Zimbabwe - Its $500 million currency note and real estate market! and the huge crisis!

WOW! A $500 million currency note after a $100 million currency note has been printed in Zimbabwe which is facing hyperinflation. Zimbabwe’s highest inflation was last estimated in July at 231 million percent but is now believed to be much higher. And did we say we were at 8% and still dreading the effects! Scary, isnt it.

$100 million in Zimbabwe = $14 USD. Unbelievably true!! The highest inflation India has ever faced is 53.8% way back in the famine year of 1943. Many other Asian countries have done far worse than India over the years. (The less said about hyperinflation-prone Latin America, the better.) Inflation in China reached 1,579% in 1947, when there was a civil war raging there. Japanese inflation peaked at 568% in 1945, the year of defeat and economic collapse. South Korea saw inflation shoot up to 210% in 1951, when it was at war with the communist North.

All this thought about the hyperinflation led me to wonder what the property market in Zimbabwe would be like. As it appears, the rentals are revised very rapidly without any major developments. Surprisingly, there is huge demand from South African and Russian buyers for Zimbabwean property despite the global meltdown and the countrys problems.

Further research provided more information about the problems. The president Mugabe who has been at the helm since the country got independence in 1980 from the Britishers in 1980, has started a new land redistribution project that takes property from white farmers and turns it over to blacks. He has said that Britain should be responsible for compensating farmers, because British settlers took the land in the first place. Land redistribution has led to widespread food shortages and stratospheric inflation.

The situation is expected to get worse in the country with widespread cholera epidemic that has killed thousands of people. The country is facing a currency crisis and a political infighting is not going to help Zimbabwe resolve its issues. Either the United Nations or the United States need to intervene to bring this country out of a crisis.

Is the fixed 9.5% rate for home loans justified?

My previous post talks about the new government regulation where home loans below Rs20 laks will be available at lower than market rates at 9.5% (Read here). On second thoughts I was wondering whether it is fair on the PSU banks to provide loans at such a cheap rate. The gainers will be home builders who have till now made millions by charging exhorbitant rates for their properties. The losers will be banks whose profitability will be eroded or the government will bear the losses through subsidies. Hence, in this case private realtors will bag the profits and government will bear the losses! Should'nt the real estate builders be asked to reduce prices of their flats/ houses/ villas that they have been selling at exhorbitant prices.

Secondly, why is the government supporting only the real estate sector. There are equally hit rate sensitive sectors like automobiles, construction etc. Why arent these being protected with impending bankruptcies in US of the 3 auto majors - GM, Ford and Chrysler. Is it because real estate contributes over 10% to GDP with its forward and backward linkages with steel, auto, construction sectors etc. Then sectors like textile need equal attention as they generate employment. What about banking? A banking sector collapse can send ripples across the economy.

Lets see what measures are further taken by the government to prop up the economy or more specifically the stronger lobbying sectors!

Government plans to fix home loan rates for PSU Banks at 9.5% will be ineffective...Heres why?

Public sector banks are set to offer home loans of up to Rs20 - 25 lakh at a concessional rate of 9.5% for a period of five years as part of the government’s fiscal stimulus package to spur spending and bolster sagging economic growth. Read more

This would mean the cost of funds is greater than the return that these PSBs would be getting. As it is the profitability and efficiency of the Indian PSBs are dangling. Banks and housing finance firms are now charging between 12% and 14% for fixed-rate home loans and offering floating-rate mortgages at between 9.5% and 11.75%.

It seems the Indian bankers have not learnt the lessons of subprime crisis and option ARM pricing. Rates will stay at 9.5% until the loan resets to the market rate.This will greatly harm the bankers as it has done in the subprime crisis.

PSU Banks account for only 20% of the total housing market, hence limiting the scope of the stimulus package.

The obvious outcome of this policy will be that the homebuilders will price the houses at 20 - 25 laks in white and the remaining in black to increase sales. Moreover, they will build jodi flats, which will individually cost 25 laks and the affluent buyers can make use of this scheme to benefit.

One concern is what will happen once the interest rates fall below 9.5%, which seems to be happening in the next 2 years. Nothing has been mentioned and this makes the deal unattractive!

Summary : Credit Cruch of 2008!!

Advertising on weathering Market Volatility : Wachovia ;-)

Don't forget to see this ad in the front page of today's WSJ online. You are being offered "6 strategies for weathering market volatility" from a "120-year old investment firm." The name of the firm? Its called Wachovia Securities...hehe.. Sourced from A fellow bloggers page

Real Estate stocks at 52 week low!! Its expected to get worse

Realty stocks took a tumble on the bourses and many logged their 52-week low on Monday.

The BSE Realty Index closed at a 52-week low at 3,407.87, down 5.26 per cent. It had dropped 16.79 per cent over the week from 4,095.50, and 31.78 per cent over the month. In January, the index clocked a high of 13,848.09.

