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Scenario of Indian Real Estate

Last updated: January 3 2010
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  • Scenario of Indian Real Estate

    Hi All,
    For a long time was thinking of starting a blog on real estate in india , specifically mumbai, but after coming across this forum decided to start posting here. Atleast as of now, we dont have brokers and builders out here posting here in disguise.
    And I am sick of the media (specifically TOI group) with their obvious nexus with the builders/advertisers lobby. Has someone seen their useless property index on "times property" supplement's first page. Don't think the ranges mentioned in them have ever changed significantly in the last one year.

    Having said that, the first thing that comes to my mind on Mumbai real estate is the low rental yields. With less than 5% yields, and interest payments greater than 8% I dont think it makes sense for retail investors to put money out here. For deep pocket investors, they can earn a better rate with even FDs

    So which brings to the next question, how long will this last. Have seen a lot of predictions in this forum stating from mid '09 to end '10. And my answer to that is " I don't know ". We are now in a liquidity driven world. The world decided to fight off the credit crises with more credit outflow. Nowdays, it does not take a great product idea or an efficient running company to be considered "successfull". From our fathers time, who didnt believe in personal or business loans, we now live in a world of privatize profits and socialized risks. So when a builder starts a project with insane price tag, dont be under the impression that the market forces will bring about the correction. The builder has access to many credit lines, starting from project loans to equity financing. Thats why even though transactions at stamp duty are at all time low, we still dont see builders dropping prices. They are going ahead with IPOs,private equity financing and loans from consortium. Banks also follow a herd mentality when disburing loans. They feel more secure when they think another bank is in the same boat as them. Another e.g of socializing risk.

    And don't be under the impression that these PE funds or Economists or JLLM have better foresight than you and me. Not many saw the credit crises coming, and the few who did , never timed it. Economists had been predicting a housing bubble burst since 2001 (Roach from Morgan Stanley) but it ends up happening in 2008. Most PE funds in Indian real estate are unknowingly playing the greater fool theory, and its not their fault. As Chuck Prince said, got to dance as long as the liquidity is there. Most are hoping to offload their stake to REITs, who again won't get supernormal returns from their rental income (more on this on another post).


    Coming back to loans, with even 8% ROI I believe not that many speculative retail investors took the bait to invest in properties. A quick check on the credit growth at all major banks shows a decline last year. So don't think a housing crises like that of U.S is gonna take place here any time soon, which means that prices will only drop if liquidity is withdrawn. And hows that gonna happen ?

    Its DEFINITELY not gonna be because of RBI raising rates. Remember 2007 ? RBI kept raising rates and both stock and real estate market kept going up. You cant fight the liquidity coming from abroad in this globalized world. Its not going to be due to change in real estate tax laws (I am a big supporter of it. More on this on another post)
    So the only way liquidity will be withdrawn will be due to another crises in europe or U.S AND for that matter even China, which will result in another migration to "safe assets" from emerging markets. Now what these crises will be and when it will happen is something that I dont know. Yes, I could also give some prediction but then I am not getting paid by Investment Bank to make predictions, and even if my predictions somehow luckily are right (based on time and event), I dont think the next set of predictions will be, so my moment of glory will be short lived, which I don't want.

    So finally, if you are a property buyer ( my defn being looking to buy a 2-3 bhk in mumbai suburbs + thane with or without bank loan) my advice is still the same as I have seen in most of the other posts. "Theres never a right time, if you are gonna be using it for your own use for a long time". Whether or not its resale or under construction is a personal choice, and your level of confidence in the execution capability of builder, and you can easily do a quick excel calculation to see your outflow , opportunity cost etc. (will try to provide factors other than the usual ones which are cost, proximity to children school & work place; in another post if you guys care)

    Wow, the first post was long and I did digress a few times but hoping it was useful
  • #2

    #2

    Re : Scenario of Indian Real Estate

    Welcome!! Excellent Post.
    You really need to put this into a blog. Please post the link if you ever do.
    Looking forward to reading more.

    HSC

    Comment

    • #3

      #3

      Re : Scenario of Indian Real Estate

      Your post reads well and puts a pink image on the coming future property market and the economical effects on the property .
      However your suggestion of now or never is something i think too !but so much of data from so many diff users is confusing and i makes me think
      is to either go with the flow ,or be a wise man and wait .
      Predictions on the other hand are PREdICTION...every one has there own ..
      You seem to understand finance and economics very well ,would request You to keep posting more information and would like to thank you for your effort .
      even i am waiting to buy in mumbai ,so waiting for some right time ....
      if there is any .

