Developers borrow Rs 250-1,000 cr from private financiers at 36-48% last month; tie-ups at project level & M&As on the cards
Raja Awasthi & Aman Dhall NEW DELHI ( Economic Times )

LIQUIDITY concerns are now tightening screws on real estate developers. With private equity deals drying up and their stocks hitting 52-week lows on Dalal Street, real estate developers are in a moment of fear, uncertainty and doubt.

SundayET has learnt that all major realty companies picked up cash from private financiers at a whopping interest rate of 36-48% per annum to save the blushes. According to industry sources, the developers acquired at least Rs 250 crore to Rs 1,000 crore from financiers in lieu of their existing projects in the last one month, since the US financial system crisis became acute. Though none of the developers were willing to go on record, many developers admitted in private that they had meetings with private financiers during the last couple of months and also picked up money.

With tie-ups already happening at a project level, experts also don’t rule out mergers & acquisitions in the sector, if the situation doesn’t brighten soon.

Says Arvind Mahajan, executive director of KPMG India: “A lot of projects announced may not happen. With significant pressure on companies, they are likely to go for restructuring and focus on selective projects in the short to medium term. There will be more tie-ups at the project level. For realty players, these will be testing times that will check whether they are strong enough to weather the downturn.”

Stock prices of major realty players, including DLF, Unitech, Housing Development & Infrastructure Ltd (HDIL), Indiabulls Real Estate, Puravankara Projects, Parsvnath Developers, Sobha Developers, Omaxe, Mahindra Lifespace Developers and Ansal Properties & Infrastructure have all tumbled more than 60% in the last one year on Dalal Street.

Badri Narayanan, partner, Ernst & Young India, agrees with the notion of private equity players that long-term opportunities exist in India but needs cautious valuation. “They are waiting to discover new value paradigms before they make any fresh investments in the realty space. Developers, on the other hand, are likely to have a re-look at their business models and re-asses consumption patterns to bring it in line with the current market expectations,” he said.

Industry sources, in fact, said that across all metros and tier II cities like Mohali, Kundli (Sonipat), Jaipur, Lucknow, Indore, Surat and Cochin, there has been a 90% drop in the number of deals.

Author : raja.awasthi@timesgroup.com
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  • Please look at my other posts! Nothing new for me!!!

    Dear Ram,

    If you notice my many other posts, I have suggested that Stock prices generally indicate the underlying Industry trend 6 - 9 months later, WHATEVER THE INDUSTRY.

    I had also suggested over 2 months ago that as long ago as 2007 Dec, I had predicted that the final bottom for sensex would be in the 8500 range - now I have revised it lower to as much as 6500 - 8500 range.

    Also I had indicated that RE Stocks are already touching 10% (Sobha is in a crisis as they NEED 400 crores and nowhere to raise it with stock at 9% of its peak of 1248 in early 2007). Others like Omaxe, Parsvnath are in the 12-15% range. Even leader DLF is 74% down.

    Finally I had predicted that bubbly cities like Bangalore, Chennai, Gurgaon, Hyderabad, Pune, etc will see anywhere from 50% to 80% decline from peak 2007 prices.

    IT, Real Estate and groups like Reliance will get particularly hard hit. Due to high leverage and thin margins RE companies will have VERY LITTLE sustaining power and will very QUICKLY resort to DISTRESS SALES. This thing about having high costs and therefore they will not sell below cost is PURE NONSENSE! When you are about to die, you will do anything!!!

    Now we are talking certain recession Globally and in India as well (see latest Aug IIP and other figures). Leading Economists who forecast this decline (Roubini, Prechter, Schiller, etc) are now talking probable Depression globally. That could make RE recession even more severe and prolonged.

    Just read my other posts for more details.

    DO NOT BUY NOW. DO NOT TAKE DEBT NOW. KEEP CASH FOR MUCH BETTER PRICES LATER! :D

    THIS IS ONLY THE BEGINNING!!!

    cheers


    Originally Posted by Pinnacle
    Developers borrow Rs 250-1,000 cr from private financiers at 36-48% last month; tie-ups at project level & M&As on the cards
    Raja Awasthi & Aman Dhall NEW DELHI ( Economic Times )

    LIQUIDITY concerns are now tightening screws on real estate developers. With private equity deals drying up and their stocks hitting 52-week lows on Dalal Street, real estate developers are in a moment of fear, uncertainty and doubt.

    SundayET has learnt that all major realty companies picked up cash from private financiers at a whopping interest rate of 36-48% per annum to save the blushes. According to industry sources, the developers acquired at least Rs 250 crore to Rs 1,000 crore from financiers in lieu of their existing projects in the last one month, since the US financial system crisis became acute. Though none of the developers were willing to go on record, many developers admitted in private that they had meetings with private financiers during the last couple of months and also picked up money.

    With tie-ups already happening at a project level, experts also don’t rule out mergers & acquisitions in the sector, if the situation doesn’t brighten soon.

    Says Arvind Mahajan, executive director of KPMG India: “A lot of projects announced may not happen. With significant pressure on companies, they are likely to go for restructuring and focus on selective projects in the short to medium term. There will be more tie-ups at the project level. For realty players, these will be testing times that will check whether they are strong enough to weather the downturn.”

    Stock prices of major realty players, including DLF, Unitech, Housing Development & Infrastructure Ltd (HDIL), Indiabulls Real Estate, Puravankara Projects, Parsvnath Developers, Sobha Developers, Omaxe, Mahindra Lifespace Developers and Ansal Properties & Infrastructure have all tumbled more than 60% in the last one year on Dalal Street.

