Realty Buyers Better Watch Out!

Aug 24, 2009

In this issue:
» Builder-broker nexus is back to haunt property buyers
» Return of the 'power' gravy train
» World facing a double-dip recession, says Roubini
» Swiss banks shun Indian interrogators
» ...and more!!

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Just like the arrival of tiny birds called 'swallows' marks the beginning of summer, the arrival of a phenomenon in the Indian real estate market is also known to signal the beginning of a season. The season of a rise in property prices that is. And what is this phenomenon? Well, it's nothing but the tendency of brokers to start underwriting more and more properties so that a perception of scarcity can be created.

As per a leading daily, the nexus between the builder and the broker, which pushed property prices to record highs in 2006 and 2007 in the NCR (National Capital Region) is back in business and hence, buyers better watch out.

Buoyed by lower home loan rates and reduced property prices, end users are once again sending out the feelers for buying properties and this is making the brokers confident that the properties they underwrite will be offloaded at a later date with a hefty premium. This is also a win-win situation for the builder as it not only results in upfront sales but also keeps the price from falling any further. It's presumably on the back of this phenomenon that a clutch of high profile firms in the real estate industry have claimed to have recorded buoyant sales in the past few months.

So, if you are looking to buy a property in the NCR, or for that matter any part of India, get ready for artificially inflated real estate prices!

 Chart of the day
Staying with real estate, today's chart of the day shows the degree of speculation that has led to the rise of realty stocks since the broader rally began on 9th March 2009. As the chart shows, while the realty index has surged by around 187% since then, the average P/E multiple of the index has risen by almost 423%, or a multiple of 5 times the P/E that these stock were trading at in March! Thus to conclude, it's entirely the case of P/E expansion that has caused the rise in realty stocks while corporate earnings have remained under pressure. The same conclusion, though to a lesser degree, also applies to metal, power, pharma, and small-cap stocks. Is this sheer speculation or the undervaluation correcting itself? More a case of the former than latter we think.

Data Source: CMIE Prowess

Realty stocks again led the rally in Indian stock markets today, as the BSE-Realty index was up by 4.4% at the time of writing. The BSE-Sensex was trading higher by almost 380 points (2.5%), while the BSE-Midcap and BSE-Smallcap indices were not left behind, as these were up by around 2.7% and 2.9% respectively.

Indian markets were in fact among the leading gainers in Asia, where other benchmark indices that rose included those in Japan (up 3.4%), Hong Kong (up 1.2%), and China (up 1.1%). Stocks in Europe have also opened the day on a strong note.

Like the realtors, the power merchants are back, and they're in a hurry to cash in on the positive sentiment prevailing in the stock markets. We are talking about the flurry of power sector IPOs that are lined up after the successful completion of those of Adani Power and NHPC. JSW Energy, promoted by Mumbai-based JSW Steel, for instance plans to raise around Rs 30 bn through an IPO soon. We'll soon see more such players, with or without any experience in running power plants, offering shares to the public.

Data Source: CMIE Prowess

Valuations of power stocks in general are back to being fairly to expensively valued (though still much lower than what these were in January 2008), given that stocks are trading in a range of nearly 20 to 30 times their trailing 12-month earnings. But if investment bankers are to be believed, power companies that are likely to come out with IPOs in the near term will be able to sell shares even at these high valuations as the 'opportunity out there is big'!

Isn't this what we heard in January 2008 as well (before Reliance Power's IPO)?

Nouriel Roubini, one of the few economists who accurately predicted the magnitude of the world's recent financial troubles, believes that the world economy faces "a rising risk of a double-dip W-shaped recession." Roubini gives two reasons why what he says might come true.

One, if central bankers and governments worldwide start taking large fiscal deficits seriously and raise taxes, cut spending and mop up excess liquidity soon, they would undermine recovery and tip the economy back into recession and deflation.

And two, if these policymakers maintain large budget deficits, they risk higher inflation in the future that will lead to rise in interest rates, which will subsequently lead to higher borrowing costs for companies and consumers, which will then lead to a continued pressure on demand and therefore stagflation (a case where inflation is high while economic growth is less or negative).

Remember, both these risks apply to India as well given the huge deficit the central and state governments have built up. Now with monsoons playing truant, the deficit is expected to rise even further as the government will try to add to its farm subsidies.

