Another bubble in the making in real estate? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Another bubble in the making in real estate? 

A  A  A
In this issue:
» Flush with funds, Indian realtors making a comeback
» India's water reservoirs well below normal
» Corruption in telecom
» US bank failures crosses the 100 mark
» ...and more!

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It is a widely held perception among Indian investors that real estate is the least volatile of all the asset classes in India, and hence, the safest. The ups and downs of the stock markets and commodities over the last year certainly adds to that perception. Compared to them, real estate prices, especially in the residential segment rarely move downwards. But the question is how much of this is due to demand and how much due to the sources of finance real estate companies have access to?

They are flush with funds raised through qualified institutional placements, private equity deals and as pointed out by Mr. Ajit Dayal in The Honest Truth, - your own bank deposit.

Two leading business dailies today feature articles about how real estate companies are making a comeback. Existing land bank is being utilised and new projects are being launched in new markets. Gone are the days of discounts and freebies. In their place, the usual price hikes are slowly making their way back. And huge IPOs are in the offing. In our opinion, investors should be cautious of a sector whose basic product is constantly being pushed outside the reach of its customers and which needs a lifeline of massive liquidity to survive.

00:50  Chart of the day
With the last signs of the monsoon for this year well and truly gone, it is perhaps a good idea to check their net impact. Today's chart shows that water level in the major Indian reservoirs is well below normal as on 1st October, 2009. In fact, the water level in all 81 major reservoirs that supply canal irrigation systems taken together are 10% below the 10 year average and 20% below last year. In our view, the real worry stems from the fact that even during the best of years, reservoirs remain about 40% below the designed storage level. These reservoirs were constructed at a huge cost to the exchequer and have caused massive displacement of people in the regions. Hence, this matter needs urgent attention. Moreover, by improving the capacity utilisation of the reservoirs, we can at least partly avoid our dependence on the unpredictable monsoon .

Note: As on 1st October, 2009
Source: Economic outlook for FY10, Economic Advisory Council to the PM

In a recent survey on our website, we had asked viewers whether they thought tackling corruption should be the first priority of the government rather than looking to monitor corporate salaries, a response was almost one sided. Of around the 500 people who took the survey, 91% voted that 'tackling corruption' should be the priority. And we are in complete agreement with this view. But the way the mobile services' license allocation scam has come to light, speaks a lot about the government's intentions, or its seriousness about stamping out corruption.

A thoughtful article written by Mr. R. Jagannathan in today's DNA Money also raises this issue. He contends that the corruption will continue to breed in all segments that work on scarcity. And the telecom sector faces scarcity of spectrum, or the air waves that carry mobile calls. As this report notes, the telecom industry in India, despite being deregulated in terms of pricing, has always seen rampant corruption because it has always dealt with scarcity. First it was the scarcity of new telephone connection. Now it's the scarcity of precious mobile spectrum.

And mind you, telecom is just one sector where corruption rules the roost! Real estate, power, education, and other infrastructure sectors also see a wide prevalence of this social evil.

Anyways, given the recent CBI raid with regards to the telecom license allocation scam, do you believe the government is serious about stamping out corruption from its governance? Tell us

If you are amongst those looking for tips for the best possible long-term trade, here it is. "Buying gold on dips and selling stocks on rallies would be the trade of the decade." This tip was offered by none other than Mr. Addison Wiggin, author of The Daily Reckoning and bestseller 'Empire of Debt'. Mr. Wiggin is also the executive producer and co-writer of the highly acclaimed documentary I.O.U.S.A, which was shortlisted for the 2009 Academy Awards. While he has gone on record to say that gold will hit around US$ 2,500 an ounce, Addison also believes that the next bubble could be in gold or commodities or Asian stocks. Nonetheless, he also confirms that Asian economies, having gone through trouble in the 1990s, are better prepared to deal with a crisis like the recent one and they are going to lead the way through recovery.

Giving a strong warning about inflationary signs in the US, Addison adds that even in normal times, the Fed's target is 2% inflation rate, which means that the dollar loses value by 2% per year.

Further, the US economy which is approaching US$ 12 trillion in debt had a ridiculous number - 64,000 to be precise - of derivative instruments with AAA ratings in January 2008. He also joked that the possibility of US debt being downgraded from triple AAA is zero because the rating agencies 'just won't do it'! We believe that such candid predictions are hard to come by.