    Badri Narayanan, partner, Ernst & Young India, agrees with the notion of private equity players that long-term opportunities exist in India but needs cautious valuation. “They are waiting to discover new value paradigms before they make any fresh investments in the realty space. Developers, on the other hand, are likely to have a re-look at their business models and re-asses consumption patterns to bring it in line with the current market expectations,” he said.

    Industry sources, in fact, said that across all metros and tier II cities like Mohali, Kundli (Sonipat), Jaipur, Lucknow, Indore, Surat and Cochin, there has been a 90% drop in the number of deals.

    Author : raja.awasthi@timesgroup.com
    CommentQuote
  • Will this have any effect on the prices of property which actually grew 400% since past 4 years.

    A flat costing 12 Lacks in 2004 is now selling at 50 Lacks, will it come back.
    CommentQuote
  • Yes. Prices will come back ...

    I have always taken what seemed like absolute nonsensical positions. On 25 Dec 2007 when the lowest "Analyst" prediction for Sensex in 2008 was 23000, I targeted 12000-15000 for 2008 end and sub-10000 for 2009. Seems I was too conservative ;).

    The Western world is completely out of control - though they are putting on a pretty good show of controlling the whole thing.

    Last week the world came within a whisker of a complete financial system failure/collapse. This week we saw a promise of $ 3 TRILLION between US and EU. Dow soared for exactly ONE DAY! Today its coming down - a one-day wonder.

    If things go seriously bad as it is increasingly being felt, the decline will beggar vast numbers of people.

    Did you notice something? While we have all been focusing on sub-prime in US and 1 in 6 home owners there becoming underwater on their loans (loan amount is greater than value of home), a 20% decline in Indian property prices will also put a vast number of recent home-owners (actually call them home-partners with banks :D) into a similar position. With job losses and salary declines coupled with doubling and tripling of EMIs a whole lot of home owners are liable to become bankrupt in India as well. NO ONE is talking about this yet.

    Yes. I can see the 12 lakhs coming back. Maybe even lower.

    cheers

    Originally Posted by prads_in
    Will this have any effect on the prices of property which actually grew 400% since past 4 years.

    A flat costing 12 Lacks in 2004 is now selling at 50 Lacks, will it come back.
    CommentQuote
  • Originally Posted by wiseman

    Yes. I can see the 12 lakhs coming back. Maybe even lower.

    cheers

    Wiseman,

    I have read all your posts in this forum and really admire the kind of knowledge you have on historical bubble theories and its applicability now.

    I also admire your confidence on price coming back to realistic levels.

    I have spent 4 1/2 years in U.S. and came back to India last year April. Immediately my priority was to buy a house.

    I have spent considerable amount of time (in weekends) visiting all the properties and burning my car fuel. I thought that I am not getting value for money in any of the property I looked at and DROPPED the idea of buying an apartment.

    I live in Ashok nagar and in 2003 (before I went to U.S), an apartment was available at Rs. 1400 / sqft.

    I just have one question to you, do you foresee the prices returning back to those levels in Ashok Nagar (Currently it is over Rs. 5000 / sqft which I feel is ridiculous.

    Thanks for your insights.

    Looking forward for your future posts.

    Ram
    CommentQuote
  • Prediction is normally dangerous and precision impossible!

    Originally Posted by ramg
    Wiseman,

    I have read all your posts in this forum and really admire the kind of knowledge you have on historical bubble theories and its applicability now.
    I live in Ashok nagar and in 2003 (before I went to U.S), an apartment was available at Rs. 1400 / sqft.

    I just have one question to you, do you foresee the prices returning back to those levels in Ashok Nagar (Currently it is over Rs. 5000 / sqft which I feel is ridiculous.

    Thanks for your insights.

    Ram



    Dear Ram,

    Thanks for the compliment. I spent every minute of my spare time last 3 years scouring the Net and devouring all important pieces of information to get to this point. But it is a hobby and I have a lot of fun doing it (obviously also profit since I avoid severe losses by knowing).

    While I may seem confident, please remember that one can get carried away by one's own logic. But the world can be illogical and turn your predictions to dust .

    You were right in only burning your petrol and not your entire lifesaving by buying at the peak. Even now prices are stubbornly sticking up there and refusing to come down. This behavior frustrates a lot of people who wait and wait for the fall, finally get impatient and enter the market precisely at the top - happened to a friend of mine in US who got fed up with my telling him for 2 years and went and bought at the top in 2006. Now he is crying blood.

    You can also never find precise bottom, so don't try it. The time to buy RE will be when volumes drop to incredible lows, when prices seem to be stagnating for 6 months to an year and when builders are bending over backward to give you all kinds of incentives to buy. Also, most importantly, you need to have enough cash to put down a healthy deposit and the job market must have stabilised so that your job is relatively safe (giving you the ability to continue paying).

    If you buy at those levels you may never see those prices again since India is a growing economy and long term trend is upwards.

    I believe that if property falls by 50% to 80%, then it must go back to 2003 levels or even 2002 levels (bottom of last recession).

    In the last week I heard 2 very well read people (one is a Prof of Finance from an IIM and another is a leading Economist in the US) tell me that the IT sector is in for a huge crash. Reason? Obama becoming President.

    If that happens, expectation is that he will drive jobs returning to US. If IT goes down substantially, expect Home prices to go down even to late-90s levels.

    With that happy note,

    cheers
    CommentQuote