Over the week, almost all real estate company stocks have taken a hammering, dovetailing the Sensex’s fall with the negative market sentiment at an all-time high, which this week is compounded by the wait for the US congressional nod for the $700-billion bailout package for bankrupt investment firms there.

Delhi-based DLF Ltd stock closed at Rs 350. 60, 5.12 per cent lower than its previous close. The DLF issue was priced at Rs 525. (52-week high – Rs 1,225, low Rs 329)
Buyback

In July, the company announced its buyback intention of up to Rs 600 a share for Rs 1,100 crore.

On September 18, it informed BSE that its board of directors would meet on September 30 to consider and approve a public announcement with the proposed buyback of equity of the company.

Sobha Developers’ stock suffered a 9.59 per cent drop, closing at Rs 171.55. The issue price was Rs 640 (Rs 1,060, Rs 164.50). Puravankara Projects traded at Rs 154.05 at close, down 3.14 per cent. The IPO price was Rs 400 (Rs 535, Rs 132.05). At close, Omaxe stock traded at Rs 96.05, down 4.38 per cent, far below its issue price of Rs 310 (Rs 613, Rs 93.60). Housing Development and Infrastructure Ltd was at Rs 166.05, down 13.72 per cent lower than its previous close (Rs 1,432, Rs 160.20). Parsvnath Developers was down 7.04 per cent at Rs 89.85 (Rs 598, Rs 86.60).

Among the marginal declines, was Ansal Infrastructure at Rs 77.30, down 4.13 per cent, and Unitech, which lost 1.98 per cent at Rs 108.85, but recovered from day’s of low Rs 97.5, which is its 52-week low. Of the many investments Lehman Brothers made in India, Delhi-based Unitech received about $175 million (Rs 740 crore).

Mr Hardeep Dayal of Centrum Broking Pvt Ltd said it was a knee-jerk reaction as the medium and long-term story remains strong. Market sentiments were down and only need-based buying was happening. People have held back their decisions to purchase properties, in anticipation of a price fall which is real. Mr Dayal was however, hopeful of a turnaround in a year.
Liquidity crunch

Enam Securities Researchers pointed out that aggressive land acquisition at peak prices through short-term high cost debt and huge working capital mismanagement (short-term debt used for long-term projects) were some of the ills that plagued the industry. Moreover, developers had stubbornly held on to selling prices and high-cost inventories, hoping for a renewal of demand and hike in prices.

Enam said the realty business model consists of three stages of value creation — land acquisition/aggregation and conversion, construction and development, and the lease/sale of the property.

The whole business model depended on the ability to infuse cheap monies at the earliest stages, including additional infusion through exits at the end of each stage, to be able to funnel monies back to stage 1 — land acquisition. Further, as each project funds another in this working-cap intensive business, liquidity is the key exponentiator of the business.

US House defeats$700 bn bailout plan!! Markets all set to crash

Indian markets are all set to touch a year low yet again today as the HOUSE has rejected the bailout plan. There is now a huge fear of a global crash with Fortis, Bradford and Wachovia being the latest victims of the subprime and real estate market crisis and the House defeating the $700 billion plan.

This is not exactly great news for the financial markets worldwide. The $700-billion bailout plan envisaged by the Bush Administration has been defeated on the floor of the house. The 205-228 vote against the plan resulted in stocks crashing in Wall Street. The Dow Jones Industrial Average were down around 500 points as the news broke.

There were 205 in favor of the legislation and 228 against. Among Democrats, 140 voted in favor and 95 against. Among Republicans, 65 voted in favor and 133 against.

WALL Street plummeted by nearly 780 points in its largest one-day drop last night, as proposed American legislation to bail out troubled banks and kick-start the global economy was rejected by the US House of Representatives.

The price of oil slumped and global financial meltdown loomed after the bill pushed by the Bush administration was voted down.

The defeat has come as a "massive setback" for the Bush administration, specifically the Treasury Department, as well as lawmakers who have been working throughout the last week on the legislation in the wake of the collapse of Lehman Brothers Holdings as well as the government's bailout of American International Group Inc. and its takeover of Fannie Mae and Freddie Mac.

A White House spokesman said that President Bush was very disappointed in Monday's House vote that rejected the administration's rescue plan.

Apparently the law makers were very wary of voting for a plan that risked so much of tax payer's money. Especially when the elections are fast approaching.

What the 109-page bill would do is to authorise the government in phases to buy $700 billion of illiquid mortgage assets, mostly from Wall Street financial institutions. The bill also has curbs on executive compensation for executives, equity stake and capital distribution control provisions to protect taxpayers.

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson have said the plan is necessary to avert serious consequences for markets and the economy.

Arent Moodys and Standard and Poors equally to blame for the subprime crisis?

