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Coming Property Crash

Last updated: May 5 2009
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  • #31

    #31

    Re : Coming Property Crash

    Just wanted to correct you on one thing ...

    Originally posted by Yuvaraj View Post
    Indian Real Estate-The Rabbit Hole Goes All The Way Down
    Sell Anantraj, Ganesh Housing, Ansal trio, Bombay Dyeing, Century, DLF, HDIL, Mahindra Life, Omaxe, Parsvnath, Purvankara, Sobha and Unitech
    Indian real estate stocks have corrected sharply since January 2008, and most stocks are now trading at deep discounts to NAVs. This scenario is no surprise, given the severe headwinds that the sector is facing at present. Anecdotal evidence points to a slowdown in Indian real estate. Developers are totally responsible for the current state of affairs-for three years they kept buying agricultural land at astronomical prices making cost of acquisition unthinkable for Individual investors. Across most of North India average selling rates range from Rs 8000 to Rs 15000 per sq feet, and Commercial Rentals at Rs 200 to Rs 300 per sq feet. Money raised through IPOs has been used to build land bank, while REITs were planned for parceling off developed projects. With the Singapore REIT market all but collapsing, both IPO and REIT route is effectively closed. On top of that Indian stocks listed on the UK AIM market have under-performed so signifcantly that even that route of
    funding is closed now such stalwarts like Hirco and Ishaan Real Estate. Finally, and most importantly, lending rates especially for Real Estate could rise so substantially over the next 6 months that it will put most apartments out of reach of middle class financing. The Result will be distress sale of land assets held by concerns such as Ansal trio, MGF Emaar and so on, which are poorly capitalised entities competing in a already soft market. Stocks from Real Estate sector were a fad, and fad's do not last Discounts to NAV do not necessarily imply a buying opportunity -regional peers have historically traded below their NAVs, and the current situation is not restricted to India. Look at the Hong Kong market for clues as to where Indian property stocks may bottom out. In Hong Kong discount to NAVs have historically increased in times of weak property prices, with maximum discounts for developers ranging between ~34-77%. Discount to NAV for Indian realty stocks
    are likely to increase further, and persist until demand recovers. Why so? A severe liquidity crunch has emerged, with channel checks indicating that developers have raised bridge finance at 18 to 25 per cent interest rates until October. The expectation is that the lull in activity during the monsoon months will end with the festive season in October 2008. Given the interest rate scenario, there is a higher than 50 per cent probability that the recovery in sales volume will be weaker than expected. This would lead to under-cutting on product prices by the developers facing a capital crunch. Asset sales will be done hence at distress levels and equity injections at much lower entry points. In six months time most stocks from DLF, Unitech, Ansal and Anantraj should begin trading at liquidation valuations. This is how the three scenarios work out: A. Liquidation case scenario: -The company cannot raise any capital and shuts down business. -The company shuts down
    business and sells of land at current estimated market price and pays of the debt and outstanding land costs. B.Pessimistic case scenario: -The company cannot raise any capital and constructs using available cash and equivalents. -Development margins fall to 30 per cent, implying a further 20 per cent correction in Real Estate prices. -The company re-invests from the construction and after two years shuts down business and sells off land at current depressed market prices and pays off the outstanding land costs and debt. C. Two year slow down scenario: -A two year slowdown will comprise volumes dropping to 50 per cent of what has been seen in FY08 accompanied by a 20 per cent correction in prices and rent across all markets. -Further 6-12 month delay in new project launches. This is over and above the already envisaged 6 to 18 month delay in new project launches depending upon how far out the project is. SEZ property-Uncertainty Reigns Politically sensitive SEZs
    in Sonepat, Rai, Manesar, Gurgaon and Noida may not be set up at all given the political uncertainties and closeness to the General Elections approaching possibly in December 2008. Give a "Zero" value to all concerns which have put money into SEZ development.

    Very well put and I agree with you entirely, only differing with you on one count. You mentioned a fall of 20% in prices. Thats too low!!!

