/ITES folks, so better tighten your purse strings.
Also regarding the comment regarding the plot which Anil bought for Rs 150 in Pune and then later sold for Rs 5800 is pure BS. Baner-Pashan apts were at Rs 1800 3 years ago and now they are Rs 3300. So cut the crap and try selling the Taj Mahal to somebody else.
NEW DELHI: It’s not going to be a happy Diwali for people working in the real estate industry. Even as sales failed to pick up this festive season, most realty firms including DLF, Unitech, Omaxe, Parsvnath and BPTP, now plan to lay off staff in significant numbers soon after Diwali.
While spokespersons of all these companies denied there were plans to cut jobs or salaries, executives in these companies told ET that job cuts were in the offing and salaries have been delayed in some of these companies.

“All real estate players, including us, will have to reduce manpower cost significantly if we are to survive in the current hostile market conditions,” says a top executive at a Delhi-based listed mid-size realty firm, which plans to reduce manpower by almost 20%. The job cuts will start happening soon after Diwali.

Executives at many other real estate firms also confirmed companies plan to offload people and a list of staff was being prepared, who would be asked to leave soon after the festive season was over. Developers are waiting for Diwali as they didn’t want to dampen sentiments further.
“Job cuts at Jet Airways became a big issue also because it was done before Diwali. Developers are wary of raking up any political controversy,” explained a senior executive.
Also, realty firms needed large number of sales staff for the festive season. But now that their price discounts or other freebies have failed to stimulate the home market, developers feel they can cut back on staff. The developers have already started easing off some staff. Many developers, including DLF, had already asked around a few hundred employees to leave.
And sources say more job cuts are in the offing at DLF, as construction pace slows and expansion plans are put on hold. Unitech, Omaxe, Parsvnath and BPTP too prepare to issue pink slips.
Salaries have been delayed at many mid-size and small realty firms, even as management is asking employees to take salary cut. Even though he denies salaries are being delayed or cut at his company, Parsvnath chairman Pradeep Jain supports the idea of salary cut.
“Employees’ salaries have risen so much in the past few years that I see no harm in reducing it a bit,” says Mr Jain.
“Salaries at the top management level have already started to come down. A number of real estate players are already renegotiating salaries with staff so that overall wage bill comes down and not many jobs are lost. Companies are preferring to retain the jobs of those capable of multi-tasking,” said Executive Access MD Ronesh Puri.
Employees at most real estate firms are in a state of panic as job loss fears mount. Too many resumes have been floating around in the market. “Earlier it was extremely difficult for a smaller developer like us to hire talent. Now we are flooded with CVs. Surely, people are being fired somewhere else,” says Ambience group chairman Raj Singh Gehlot.

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Crisis of the mind

IBN live reports on a suicide/murder by a stock broker who is unable to make good of his losses and take care of his family and buy a flat. As we have discussed, investors have huge losses where they are losing all their capital which they have built up over the past 3 years, plus many have taken loans against the stocks/margin which the banks are asking them to pay back. Added to that they have EmI's on houses. The whole bubble was created on a house of cards and the deck has collapsed.

One of the readers mentioned about an apt which he had purchased for 30L which is now 1.2 crores in 3 years. This is a fantastic investment if he is able to liquidate it at 1.2 Cr. If he does he has found a sucker and more power to him. If he does'nt then I guess he is the sucker, since he wont see 1.2Cr for a very long time. Just as the Sensex has retraced all the 100% return over the 3 year period and stocks are down 70%,80%. so will the housing market retrace to lower levels. No bubble exists in a vaccum and this is no exception.

Also having lived in Bangalore and mumbai with mumbai being my hometown, I can say that Bangalore has many more opportunities for higher paying jobs then mumbai. Housing is also way too cheap as compared to mumbai and with newer societies with all amenities which have sprung up over the past 5 years, things are better in Bangalore then before. The locals complain of the spike in traffic but then mumbai has equally bad traffic so to a mumbaikar there is no difference, but the housing cost and the pay packet, both which work in his favor.

There will be some people who will argue the black money aspect of housing and I can only say that the house of cards was created on EmI availability which generated more black money for the builders. Now that the generator fuse has been shorted, so will the output.