We all have heard what the collapse of the real estate market has done eventually to the fate of the largest investment banks such as Lehman Brothers, Merrill Lynch, Bear Stearns and the large mortgage lenders Fannie Mae and Freddie Mac. The instruments behind this fall was the CDOs and mortgage backed securities that the whole world was rushing to invest in. Why was the whole world bullish on these instruments?

One party to blame is the credit rating agencies - Moody's and S&P. These are the guys who started to provide AAA ratings on these complex derivative instruments based on their own private research and provided the cue to the investment banks and others to invest in. However, there is a potential conflict of interest that needs to be pointed out. They were paid by the businesses whose products they rated.

Employee training lax?

Lets take a look at the employee numbers and the training practices of these agencies. From 2001 to 2007, the company's global employment more than doubled to 3,600 . Was there adequate training to these new employees to understand the products they were rating?

``It was very difficult to get people in, train them up sufficiently to really understand this stuff -- from structure to quantitative issues -- and then to keep them, because investment banks were very keen to get good people to help them optimize their trade ideas,'' says a former S&P quantitative analyst in London who left in April 2006. What do we expect these employees to do.

More revenue and higher margins

Looking at this picture from a financial angle. The rating agencies all stood to only gain by rating these complex derivatives. While prospectuses don't disclose fees, Moody's says it charged as much as 11 basis points for structured products, compared with 4.25 basis points for corporate debt. A basis point is a hundredth of a percent. S&P says its fees were comparable. Why would the rating agencies not take up this business???

Looking at financial figures, the rating companies earned as much as three times more for grading complex structured finance products, such as CDOs, as they did from corporate bonds. Through 2007, they had record revenue, profits and share prices. Moody's operating margins exceeded 50 percent for the past six years, three to four times those of Exxon Mobil Corp., the world's biggest oil company. Structured finance rating accounted for just under half of Moody's total ratings revenue in 2007.

Doesnt it all add up that the rating agencies were as careless with their work as were the investment banks who indulged in these exotic derivatives. Only when you ask them, a smart answer from the rating agencies claim that its their mere opinion (backed by private research). Hence they are not liable if the ratings go wrong. No wonder, most of the Mortgage bonds that enjoyed AAA ratings defaulted without any repercussions for these agencies.

Time can only tell whether we will see some actions against these rating agencies.

Ocean front Living in Dubai

Amazing housing development taking place near Dubai. Check out the good fitouts. A dream to get a house like these :)

World's largest fountain in Dubai : Spectacular!!

Dubai’s prominent developer, Emaar Properties said on Monday it plans to build one of the largest fountains in the world as the centrepiece of its Downtown Burj Dubai project. Arabian Business reveals what the real estate giant has in store.

The fountains, which has yet to be named, will be capable of shooting water over 150 metres into the air, the height of a 50 storey building, and stretch over 275 metres, the length of two football fields.

The $218 million project will be 25 percent larger than the iconic fountains at the Bellagio Hotel in Las Vegas.

Like the Fountains of Bellagio, Emaar’s fountains will include an integral light and sound show and is expected to become one of Dubai’s major tourist attractions, drawing over 10 million visitors per year.

The fountains will shoot 22,000 gallons of water in the air at any given moment and feature over 6,600 lights and 50 colour projectors.

The fountains have yet to be named and a cash prize of $27,225 has been assigned to the winner of a competition to name the water feature.

The structure is scheduled to be operation by 2009.

Bringing Down Bear Stearns

A brilliant read on how Bear Stearns was built over the years and its collapse amidst all the poilitics and short selling that triggered its fall. Amazing insights into the functioning of Bear Stearns and its collapse!

Read the story

What exactly is an Option ARM?

Hybrid Adjustable Rate Mortgage - An ARM is a type of mortgage in which the rate of interest charged on the borrowed amount varies based on an underlying index rate. As the underlying index rate varies, so does the monthly payment amount on the mortgage. In general, an ARM allows a borrower to obtain a mortgage with an interest rate that is usually lower than a fixed-rate type of mortgage, at least at the beginning. The interest rate is usually some fixed amount above an index rate, such as the "cost of funds" rate. As the index rate changes, so does the interest rate on the ARM.

This type of ARM is especially good if you are going to be in your home for only a few years. You get a lower interest rate during that time and can plan to sell before the monthly payment resets.

Example to make it clear : A Hybrid Arm Vs. a 30-Year Fixed Mortgage

If you borrowed $250,000 with a 30-year fixed-rate mortgage at 6.5%, your monthly payments would be $1,580.17 for the lifetime of the loan. If, on the other hand, you get a hybrid ARM at 4% for five years and an indexed rate for the remainder, your first 60 monthly payments would only be $1,193.54. They would then change yearly as the interest rate resets each year. If, for instance, the new rate at the start of year six is 8%, then the payment would become $1,745.22. This payment could change up or down, depending on the movement in the indexed rate.