The years before the financial crisis saw India grow by a stupendous 9% plus and the Chief Economic Advisor Mr. Virmani believes that this kind of growth will not be possible till FY12. It's not hard to see why. The global financial crisis has obviously slowed down India's growth. Poor monsoons have also not helped matters. That said, if India does manage to grow at a lower rate of 6% this fiscal, she is much better off than her developed peers who are not likely to witness much growth. In fact, Finance Minister Pranab Mukherjee believes that the Indian economy has started recovering and it will be interesting to see whether the RBI will make any changes to its monetary policy to be released tomorrow. While it may not raise interest rates till the recovery becomes more sustainable, it will also have to constantly keep an eye on inflation so that the latter does not reach unmanageable levels.

Even as the world continues to talk of 'green shoots' and a 'V shaped recovery', the tally of bank failures in the US for the year 2009 crossed the 100 mark last Friday, with regulators there announcing the year's 106th closure. What's more, that's more than four times the number of banks that failed in the whole of 2008, and the highest yearly total since 1992. So what is causing these failures despite all the government aid? These banks are basically regional smaller banks, and their only fault is that they are not 'too big to fail'. Thus while larger financial institutions and the smaller ones alike have committed the same mistakes, the latter are finding themselves forsaken by virtue of their small size.

Meanwhile, the Indian markets traded in a volatile manner today and the BSE-Sensex was trading lower by 50 points at the time of writing. As for global markets, Asia was trading in the green, while Europe began the day on a firm note.

04:50  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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15 Responses to "Another bubble in the making in real estate?"

chaman lal kapur

Nov 20, 2009

In my opinion,Indian economy can be saved if our Govt make some policies in FII investment in India.Now a days in the eyes of FII India is the only country in the world where their investment is safe and will featch much more return as compare to other country in the world.As such the investment of FII in Indian stock market has been tremendiously increased because of no other is prosperious in the world except INDIA.
Now the investment of FII has reached at such a place ,incase of any bad news, when FII will becomseller and no one else will be in a position to save us in the grave situtaion.Keeping inview the above Govt should frame some policies to avert the situation.



Oct 28, 2009

Just wanted to say .that the reviews r good..

But wanna ask abt biz developments and prospects....

if u can publish sme thin on this..........



Oct 27, 2009

5 minutes are well spent with your Lively and condensed a weil researched highlites. Keep up. Best wishes


Manoj Barve

Oct 26, 2009

There is so much discussion going on about corruption. Why are we not able to identify and deal with the root cause of this? Are we corrupt at core and do not really wish to solve this problem? Or are we dumb to find a solution?


s elango

Oct 26, 2009

good nice articles



Oct 26, 2009

In line with the article published above I want to register my comments,on the corruption. The corruption level in local adminstration which are very near to common public, ia very high that is to say its about 60 percent.That is for every one rupee of govt spent only Rs.04 is spent to the common cause like roads water facilities,sanitation etc Only Lord Vishnu should take another avathar, to destroy all this corrupted community for this part of the earth aarkey


Rajkamal Bothra

Oct 26, 2009

It is wrong to paint the whole sector (Real Estate) with one brush.Companies like Ahluwalia contruction, Parsvnath Developers will trive in coming days. It is always better to have a stock specific approch. Find the winners of the sector and stick to them. Every stock is worth buying at certain price.


Shamity Sood

Oct 26, 2009

Thanks a tonne!! Birds eye view on Important matters is really helpfull , during hectic days routine.
And in My Opnion -
The Indian Economy can be Saved and insulated well from any further Financial clamities by simply bifurcating investment oppurtunities on the basis of nationality .i.e foriegn investors should be regulated in case of critical and survival sectors + arrangements should be made that whenever an FDi or FII flows into the economy we should back it with some indain investments . the idea is to simply maintain a Fixed ratio between Foriegn : domestic investment



Oct 26, 2009

What happened to banks in US because of housing loans & failure to repay them will repeat in India also.
Today Indian banks r are showing high profits but little do the RBI or the banks realise what they r heading for in the near future.


sunilkumar tejwani

Oct 26, 2009

The greatest joke in Indian politics: tackling corruption!
the recent CBI raid on telecom dept. is a hogwash. Every one knows CBI is a tool of The PMO & whenever the spoils are not shared by the lower echelons with the higher echelons The CBI comes into picuture.

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