    In the last crash 1995-'98 the decline even in prime locations was closer to 75-80%. And there was no Global Crisis in sight! This time the Global Crisis will be so severe that the 75% to 80% decline in bubbly markets is practically guranteed.

    cheers

    Comment

    • #32

      #32

      Re : Coming Property Crash

      Great discussion I must say.

      I am looking for a house these days. I have made quite a few visits to Indirapuram area(Delhi NCR) and have found that the builders are giving 25% discount on the listed price. One of the builders was also willing to book the flat for me at the pre-launch rate of 2 years back.

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      • #33

        #33

        Re : Coming Property Crash

        A story caught my eye today that just proved what I have been saying and convincing my other NRI friends for past 2 years. YES I AM AN NRI. The story was about the Indian employees in gulf countries finding it hard to save and are loosing employment (and hence work permits). The people when back in the country will put unnecessary burden on the already bleak job market in the country.

        But we all knew that this would happen... didn't we? Oil prices have gone down from $147 to $40. What do you think happens to the budgets of gulf countries ? Worst is, the whales (stock market term for big investers) got caught in the derivatives crash with their pants down. How do I know... I worked on those derivatives namly credit MBS, CDO, ABS etc. Another thing I will tell you (now that I don't work for an IB), the crash hasn't happened yet. Worst is yet to come.

        That brings me to my current employment. I am in a fairly decent position to be making hiring decisions. In this market, we have strict directions of "Operations Only Mode". That means certain layoffs of average and above average staffed divisions and no new recruitment in site for all of 2009.

        I have a simple comment to all builders on the site including prat12.
        Your ego is writing checks that your body cannot cash
        We in India haven't see 1 recession properly let alone a depression. The reason for that was we were never a capitalist economy since independance. For whatever its worth, Nehru/Morarji Desai/Indira etc policies saved us from fluctuations. Now that we have opened the economy since 1991, we will be seeing our first market crash. It couldn't have came at a worst possible time. Rest of the world is messed up to... So no takers.

        Again, the builders who relied on the NRI for their property sales... I am telling you... I GOT CASH & I AIN'T BUYIN...

        People who HAVE TO buy a house, why not rent for now. 8 out of 10 properties in Noida and Gurgaon are investment properties. It's all rented out. The investers are going to get burned big time. Save now and buy CHEAP... I mean really cheap... like Pennies on a Dollar. Wait 2-3 years ATLEAST.

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        • #34

          #34

          Re : Coming Property Crash

          Absolutely right Alan ... now I can retire

          Originally posted by nick_alan_76 View Post
          A story caught my eye today that just proved what I have been saying and convincing my other NRI friends for past 2 years. YES I AM AN NRI. The story was about the Indian employees in gulf countries finding it hard to save and are loosing employment (and hence work permits). The people when back in the country will put unnecessary burden on the already bleak job market in the country.

          But we all knew that this would happen... didn't we? Oil prices have gone down from $147 to $40. What do you think happens to the budgets of gulf countries ? Worst is, the whales (stock market term for big investers) got caught in the derivatives crash with their pants down. How do I know... I worked on those derivatives namly credit MBS, CDO, ABS etc. Another thing I will tell you (now that I don't work for an IB), the crash hasn't happened yet. Worst is yet to come.

          ...

          Again, the builders who relied on the NRI for their property sales... I am telling you... I GOT CASH & I AIN'T BUYIN...

          People who HAVE TO buy a house, why not rent for now. 8 out of 10 properties in Noida and Gurgaon are investment properties. It's all rented out. The investers are going to get burned big time. Save now and buy CHEAP... I mean really cheap... like Pennies on a Dollar. Wait 2-3 years ATLEAST.

          The problem Alan, is that most people in India are STILL in deep denial mode. The poor kids have never seen bad times - since they have always thought that every 6 months they will automatically get 30% raise in salaries, never mind that they have average skills and little knowledge (and the cooking of CVs is 40% completely fake and the rest with 40% inflation about experience, skills and salary earned).