One last point I'd like to make is the psycology of builders who want to keep raising prices even if they can make a handsome profit by selling 10% below their current prices. It achieves the following purposes

1. Creates an illusion that prices are rising prepetually for the buyer who is seeking appreciation.
2. Provides mental comfort to existing owners that they are in the money and they dont need to sell
3. Traps NRI's and other high net worth people who has disposable income and/or black money
4. Enforces the notion that real estate is a growth asset as opposed to an income generating asset. If you looks at the P/E it is abysmal in mumbai
5. Sells the mantra of moving up the chain as real estate always builds equity.

All these things work in the long run if you have a good entry point. In a bubble economy, all bets are off and the last man standing will face the music.

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Don't buy unfinished homes

The news is coming thick and fast. DNAIndia is finally doing some realistic reporting. The game is simple. Its a buyers market and the buyer can demand a 40% reduction of a completed property. A deal will only happen if both parties agree and today there are no deals since there is a disconnect. Greed is good but only for a limited time. Now it is the buyers time to get greedy. As the article rightly points out, going for an under construction property is a disaster waiting to happen. There are thousands of new projects which are launched in 2008 and most of them will be delayed by 2-3 years beyond their projected dates. Already Raj Thackrey's campaign is having an effect on mumbai's and Pune's construction market where builders are attributing him to delays. They are also invoking the Force majeure clause which allows them to disown responsibility for building delays. 99acres.com and magicbrics.com have thousands of properties for sale and half of them are ready to occupy. It is a buyers market like never before. So if you have cash, you are king.

Liquidity crunch delaying projects, only 30% price cut can help: Experts

MUMBAI: Want to buy a home this festive season? Then don’t go for a one that is still under construction, warn experts in the realty sector. The global slowdown and crash of financial markets has left builders with little money and they are struggling to wrap up even the half-finished projects, let alone going for new ones, according to industry analysts. Experts warn that the financial strain on realtors is causing indefinite delays in the completion of many projects.

“Those who intend to buy property should go for only completed flats. It’ll be too risky to buy properties under construction,” said an analyst with a foreign brokerage who did not wish to be named.

Real estate is an end-user sector where the money mainly comes from home buyers and development happens in phases.

“But developers across the board raked in money from initial public offerings and invested them in buying land parcels paying huge premiums. Now, banks have stopped lending, money from private equity is very costly and unorganised lenders are charging interest rates as high as 30%. So how can developers complete projects profitably,” asked the analyst.

He cited the example of a Mumbai-based realtor whose high-end residential project in Lower Parel, one of the city’s commercial hubs, was to be completed in 2006 but has now been delayed till 2009. Uncertainty looms large over whether even this deadline will be met, he said.

An official of the realtor in question had earlier told DNA that the project would be rolled out before Diwali this year. An email sent seeking clarification on the new deadline remains unanswered.

This isn’t an isolated case. Analysts say delays of three to four years are likely in under-construction projects.

Despite the headwinds, developers have stubbornly stuck to their pricing. This could be one of the reasons why sales have failed to pick up, even though builders are offering freebies such as free stamp duty registration and parking space, modular kitchens and interiors, and interest-free EMIs till the buyer gets possession of the flat.

“A price correction of a minimum of 30% is required for sales to pick up. If this correction does not come in six months then some listed developers will end up being negative cash companies. Even if buyers are desperately looking for houses, they should wait for a minimum of three months before taking the plunge. Also, they should look only for properties that are ready and available for possession,” said an analyst of a domestic brokerage.

Vikas Oberoi, managing director of Mumbai-based developer Oberoi Constructions, agrees. “Buyers should be wary of under-construction projects because developers who are overleveraged will not be able to complete their projects. So a buyer should look at a developer’s past projects. At these times, it’s all the more important for people to be careful about where they invest,” he said.

And though the slump is pinching, consolidation in the industry is not seen coming. An analyst said, “Even if a developer gets land at a discount of 35-45%, he will not buy it to save money for construction. Those who haven’t seen free cash flows in the last 6-8 months will halt their launches and sit tight till the tides turn in next 18-24 months.”

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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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State of Denial

Mint has a couple of good articles on the denial of the Indian builders to accept the reality of a slowdown. The Sensex has crashed 50%, midcaps 60%, small caps 70% but India real estate developers think that the word correction applies to everyone but them. Like Marie Antonette said "If you don't have bread, eat cake" the Raheja's are pricing villas for 6crores. God save the ostriches. The articles are below

Mumbai: Bhav gira kya (Has the price fallen)?” the prospective buyer asked.
“Bhav chada hi nahin girne ke liye (It needs to rise before it can fall),” came the stoic response from across the counter from the Housing Development and Infrastructure Ltd, or HDIL, representative.

