Real estate's explosive growth prospects

Jun 17, 2008

In this issue:
» India needs to pull up socks, says Goldman
» Real estate to grow 14 fold in 10 years
» China has its ammunition ready to attack US
» To do or not to do a Novartis
» ...and more!

  India needs to pull up socks, says Goldman
Ever since India's 'band aid rather than surgery' stance with respect to managing its finances started getting prominence, downgrades to its ratings have become commonplace. The latest to join the bandwagon is the global investment bank Goldman Sachs. In a recent update that the bank has done on BRIC nations (Brazil, Russia, India, China), it has placed the country in a poor light.

Sticking with its earlier forecast of the domestic economy outsizing the US juggernaut by 2050, the investment bank has gone on to add that India will have to work harder to achieve its goals. Is this an understatement of great magnitude? Since as per the bank's rankings of 181 nations, a random sample of 10 nations will result in 6 countries being ahead of India and only 4 behind! Not a very good position to be in especially when the country is in great need of foreign capital.

Apparently, Goldman has looked for 13 indicators including inflation, government deficit, external debt, investment rates, openness of the economy, personal computer penetration, phones, internet, education, political stability, corruption etc. Need we say where do we score the least?

  • Also read - Economy: Key impediments

      In the meanwhile...
    Crude prices cooled off a bit in Asia on Tuesday after touching record highs in the previous volatile session. The blip is believed to be temporary though and prices are expected to climb upwards as supply pressures continued to mount amidst strong demand. Gold futures for August delivery on the other hand rose by 1.5% helped largely by a weak dollar. As far as Indian markets are concerned, they ended higher for second consecutive session led by good progress of monsoons and encouraging advance tax payment figures. Among global markets, while Asian markets closed mixed, European markets are trading positive currently.

      Real estate to grow 14 fold in 10 years
    While real estate stocks are getting big thumbs down on the bourses currently, a strong endorsement from the industry body Assocham (Associated Chambers of Commerce and Industry in India), will definitely soothe some frayed nerves. As per the body, realty in India is expected to grow at a scorching pace of 30% annually over the next decade as more and more IT parks and residential units mushroom across the country. In other words, a stupendous growth of 14 times in 10 years! In the meanwhile, foreign direct investment (FDI) into the sector is also likely to witness a 5-fold jump to reach US$ 30 bn levels from the current US$ 6 bn.

    While this definitely is music to the years of real estate developers, most of whom have seen their market caps erode at a fast pace in recent months, imagine the magnitude of demand that it will trigger in other related sectors like cement and steel.

  • Also read - Real Estate: Taxed growth

      China has its ammunition ready to attack US
    US, the world's largest economy and China, its potential successor will come face to face in the latest round of semiannual economic talks. This time around it is the former that is likely to feel the jitters. A stagnant economy and a depreciating currency of the former has given the dragon nation enough ammunition to go one up on its most influential rival, who in the past has been critical of China's economic policies. The US' failure in recent times to grow its economy and put the lid on the sub-prime crises has given China more than enough reasons to defend its own policies and assert that its model of state subsidies and currency protection is more helpful to developing nations than the one so strongly advocated by the US.

    The numbers too seem to be pointing towards China, whose growth in recent decades has been the toast of the world and has made the nation a key driver of global economic growth along with the US. India though seems to have its foot in both the boats and is moving full steam ahead with even results that fall between the two approaches.

      To do or not to do a Novartis
    The US$ 4.6 bn deal between India's Ranbaxy and Japan's Daiichi has once again set the ball rolling on the debate amongst innovator companies of acquiring a generic company or not. The already thin profit margins of these companies (innovators) are being further made thinner by escalating legal costs that are being incurred to protect their new drug discoveries from the clutches of generic players. Increasingly, innovator companies are being forced to settle litigations outside courts, lending credence to the fact that generic companies have started having strong basis to defend themselves. In such an environment, it does make sense for such companies to acquire their generic counterparts.

    But if the past history is any indication, straddling both the worlds have proved to be a difficult proposition. So far, only Novartis has been successful in managing both an innovator drug company and a generic company. If the innovator companies do indeed decide to embark on acquisitions, India is likely to emerge a hot bed of activity what with the Indian pharma space littered with such companies.

  • Also read - Pharma, the year that was

      Is there an end to rising oil prices?
    Not too soon, says Morgan Stanley through its Global Economic Forum. Until recently, the spike in oil prices was demand driven as emerging economies' (primarily India and China) thirst for oil was unquenchable. Morgan Stanley states - "The two most recent spikes in crude oil prices, from US$ 100 per barrel to US$ 125 in early May, then from US$ 128 to close to US$ 140 in early June, are pointing to structural changes in the oil market, which is suggesting that we are now facing a genuine supply-side shock. The nuance is important because a supply-side shock is by nature contractionary for the global economy, in contrast with a demand-driven change, where strong economic expansion is inflating input prices."

    It further states that non-OPEC producing countries having likely reached peak production and geopolitical issues in the Middle East are two major reasons supporting the premise of a supply-induced shock. Particularly, the recent tensions between Iran and Israel have brought to the fore the possibility that there is not enough global spare capacity to extract oil, with OPEC nations seemingly reluctant to increase output and non-OPEC production having stagnated. No wonder then that Saudi Arabia's decision to raise production by 500,000 barrels per day was greeted with much cheer sending the global stock market indices on an upward path.

      Slowdown checks in for hospitality players
    As per a leading business daily, the Indian hotel industry, one of the lead indicators of economic slowdown has been feeling the pressure in recent times. The hotels catering to the business travelers are witnessing a decline in occupancy levels. The latest figures state that the occupancy levels are down nearly 5% to 10% in the month of June. The reason for the same is mainly attributed to the rising costs, such as those of airfares.

    Companies across sectors are going in for cost cutting methods to maintain their margins. This impact has been witnessed specially in hotels in business hubs such as Bangalore and Hyderabad wherein many of the hotels had gone in for capacity expansions in the recent past to cater to the growing demand of the hospitality segment. With new supply expected to come in the near future and slowdown in travelers, the occupancy levels are expected to further decline. Tough times indeed!

  • Also read - Hotel industry: More than just hospitality

      Want to grow your money 5 times in 5 years...
    ...and that too with minimum risks? You have help at hand. Ajit Dayal, Equitymaster's founder and the author of our popular column, 'The Honest Truth' believes that a low cost index fund is the way to go. As per analysis done by him and his team, if you had bought a fund that tracked the NSE-50 Index you would have made 5 times your money in 5 years. Without any time wasted worrying about which stocks to buy or sell; or which mutual fund to subscribe to. It is the type of return that will make any investor salivate. Furthermore, most funds find it difficult to consistently beat the indices over long-periods of time and hence, a low cost index fund may be indeed the way to go.

  • Read more - Buffett's bet on index funds

      Today's investing mantra
    "You pay a high price for a cheery consensus." - Warren Buffett

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