Strong case for a correction in realty prices

Nov 29, 2010

In this issue:
» Deep discounts on the once fancied IPOs
» Is gold due for a correction?
» Why dollar may remain strong in the near term?
» Fund raising agony for SMEs
» ...and more!!

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We have come across a spate of conflicting news on the real estate sector in recent days. Some elaborated on how the latest scam would ring in correction in realty prices. Others referred to bankers' willingness to continue lending to the beleaguered sector. What, however, was clear that the health of players in the sector was far from being sound. The latest report on near term dues that is sitting on the players' balance sheets cements our doubts on its well being.

A business daily has reported that the real estate loans that were restructured under the RBI directive in June 2009 are coming up for part repayment. In fact a onetime payment of Rs 140 bn is due in the next two months. Given that the loans are already long overdue, the bankers are unlikely to extend repayment tenure further. And builders may have little option but to arrange for liquidity. In such a scenario, the case for a correction in realty prices does hold strong. But the real problem may go much beyond this.

The extent to which the builders can offload projects will depend upon the type of projects. While affordable housing may find takers, premium residential and commercial properties could be difficult to sell. Also the upmove in interest rates may render home loans unaffordable to many retail buyers. Thus arranging liquidity may not be as easy for players across the real estate sector. Those looking to reduce their debt burden by taking advantage of higher prices will have to look for other options. In the meanwhile, the near term repayment may itself pose a huge crisis.

What is even more worrying is the fact that only 22% of the total bank lending to commercial real estate in the past 4 years has gone to listed players. The rest went to unorganized and small ones. With large outstandings and few funding options, the days of several small players in the sector may be numbered.

Do you think real estate players will reduce property prices to meet debt obligations? Share your views with us.

 Chart of the day
As social, economic and political tensions impact the trade boundaries in the global economy, it is pertinent to note how interdependent economies are on each other. With growth in global trade, economies have become more dependent on not just their domestic demand but also that in their export destinations. In fact, one of the most export competitive economies today is also the fastest growing one in the world (China). As today's chart shows, as per IMF's projections, global exports will comprise 33% of world's nominal GDP in 2030 as compared to 26% at the end of 2010.

Data source: IMF WEO

The recent spate of IPOs had sent investors scrambling in the market. Everyone wanted a share particularly of the glamorous and the much publicized companies. It was all about the listing gains. It was common knowledge that such glamorous IPOs would lead to high listing gains. But over time these gains have just evaporated. Most of these fancy companies now trade at deep discounts to their IPO prices. Company specific events and broader market corrections have led to an erosion of gains for most of the companies. Of the total 55 IPOs that came out in 2010, almost 31 of them trade at discount to their offer price. Of these 21 companies saw a subscription of two times or more for the shares. We believe that the main reason behind this is that the IPO valuations just did not justify the fundamentals of most of these companies. Eventually all prices tend to reflect company fundamentals. Therefore an investor should be careful while selecting a stock. It is better to pick a great company at cheap valuations rather than following the herd and get stuck with a bad stock.

Looking at gold these days, it seems difficult to believe that the yellow metal could have undergone a prolonged bear phase. However, gold did indeed have a very long bearish phase. Just before the start of this century, it witnessed close to two decades of falling prices. Certainly, a very long period of depressed prices. In fact, the frustration had reached such a point that the World Gold Council, an association of gold and gold mining companies, came close to shutting shop. It was then that the idea of expanding the pool of gold buyers and having an exchange traded fund for gold came to light. And the rest, as they say, is history. Today, some 5-6 years later, not only has gold breached its previous highs in nominal terms, but the exchange traded fund has also become a force to reckon with.

WSJ reports that the fund, popularly known as SPDR Gold Shares, has grown to a US$ 57 bn giant. In fact, as on Sep 30, 2010 the fund was placed fifth in the list of the Governments that hold the most amount of gold. And it may not be done yet. The fund is soaking up US$ 30 m of gold daily, lending enormous support to gold prices. The pendulum though could also lead to painful results if it starts swinging the other way. In other words, due to its sheer size, the fund could worsen things in a falling price environment for gold. No such threat however looms on the horizon right now.

The economic tensions in Europe and geopolitical concerns in Korea have seen a beneficiary. It's the US dollar, which is gradually recapturing its role as the safe haven currency. At least this is what The Wall Street Journal reports. The US dollar has firmed up against the Euro and the Yen in recent times. Anyways, the sustainability of dollar's strength is anybody's guess. This is given that the US itself is facing a financial turmoil that has been covered up as of now by the Fed's stimulus.

Anyways, in the short to medium term, economists expect the dollar to remain strong against other key currencies. Apart from the European and Korean concerns, monetary tightening in China is expected to add to the global economic turmoil. And this will be good for the dollar, as always!

Small and medium enterprises (SMEs) looking to raise funds from the capital markets will have to once again wait a little longer. SEBI had come out with norms for setting up SME platforms a year back. But this has not yet translated into any meaningful action. There are several reasons for the same. For starters, as per the norm, SMEs must have their merchant bankers active as market makers. This could either be alone or in partnership with other entities such as private equity funds, venture capitalists, QIBs and the like. A market-maker typically lends liquidity to a trading platform by providing buy and sell quotes when there is not enough activity in the market. However, there has been considerable uncertainty as to how this mechanism will be work out.

