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Real Estate prices - On the way down?

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Real Estate prices - On the way down?

Last updated: June 18 2012
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  • Rddh12
    started a topic Real Estate prices - On the way down?

    Real Estate prices - On the way down?

    An interesting article:


    The safest argument for higher property prices is the corruption factor. The nexus between real estate promoters and politicians is always spoken of when there is talk of unsustainable high property prices.

    Politicians invest black money in property and it is in their interests to keep property prices high. Politicians also pressurise bankers to go soft on loan defaults by real estate promoters and that leads to the promoter being able to maintain prices despite a clear lack of demand.

    These arguments for property prices staying high and going higher may hold true in the very short term, but in the longer term, it does not hold true.

    Lack of funding to the real estate sector forces builders to resort to the informal markets, where costs are usurious. Reuters
    In fact, the corruption factor has become a selling point for builders, while investors justify paying high prices citing corruption. But buying property based on the corruption factor can only lead to disaster.

    Corruption actually kills property prices

    Corruption has costs and these costs impact property prices adversely. For example, a bank forced to restructure loans to real estate will cut down its exposure to the sector leading to a lack of bank funding to the sector and high cost of loans for consumers.

    Lack of funding to the real estate sector forces builders to resort to the informal markets, where costs are usurious. The builder usually cracks when servicing debt becomes unmanageable. The result is half-way constructed buildings or unsold inventory leading to depressed sentiment in the markets.

    The high cost of loans for the consumer leads to postponing of genuine purchases leading to demand coming off. The consumer who is aware of unsold inventory will keep away from making purchases on hopes of builders lowering prices down the line. High supply coupled with falling demand leads to prices coming off down the line.

    How real estate stock investors react

    Equity investors, in comparison, do not factor in corruption when selling real estate stocks when the going gets tough.

    Equity investors look at balance sheet strength, growth potential and return on capital; when all three signs show of stress, they sell the stock. The BSE Realty index is down 88 percent from its high of 13,848 hit in January 2008 and is currently trading at around 1,650.

    The sharp fall in the value of realty stocks is in stark contrast to property prices either staying high or going higher.

    Equity investors are assigning lower property values to builders, while property investors are assigning higher property values to builders.

    Property prices usually follow equity prices on the way down as builders cannot get access to equity capital for leverage and with both sources of funding — equity and debt — cut off, builders will have a tough time staying afloat.

    Ultimately, market forces win

    The market is a great leveller. Equity markets have levelled the highflying ambitions of realty companies, which built up huge expectations of unfettered growth.

    Real estate markets will do the same as the patience of investors (whether it is a politician investing in black money or a speculator seeking to make leveraged gains) wears off on the extension of a return horizon. Investments made with a three-year time frame have now been extended to six years.

    The time factor brings down returns and with interest rates high in the system, the opportunity cost becomes higher. The market then follows the supply-demand principle: with supply far higher than demand, there is a fall in prices.

  • Gaurav2k101
    replied
    Originally posted by Nishant Sharma View Post
    Whitefield is one of the worst hit places in case of a business slowdown (esp pertaining to IT). 2008/2009 was witness to the same. Residential units which are primarily bought via loans and that too by guys whose jobs are not secure are invariably the first ones to blink. Gurgaon is no exception, in 2009 land deals were available at 1/2 of peak rates in sector 51, which now are >3 times of their 2009 values.
    Mixed use premium areas like JP Nagar, Kormangala, Indiranagar, Jayanagar, SadashivNagar which primarily have houses hardly see any downside, infact its very difficult to find sellers there. Even South bangalore didnt see much downside during that time. There was little supply in north bangalore but the prices had fallen there decently as well to the tune of 25% (maybe cos manyata tech and related guys buy there). However the biggest cut was in the Whitefield, ORR and Sarjapur area where prices had come down to 2006 levels. Prices have ATLEAST doubled since then. Its a bubble out there in ORR, Whitefield, Sarjapur and that will be the first one to burst in case of a slowdown.
    Agree to some extent to ur view but again there is 1 more point.

    We cannot compare the situation to 2008-09.

    What is the difference in whitefield area since then:
    1) 2 new malls already operational. Phoenix and ITPL. Footfall is also high in these malls. In-Orbit is about to open in couple of months. Posters already up with Shopperstop nd McDonalds.
    2) Many companies have expaned their offices in Whitefield. Capgemini has taken the building in Brigade metropolis and Prestige Shantiniketan(PSN).
    3) Till now ITPL is one of the biggest office space in bangalore and gues what PSN has more space than ITPL. Half of the building is already occupied by HUL, Britania, Capgemini , Huawei , Caterpilar etc. and they are operational.So in an area of 2 km around 1 lakh people will work in few months from now. In whitefield around 3-4lac people will work.
    4) Metro Phase 2 is approved to come to whitefieldthough it will take 5-6 yrs now but it'll come.
    5) narayana hrudalya and other hospitals have started work there.
    6) Marriot hotel is opening soon in Inorbit.
    7) Many international schools are here.

    2 yrs back no one wanted to stay in Brookefield, whitefield area but now everyone wants to stay here due to availability of everything anyone would want and still they an save 2-3 hrs of traffic everyday. Most people doesn't want to stay in koramangla now.

    Ground Reality: There are many end users who want to buy a 2BHK but there is no ready to move in available and those available are at high price. If there is 10% cut then u'll see huge surge in demand.

    The main problem is new launches by builder.

    These r risky but ready to move in whitefield will not have any problem and demand is already more than supply in that segment.