      Comment

      • #4

        #4

        Re : Scenario of Indian Real Estate

        Good post. welcome to the forum homie

        Originally posted by sattebaaz View Post
        Hi All,
        For a long time was thinking of starting a blog on real estate in india , specifically mumbai, but after coming across this forum decided to start posting here. Atleast as of now, we dont have brokers and builders out here posting here in disguise.
        And I am sick of the media (specifically TOI group) with their obvious nexus with the builders/advertisers lobby. Has someone seen their useless property index on "times property" supplement's first page. Don't think the ranges mentioned in them have ever changed significantly in the last one year.

        Having said that, the first thing that comes to my mind on Mumbai real estate is the low rental yields. With less than 5% yields, and interest payments greater than 8% I dont think it makes sense for retail investors to put money out here. For deep pocket investors, they can earn a better rate with even FDs

        So which brings to the next question, how long will this last. Have seen a lot of predictions in this forum stating from mid '09 to end '10. And my answer to that is " I don't know ". We are now in a liquidity driven world. The world decided to fight off the credit crises with more credit outflow. Nowdays, it does not take a great product idea or an efficient running company to be considered "successfull". From our fathers time, who didnt believe in personal or business loans, we now live in a world of privatize profits and socialized risks. So when a builder starts a project with insane price tag, dont be under the impression that the market forces will bring about the correction. The builder has access to many credit lines, starting from project loans to equity financing. Thats why even though transactions at stamp duty are at all time low, we still dont see builders dropping prices. They are going ahead with IPOs,private equity financing and loans from consortium. Banks also follow a herd mentality when disburing loans. They feel more secure when they think another bank is in the same boat as them. Another e.g of socializing risk.

        And don't be under the impression that these PE funds or Economists or JLLM have better foresight than you and me. Not many saw the credit crises coming, and the few who did , never timed it. Economists had been predicting a housing bubble burst since 2001 (Roach from Morgan Stanley) but it ends up happening in 2008. Most PE funds in Indian real estate are unknowingly playing the greater fool theory, and its not their fault. As Chuck Prince said, got to dance as long as the liquidity is there. Most are hoping to offload their stake to REITs, who again won't get supernormal returns from their rental income (more on this on another post).


        Coming back to loans, with even 8% ROI I believe not that many speculative retail investors took the bait to invest in properties. A quick check on the credit growth at all major banks shows a decline last year. So don't think a housing crises like that of U.S is gonna take place here any time soon, which means that prices will only drop if liquidity is withdrawn. And hows that gonna happen ?

        Its DEFINITELY not gonna be because of RBI raising rates. Remember 2007 ? RBI kept raising rates and both stock and real estate market kept going up. You cant fight the liquidity coming from abroad in this globalized world. Its not going to be due to change in real estate tax laws (I am a big supporter of it. More on this on another post)
        So the only way liquidity will be withdrawn will be due to another crises in europe or U.S AND for that matter even China, which will result in another migration to "safe assets" from emerging markets. Now what these crises will be and when it will happen is something that I dont know. Yes, I could also give some prediction but then I am not getting paid by Investment Bank to make predictions, and even if my predictions somehow luckily are right (based on time and event), I dont think the next set of predictions will be, so my moment of glory will be short lived, which I don't want.

        So finally, if you are a property buyer ( my defn being looking to buy a 2-3 bhk in mumbai suburbs + thane with or without bank loan) my advice is still the same as I have seen in most of the other posts. "Theres never a right time, if you are gonna be using it for your own use for a long time". Whether or not its resale or under construction is a personal choice, and your level of confidence in the execution capability of builder, and you can easily do a quick excel calculation to see your outflow , opportunity cost etc. (will try to provide factors other than the usual ones which are cost, proximity to children school & work place; in another post if you guys care)

        Wow, the first post was long and I did digress a few times but hoping it was useful

        Comment

        • #5

          #5

          Re : Scenario of Indian Real Estate

          Welcome, we need such long(?) posts with deep analysis

          Originally posted by sattebaaz View Post
          Hi All,
          For a long time was thinking of starting a blog on real estate in india , specifically mumbai, but after coming across this forum decided to start posting here. Atleast as of now, we dont have brokers and builders out here posting here in disguise.
          And I am sick of the media (specifically TOI group) with their obvious nexus with the builders/advertisers lobby. Has someone seen their useless property index on "times property" supplement's first page. Don't think the ranges mentioned in them have ever changed significantly in the last one year.