Then there is lack of awareness among SMEs about the platform itself. Transparency is another issue. Since most SMEs are family run, not many are keen to maintain all the documentation and accounting standards. Thus, it appears that SEBI's proposal to provide liquidity to SMEs in its current avatar is not likely to work out. Unless another alternative to raise funds is provided to them.

As the Indian economy grows, the corresponding need for industry responsive skilled manpower continues to rise. The state of Gujarat has been at the forefront of economic development in the country. It has now proactively chalked out plans to meet the burgeoning need of skilled manpower. The Gujarat state government has set an ambitious goal to provide specialised training to two lakh people every year, starting from 2013. Toward this end, it aims to set up about 300 skill development centres across the state to prepare skilled workforce for various industries. With an average funding of Rs15 m for each of the centres, the ambitious project will entail total expenditure to the tunes of Rs 4.5 bn. The state government will bear 50% of the funding.

The skill development project will ensure that the existing and fresh workforce have the required skills to get proper employment in their respective industries. To keep up the current growth momentum and to ensure equitable development across the country such training initiatives are a must going forward. We hope the other states take a cue from this and initiate similar projects.

Led by strength in IT, energy, banking and capital goods stocks, the Indian indices made a strong start to the week. The BSE-Sensex was trading 265 points higher at the time of writing this. The mid and small cap stocks, however, are out of favour with the respective indices down by 0.1% each. The top losers over the year from the BSE A group include several players from the real estate, telecom and commodity space. Other Asian markets closed a mixed bag. The European markets have opened higher.

 Today's investing mantra
"The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage." - Warren Buffett

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46 Responses to "Strong case for a correction in realty prices"

lalit kakrania

Dec 20, 2010

what i think is that dont buy for speculative purposes.
if massess get this price will reach to were it belongs.

we inflate them and fall for the bate.

purchaser has ultimate power,group up,the way they grouped up and you can turn the tabke around.



Dec 11, 2010

Difficult to say if prices will come down or not but definitely we are heading the wrong way . In the last 6-9 months prices have shoot up by almost 60-70 %.

With rising interst rate , increasing prices every month .it's unaffordable now.Then then component of cash as all is not white deal add to the woes.

I strongly feel there is a need of a REGULATOR in the realty mkt.Much more money goes in this than in stock mkt & every human being is a participant in this market then why don't we have any regulator for it.


joginder obhroi

Dec 11, 2010

We hear for long sell by carpet area buy by carpet area,builders not allowed to sell parking space,we buy ,they sell,GOVT.DONOT PRACTICE WHAT IT PREACHES,THE GOVT. ASK US TO BUY BY CARPET AREA BUT ITSELF CHARGES STAMP DUTY BY BUILD UP AREA....THE INTENSION OF THE GOVT. IS TO PLEASE BOTH and keep the matter draging



Dec 7, 2010

There is a strong nexus between politicians and real estate developers. All the land deals done is the with the hand of Politicians and hence very little chance of coming down. We have PSU banks and all the deposits of the public is there for years and one call and the job is done. Well if this happens lets compare the ratio of the total loans to real estate loans and we will come to know if the funds will have come from PSU banks.



Dec 7, 2010

I don't think the greedy real estate developers will reduce price to much extent.



Dec 4, 2010

Builders and real estate developers have a strong lobby. evenif they default they will get protection by way of extended credit or restructuring of their debts. There is hardly any chance that they will reduce the price of the properties as most of them enjoy pretective umbrella of powerfull........ who only want to milk the comman man


Tikam Patni

Dec 2, 2010

No, in the past they did not, and now also they will not. All real estate developers are the fronts for Moneys of the Netaas.


Manoj Kumar

Dec 2, 2010

No way! these people are greedy sharks, they will try to hold out and manipulate things to the very last and if they will be unsuccessful in those efforts only then the whole sector will come crashing down.


Husain Ali

Dec 1, 2010

yes very very strong case
they dont have option but to offload or abandon the projects.
they will see cost benefits analysis of burden of interest on loans and finding other alternative to fund
which will not be forthcoming from underworld black money financiers or politicians as they are many in midst of scams and scams and scams


Shardul Pasawala

Nov 30, 2010

Simple rule of Economics say that Food Shelter and Clothing are the Basic necessities of life; if availbel within the reach of common masses can trigger Growth of Nations' economies around the world. In India all these three are in jeopardy. Majority of Indian Population is Middle, Lower Middle and Poor Class who can not afford an housing priced at such exorbitant rates anywhere across the Country. Food inflation is snatching away bread from billions and Cotton and Yarn prices are soaring at its peak due to Govt. Export Policies. ECONOMY AND SOCIAL STRUCTURE OF COUNTRY IS HEADING FOR CHAOS SOONER. Addition of One Bhopal City into population; though a matter of grave concern; of our country every day is playing a role to sustain demand supply mechanism. Yet, ultimately purchasing power of masses is going to be a decisive factor in coming times.

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