          So they have the foolhardiness to even think about buying 95 lakh flats in remote areas, thinking that cities will grow forever into the wilderness and every year they will see prices going up into infinity and their salaries rising in step.

          Our youngsters are in the same place that Americans were in 2005. So, as you say, we have not even seen the beginning of the depression in India. Secondly, to give a different perspective, the boom in IT has only just started the slide. I know of many American companies starting to shift BPO and development work back to the US simply because they are finding people willing to work in the 20k to 25k range in smaller towns (and don't think that by shifting to smaller cities you get poorer programmers).

          Have you read the papers today? There is a steep rise in cars being turned in by techies because they are not able to bear the debt. The only reason its cars now is because homes are much more dear to these buyers and for social and psychological reasons. But that does not change the economics of it. When this goes on for a longer period and homes start declining steeply people will realise that they should have sold the houses first (when it still sold for a decent amount) and not the cars. By then it will be too late.

          People are still stuck in a state of indecision because they don't know who to believe. The builder who keeps telling them that the fall will not happen. Or people like us who say its guaranteed.

          At any point of decision there are 3 things you can do. Yes. No and Indecision. The worst decision is indecision. And thats what every one is upto. I'm clear. I'm a seller before my goose is cooked.

          As I already said, builders showed some profits Dec Qtr because of the residual effect of past orders at high rates. Now, that window is fast closing. With the triple combo of no new sales, huge inventories of flats built on debt to meet demand that has evaporated, people losing ability to pay EMIs and coming to market with distress sales, increasing number of Gulf and American rerturnees you will find very steep increases in selling pressure at ever lower prices and very steep decreases in buyers with ability to buy.

          The endgame is beginning now and in an year or so the effects will be devastating in our economy as well.

          I like the quote a lot

          cheers
          Last edited February 8 2009, 02:43 PM.

          Comment

          • #35

            #35

            Re : Coming Property Crash

            Property rates across the country have fallen by about 15-20% with the decline in the economic situation.
            According to analysts, the impact from the ongoing financial crunch and mounting pressure from various other circles, could peak by the end of March. That’s when many developers will be forced to sell unsold [COLOR=blue ! important][COLOR=blue ! important]stock[/COLOR][/COLOR] at a much cheaper price, said one executive with a leading developer.

            Currently, a lot of real estate developers are rushing to clean up their highly leveraged balance sheets. “In their last attempt to save diminishing margins, we could see some developers make their moves in the last quarter of FY09. To [COLOR=blue ! important][COLOR=blue ! important]boost [COLOR=blue ! important]sales[/COLOR][/COLOR][/COLOR]
            , a further cut in prices are unavoidable,” said an analyst from a leading investment bank.
            Either land or AIR and FOOD. Choice is yours.

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            • #36

              #36

              Re : Coming Property Crash

              Originally posted by arin_12 View Post
              Property rates across the country have fallen by about 15-20% with the decline in the economic situation.
              According to analysts, the impact from the ongoing financial crunch and mounting pressure from various other circles, could peak by the end of March. That’s when many developers will be forced to sell unsold [COLOR=blue ! important][COLOR=blue ! important]stock[/color][/color] at a much cheaper price, said one executive with a leading developer.

              Currently, a lot of real estate developers are rushing to clean up their highly leveraged balance sheets. “In their last attempt to save diminishing margins, we could see some developers make their moves in the last quarter of FY09. To [COLOR=blue ! important][COLOR=blue ! important]boost [COLOR=blue ! important]sales[/color][/color][/color]
              , a further cut in prices are unavoidable,” said an analyst from a leading investment bank.
              DLF has raised a loan of around 2000 crores from 3 banks long term loan(latest news)
              spokesman says they will fullfill their obligations.

              so now v will have 2 wait till Q409 to see the crash.
              we all are in the present-bias(the very cause of the boom) we feel that the present trend would keep on continuing.