That exchange more or less sums up the current dynamic between discount-seeking buyers and reduction-resistant sellers in India’s real estate market, a chasm that was apparent at Property 2008, the 13th real estate and housing finance exhibition, a four-day event held last fortnight at the Bandra-Kurla complex in Mumbai.
A dozen signboards outside the site of the expo screamed, “Take the right decision. Buy now”, but buyers seemed indifferent to that message, even though they flocked to the exhibition in droves on Saturday.
Even as analysts caution that the days to come will be critical for developers as their inventory of unsold houses increases, real estate firms put on their bravest faces at the exhibition and said they wouldn’t consider reducing prices.
Under pressure: Real estate development in the country, including housing projects such as this one in Ghaziabad, is heavily dependent on population migration due to rapid urban growth. Harikrishna Katragadda / Mint
Everyone has got it wrong, they insist. “Make up your mind, this is the right time. The economic cycle is maturing and, by January next year, apartment prices will go up,” said Vinod Manwani, marketing head at the Nahar group, which is developing more than 100 acres in the heart of Mumbai, near Powai lake.
Analysts say real estate firms aren’t helping themselves with this attitude.
“The current slowdown in demand for realty, coupled with declining internal accruals and reduced funding options, exposes them (real estate firms) to the downside of this aggressive strategy; there are large amounts of debt already on their balance sheets and, (with) external funds increasingly hard to come by, we foresee delays on their many ongoing and planned real estate projects, thereby leading to the possibility of sale of projects or even enterprises,” said Akash Deep Jyoti, head of corporate and government ratings at Crisil Ltd, a Standard and Poor’s company.
A report in Monday’s The Economic Times said banks and finance companies have begun pushing developers to sell cheap.
To make matters worse, many companies have borrowed from outside the banking system at much higher rates.
The best way out is for them to sell assets and offload completed projects, said Jyoti.
Builders also need to get realistic on pricing, as a significant correction is yet to happen, added Jyoti.

Bangalore: Real estate entrepreneur Vijay Raheja has lined up a raft of projects in Mumbai and Bangalore for the next six months to a year—braving a slump in the property market after splitting the family business with his brother in July—and started with a development targeted at the rich. His company, V Raheja Design Construction launched its first project post the split on Dussehra—the Verena luxury villas spread over five acres in east Bangalore’s Whitefield neighbourhood where each unit has been priced at Rs6 crore. Exclusive: V Raheja Design took over construction of the new JW Marriott hotel at UB City in Bangalore in July. Hemant Mishra / Mint“There are 40 villas, and all will be sold by invitation. Other residential and commercial projects will be launched gradually,” said a senior official at the company who manages the Bangalore operations, but did not want to be identified. Raheja is working on projects including an IT park, Gigaplex, a residential project, Buena Vista, and a commercial property, Raheja Chambers, in the city. In Mumbai, an information technology park is under construction. Raheja and his younger brother, Deepak, split the 56-year-old B Raheja Builders between themselves and founded their own companies, ‘Mint’ reported on 7 July. The properties and projects of B Raheja Builders were divided between the brothers, with V Raheja Design taking over the construction of the new JW Marriott hotel at UB City in Bangalore. “A Rs6 crore villa is overpriced where builders are unable to sell Rs3 crore houses in the same area,” Naresh Dandapat, regional director (south) at property consultancy Knight Frank India, said of the Verena villa project. But the official defended the pricing, saying, “They are exclusive and contemporary, and have been priced accordingly.” Analysts say builders need to get realistic about pricing, sell assets and offload finished projects

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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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Equity Funds attacked by bears

I was curious to see what the year to date performance could be on mutual funds on 10/15/2008 and here is the snapshot of the query. Not one diversified equity fund has shown any gains over the past 1 year. Attached is the picture which says it all. You can run other queries on the Mutual fund screener tool and find out the top losers over the past year or two but the amount of money lost this year is over 30% so all the gains made over the 3 year horizon are wiped out in half. If someone had put the same amount of money in a fixed deposit, they wouldn't have done too bad. The FII's have scooted with the gains and the brokerages have to be squarely blamed for deceiving the common Indian investor of their life savings.

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