          Having said that, the first thing that comes to my mind on Mumbai real estate is the low rental yields. With less than 5% yields, and interest payments greater than 8% I dont think it makes sense for retail investors to put money out here. For deep pocket investors, they can earn a better rate with even FDs

          So which brings to the next question, how long will this last. Have seen a lot of predictions in this forum stating from mid '09 to end '10. And my answer to that is " I don't know ". We are now in a liquidity driven world. The world decided to fight off the credit crises with more credit outflow. Nowdays, it does not take a great product idea or an efficient running company to be considered "successfull". From our fathers time, who didnt believe in personal or business loans, we now live in a world of privatize profits and socialized risks. So when a builder starts a project with insane price tag, dont be under the impression that the market forces will bring about the correction. The builder has access to many credit lines, starting from project loans to equity financing. Thats why even though transactions at stamp duty are at all time low, we still dont see builders dropping prices. They are going ahead with IPOs,private equity financing and loans from consortium. Banks also follow a herd mentality when disburing loans. They feel more secure when they think another bank is in the same boat as them. Another e.g of socializing risk.

          And don't be under the impression that these PE funds or Economists or JLLM have better foresight than you and me. Not many saw the credit crises coming, and the few who did , never timed it. Economists had been predicting a housing bubble burst since 2001 (Roach from Morgan Stanley) but it ends up happening in 2008. Most PE funds in Indian real estate are unknowingly playing the greater fool theory, and its not their fault. As Chuck Prince said, got to dance as long as the liquidity is there. Most are hoping to offload their stake to REITs, who again won't get supernormal returns from their rental income (more on this on another post).


          Coming back to loans, with even 8% ROI I believe not that many speculative retail investors took the bait to invest in properties. A quick check on the credit growth at all major banks shows a decline last year. So don't think a housing crises like that of U.S is gonna take place here any time soon, which means that prices will only drop if liquidity is withdrawn. And hows that gonna happen ?

          Its DEFINITELY not gonna be because of RBI raising rates. Remember 2007 ? RBI kept raising rates and both stock and real estate market kept going up. You cant fight the liquidity coming from abroad in this globalized world. Its not going to be due to change in real estate tax laws (I am a big supporter of it. More on this on another post)
          So the only way liquidity will be withdrawn will be due to another crises in europe or U.S AND for that matter even China, which will result in another migration to "safe assets" from emerging markets. Now what these crises will be and when it will happen is something that I dont know. Yes, I could also give some prediction but then I am not getting paid by Investment Bank to make predictions, and even if my predictions somehow luckily are right (based on time and event), I dont think the next set of predictions will be, so my moment of glory will be short lived, which I don't want.

          So finally, if you are a property buyer ( my defn being looking to buy a 2-3 bhk in mumbai suburbs + thane with or without bank loan) my advice is still the same as I have seen in most of the other posts. "Theres never a right time, if you are gonna be using it for your own use for a long time". Whether or not its resale or under construction is a personal choice, and your level of confidence in the execution capability of builder, and you can easily do a quick excel calculation to see your outflow , opportunity cost etc. (will try to provide factors other than the usual ones which are cost, proximity to children school & work place; in another post if you guys care)

          Wow, the first post was long and I did digress a few times but hoping it was useful

          Sattebaaz,

          Welcome to this forum. While you may start a blog (which could take a long time to gain readership; there are innumerable blogs already), your posts are much more likely to reach a well focused group which numbers in the 10s of thousands here (I think) - basically you hit the ground running. Besides, since there are many silent but seriously smart readers on this forum you will also get some good reviews of your posts, which could actually sharpen and improve your thinking over time!

          So, continue to post here and hopefully with opinions which are different and original!

          cheers

          Comment

          • #6

            #6

            Re : Scenario of Indian Real Estate

            A very good, well-thought out post...Thanks

            Comment

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