              Comment

              • #37

                #37

                Re : Coming Property Crash

                Market is not only DLF there are so many player. Its a hide and seek game between Bank and the developer. And remember that the Politicians are deeply involved into the RE.
                If tomorrow Bank goes for a Bankrupt/ waive off these 2000 Cr we will be in soup again.
                Either land or AIR and FOOD. Choice is yours.

                Comment

                • #38

                  #38

                  Re : Coming Property Crash

                  Originally posted by arin_12 View Post
                  Market is not only DLF there are so many player. Its a hide and seek game between Bank and the developer. And remember that the Politicians are deeply involved into the RE.
                  If tomorrow Bank goes for a Bankrupt/ waive off these 2000 Cr we will be in soup again.
                  you think banks have not taken adequate collateral security.
                  dont just presume things banks not stupid.Indian banks dont do subprime loans,thats why they are still safe.and 2000 cr for 3 banks is small % of their lendings so they will not b in soup even if they write it off

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                  • #39

                    #39

                    Re : Coming Property Crash

                    I think I found following searching google.
                    ......................................
                    Economic times
                    29 Nov, 2007


                    For every Rs 10 lent by new private banks, Rs 3 was lent to the real estate sector. In FY07, 32% of their loans were to the ‘sensitive’ real estate market, including direct and indirect exposures. This was despite tightening of lending norms during the period.

                    According to figures available in the latest Reserve Bank of India’s (RBI) reports on Trends and Progress in Banking released, 32.3% of the total loans extended by new private banks were to the sensitive real estate market, up from 29.1% in the previous year.

                    Exposure to real estate sector is inclusive of both direct and indirect lending, it said. Lending to real estate is a part of the exposure to the sensitive sector, including lending to real estate and commodities. These sectors are considered sensitive since loans can turn bad due to external circumstances that result in a fall in asset prices.

                    Real estate market exposures, according bankers, include larger home loans, loans to developers and loans against property. These are direct real estate exposure. In addition, it also includes certain indirect exposures like loans to institutional lenders in housing and property as well as investments in mortgage-backed securities. The RBI report, however, does not come clearly on the definition of the real estate market. Even foreign banks had a high share of 26.3% of its total advances in the market in FY07.

                    In contrast, public sector and old private sector banks were more conservative in their real estate exposures with shares at 15.1% and 16.6% of their respective total loans in FY07. According to RBI, in absolute terms, the real estate exposure amounted to Rs 3,70,689 crore, up 41% over the previous year’s exposure of Rs 2,62,033 crore, way above the overall non-food credit growth of 28% during the year.

                    Interestingly, the real estate exposure rose sharply, despite several prudential measures initiated by the central bank during the fiscal year, requiring banks to set aside additional capital. For instance, in May 2006, the risk weight on bank exposure to commercial real estate was increased to 150% from 125%.

                    The general provisioning requirement for banks on standard advances in specific sectors, which also included residential housing loans beyond Rs 20 lakh and commercial real estate loans, was increased to 1% from 0.4%.

                    And later in January 2007, RBI increased the provisioning requirement in real estate, among others, from 1% to 2%. These measures were taken in order to contain reckless exposure by banks in the wake of unabated rise in real estate prices.

                    The regulator also widened the scope of real estate during the year. It has also asked banks to treat loans extended for setting up special economic zones (SEZ) as real estate loans.

                    Even though prudential measures have failed to curtail growth in real estate exposure, the capital requirements of commercial banks would rise if the current pace and pattern of loans continue. This could be particularly true in the case of new private banks and foreign banks which have been aggressive in areas that require setting aside higher prudential capital.
                    ..............
                    Govt has tried to bail out 3 small banks with Rs 4000 crore, just imagine what will happen if big banks are in similar situation. I do not think our Govt., has so much money as US Govt., to bail out banks or real estate developers.

                    Comment

                    • #40

                      #40

                      Re : Coming Property Crash

                      Another interesting article from Business Standard - Real estate pushes up PSU bank lending to sensitive sectors http://www.business-standard.com/ind...?autono=326575

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