    Price will go up for ready to move even if recesison hits. Because in connstruction flats will be delayed fot 2-3 yrs from their due date and hence it will add more pressure on the supply and hence demand will go up.
    If recession hits then Sarjapur will be hit first and then devahalli.

    So for all the factors Whitefield seems to be a safest bet among all other locations.

    All other views are welcome.

    Leave a comment:


  • Nishant Sharma
    replied
    Whitefield is one of the worst hit places in case of a business slowdown (esp pertaining to IT). 2008/2009 was witness to the same. Residential units which are primarily bought via loans and that too by guys whose jobs are not secure are invariably the first ones to blink. Gurgaon is no exception, in 2009 land deals were available at 1/2 of peak rates in sector 51, which now are >3 times of their 2009 values.
    Mixed use premium areas like JP Nagar, Kormangala, Indiranagar, Jayanagar, SadashivNagar which primarily have houses hardly see any downside, infact its very difficult to find sellers there. Even South bangalore didnt see much downside during that time. There was little supply in north bangalore but the prices had fallen there decently as well to the tune of 25% (maybe cos manyata tech and related guys buy there). However the biggest cut was in the Whitefield, ORR and Sarjapur area where prices had come down to 2006 levels. Prices have ATLEAST doubled since then. Its a bubble out there in ORR, Whitefield, Sarjapur and that will be the first one to burst in case of a slowdown.

    Leave a comment:


  • Gaurav2k101
    replied
    Originally posted by Ultimate View Post
    Just read this news - Tax fears make overseas investors pull out Rs 1 trillion from India - The Times of India


    I think the end users need to be very careful about the extremely bullish comments made accross various threads in the forum. I think this forum is full of investors which for obvious reasons keep talking about the so called increase in prices by the builders and in the market in general. I think any astute investor should simply try finding answer to one question - How many end users can afford buying properties at these levels i.e. 1-2cr and much much more? I dont think there are loads of people who can do so. People's salaries are not rising 50% every year to justify that kind of increase in property prices. This is a complete investor, broker and builder created sham. I personally would not invest my hard earned money at these stupid levels. For end users its a different story.
    There is one more scenario :
    These days the new launch are at par or even 10-20% more than a ready to move in flat. And people are going mad over these new launches as less money is required to spend in the start.

    RE collapse may not happen.

    From current prices, if the investor reduce the price by 10-15 % , there will be many end-user just waiting that to happen and jump the gun.

    Again the mantra of RE: Location , Location and Location.

    If doomsday doesn't happen then RE prices at the key locations in various cities like Golf course road in Gurgaon, Whitefield, Indiranagar , Hebbal etc in Bangalore may not come down. The price may stagnate for sometime but will not crash.

    If someone makes an argument that the RE prices at all the places will crash then i dont agree.

    I agree that the RE prices at the locations such as Devenahalli may come down as everything is on papers now it cannot be self sustained.

    Leave a comment:


  • gandabaccha
    replied
    Originally posted by subbisrini View Post
    It's a quote from investment guru Warren Buffet.

    Thx, i guess i forgot where i got that from.

    Leave a comment:


  • subbisrini
    replied
    Originally posted by gandabaccha View Post
    I remembered a little something from somewhere which tends to reflect very well your comments.
    "Only when the tide goes down ,you can see who is swimming naked"
    It's a quote from investment guru Warren Buffet.

    Leave a comment:


  • gandabaccha
    replied
    Originally posted by SS1983 View Post
    This is a feature of asset bubbles. Irrational exuberance. In a way, most of the builders are neck deep in debt. Unless they raise the rates, they cannot keep up with the interest costs of their debts. There is an enormous amount of wealth destruction about to happen in this euphoria.

    If you want to play real prudent, keep your cash out of real estate now. Let people who have cash sink in their money. When the demand drops later, you will get more pricing power and there will be few people with cash to invest then.

    I remembered a little something from somewhere which tends to reflect very well your comments.
    "Only when the tide goes down ,you can see who is swimming naked"

    Leave a comment:


  • Ultimate
    replied
    Tax fears make overseas investors pull out Rs 1 trillion from India

    Just read this news - Tax fears make overseas investors pull out Rs 1 trillion from India - The Times of India


    I think the end users need to be very careful about the extremely bullish comments made accross various threads in the forum. I think this forum is full of investors which for obvious reasons keep talking about the so called increase in prices by the builders and in the market in general. I think any astute investor should simply try finding answer to one question - How many end users can afford buying properties at these levels i.e. 1-2cr and much much more? I dont think there are loads of people who can do so. People's salaries are not rising 50% every year to justify that kind of increase in property prices. This is a complete investor, broker and builder created sham. I personally would not invest my hard earned money at these stupid levels. For end users its a different story.

    Leave a comment:


  • SS1983
    replied
    Originally posted by Desperado View Post
    Tulips, in Bangalore big builders are not bringing down the price at all.
    Economy is tanking but real state is going up in Bangalore.
    This is a feature of asset bubbles. Irrational exuberance. In a way, most of the builders are neck deep in debt. Unless they raise the rates, they cannot keep up with the interest costs of their debts. There is an enormous amount of wealth destruction about to happen in this euphoria.

    If you want to play real prudent, keep your cash out of real estate now. Let people who have cash sink in their money. When the demand drops later, you will get more pricing power and there will be few people with cash to invest then.

    Leave a comment:


  • Desperado
    replied
    Tulips, in Bangalore big builders are not bringing down the price at all.
    Economy is tanking but real state is going up in Bangalore.

    Leave a comment:

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