While Roubini continues to ring warning bells, leading global research houses are in no mood to give up on the happy mood that rising stock prices have brought since early this year. Reports coming out of firms like Morgan Stanley and JP Morgan indicate that the bull market in Indian stocks is here to stay, driven by easy liquidity floating around the globe. The former has in fact not ruled out a run up in stock prices in line with what happened in 2003.

We wonder given the rapidity with which these investment houses change their views on stocks, should one really take their prognostications seriously?

Swiss banks have agreed to turn over client details to the US but they have said that India is not welcome on a name-fishing expedition. We wonder why such a shabby treatment is being meted out to us. Is it because the US has got more muscle power than India?

India, according to some recent reports has the equivalent of US$ 1,500 bn (or 1.5 times our GDP) in foreign bank accounts, which is the highest in the world. Amongst the top 5, India leads the pack with more than 57% of the total illegal money from the top 5 countries being held under Indian names.

While the Finance Minister recently informed the Parliament that the government was committed to unearthing black money within and outside the country, we cannot help but wonder how long the looting of the common man by corrupt politicians, government bureaucrats and dishonest industrialists will continue.

 Today's investing mantra
"Although it's easy to forget sometimes, a share is not a lottery's part-ownership of a business." - Peter Lynch

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9 Responses to "Realty Buyers Better Watch Out!"

prasad v

Aug 24, 2009

Inflating population may be the prime cause for real estate prices to continue to soar in India. Not sure how much political muscle is protecting the nexus between builders and brokers, no wonder India has highest corpus of black money in banks abroad.

It will do India a lot of good even if our Govt. becomes successful to make Swiss officials spell out names top 20% black money holders from out my view they may be holding on to 80% of black wealth.


sudhir apte

Aug 24, 2009

Continue the good work. P/e ratios of power companies are really eye popping. But would the investors ever learn from their past mistakes? Merchant bankers and companies are out to fleece him. I hope a few underwriters get in serious trouble. I can understand the small investor getting conned but how the institutional investor falls prey to these tricks ? or are they also a part of the racket? Adani Powers market cap (22000 crore) more than that of Tata Power a company in business for more than 50 yrs. What travesty of values.


George Thomas

Aug 24, 2009

Really interesting and greatly helpful.



Aug 24, 2009

I must appreciate your timely assesment of present situation.This refers to "SWISS Bank ACCTT" !
The Great India (Mera Bharat Mahan) will take another 50 to 75 years to "IMPROOVE" & come to the level of so called DEVELOPED countries ....
Unfortunately AAM Admee is totally ignorant of the act of so called Leaders or Ministers in Central Cabinate who are simply enjoying the Great success in Lok Sabha elections (REsults declared on 16 th of MAY 2009 !
They are fortunate enough to Carry on so long as INDIA is Illitarate & totally IGNORANT about FACTS !!!



Aug 24, 2009

swiss are a respected lot but I wonder why?in my opinions they are mother of all pimps of the world. the money deposited there is all garnered by the corrupt and the criminals at the cost of poor innocent people wonder they are not In UN but the world should shun them.having said this India,s record is none too good. there is hardly any prosecution let alone conviction in economic it is going to be tough for India to get any details from the swiss


p.s.johney kutty

Aug 24, 2009

congratulation for revealing the builder agent mafia.They make the realty prises sky rocketing.Poor investors are fallen in their trap



Aug 24, 2009

Big nexus b/w broker, builder...

a broker showed my friend a 2 bhk in charkop for 50lac....and gracefully said..since ur a close friend i can get u a discount of 50k........
brohers r not willing to lessen the price..they themselves decide...hope...reality bites



Aug 24, 2009

Another good take on variety of issues. Good to see EM taking up the issue of black money held in Swiss banks by Indians. Swiss bankers are not going to be accede to India's request unless some armtwisting is done. Indian govt should ban swiss FIIs from doing business in India. The same black money in Swiss banks is finding its way to Indian stock markets thru' hedge funds which should be stopped. Will the Indian govt show enough courage?


mehul mehta

Aug 24, 2009

Appreciate the ironical views between 2 giant fund houses n Roubini's, nevertheless liked Mr . Ajits candid opinion by using the apt word "rapidity". Would go a step further n not hesitate to use "Chameleon Change" word here. How can economies change on macro levels within a matter of 2 to 3 mths?.

Another case of "you scratch my back, i scratch yours"

gluck..Ajit ..nice to have courageous n pointblank people alive in mkts..

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