Option ARM - This is a type of mortgage that can offer various payment options ranging from a minimum payment option, which is usually less than the monthly interest due, to an accelerated payment option, which will cut down on the term of the mortgage.

This type of loan is best for people who want the low monthly payment to start, but can afford a much higher monthly payment. It also is good for those who will move out before the ARM resets.

Example - Option ARM Payment Scenario

Suppose you borrowed $250,000 with a low teaser rate of 1.5%. Your initial minimum monthly payment would be only $862.80 - very affordable. But, the fully amortized payment at the loan's indexed rate of, say, 6.2% would have been $1,531.17, so the difference of $668.37 is added to your mortgage's principal every month. In the second year, the terms of your loan might cause the minimum payment to increase slightly to $927.51, but the amortized amount is now $1,659.40 because the indexed rate has gone up to 6.56% - and now $731.89 is being added to the balance each month. By the time Year 5 rolls around, you could be paying a minimum of $1,071.85, while the loan's indexed rate has increased to 8%, and you are adding some $940 a month to the principal. Not too bad, so far, but at some point, you've got to start paying down that principal. The bank, after all, wants its money back.

This is where Year 6 comes in and the option ARM resets. Thanks to making only the low minimum payments, you would owe almost $300,000 instead of $250,000. At 8%, monthly payments for the remaining 25 years will be $2,312.10, more than twice what you were paying in Year 5 and almost three times what you paid in Year 1. Ouch!

This type of loan is best for people who want the low monthly payment to start, but can afford a much higher monthly payment. It also is good for those who will move out before the ARM resets.

Now read about the real problem with Option ARM here

Ticking time bomb : The real pain is bigger than subprime! Option ARM!!

A nasty mortgage product promises yet more misery

OPTIMISTS, look away now. Prices in America’s housing market may have slumped, but the pain for a significant subset of homeowners has barely begun. Even at Barclays Capital, which spotted some of the improvements mentioned in the previous story, there is still concern. The bank’s Nicholas Strand says that roughly 1.4m households, most of them in California, hold a particularly nasty type of adjustable-rate mortgage called the “option ARM”. Although the overall value of option ARMs is lower than that of subprime loans—some $500 billion, according to Mr Strand, compared with about $1 trillion in subprime loans—their sting is more venomous.

The option ARM allows borrowers to pay less interest than the formal rate for a limited period (the vast majority of customers choose this option). In return, the unpaid interest is added to the original loan, a process soothingly called “negative amortisation”. While house prices are rising, the product just about makes sense. If borrowers do get into trouble when they start paying off the loan in full, higher property values offer some wiggle-room. But when house prices are falling and refinancing is difficult, as is now the case, the option ARM is the financial equivalent of a bikini in winter. Homeowners end up owing more on a property that is worth less.

Delinquencies are already rising fast. Write-offs for option ARMs at Washington Mutual, a stumbling thrift, have zoomed from 0.49% in the last quarter of 2007 to 3.91% in the second quarter. But the real crunch will come when the mortgages “recast”, forcing borrowers to start making full payments. The loans recast after a set period (typically some five years after origination) or when the principal hits a predetermined ceiling. The biggest wave of recasts is due to happen in 2010 and 2011. By some estimates, borrowers’ monthly payments will then surge by 60-80% (see chart), at a time when property values may still be at, or close to, their trough.

Rating agencies were unusually alive to the dangers of option ARMs: they demanded more collateral to protect holders of securitised-mortgage bonds. Banks were slower to wake up to the danger. An option-ARM product called Pick-a-Pay (a name that gave fair warning it could lead to trouble) accounts for 45% of consumer lending at Wachovia, a large bank. Wachovia stopped originating loans that allow negative amortisation in June, and is setting aside heftier reserves to cope with expected losses. It has also waived prepayment penalties for existing product-holders and is marshalling its employees to help move these customers on to conventional mortgages. Such efforts are welcome. But they also signal just how protracted America’s housing woes are likely to be.

Sourced from Economist

Lehman Brothers had investments in DLF and Unitech

Lehman Brothers’ bankruptcy is likely to cost Indian real estate dear. It may impact the financial major’s existing investments worth $500 million in realty firms, including DLF and Unitech, besides drying up another $500-million worth of potential investment which was expected to flow into Unitech’s Mumbai projects.

The news of Lehman’s collapse brought the BSE realty index down by 7.65% on Monday, while the benchmark Sensex declined 3.35%. Both DLF and Unitech fell 7.5%.

Lehman’s fall signals a deepening of credit crisis for Indian developers, who have lately been battling falling sales, rising cost of construction and tightening credit. It is expected that the US-based firm is likely to go for a fire sale of its assets.

The financial services major was very bullish on India and was among the active investors in Indian real estate. Early this year, it had leased out an office space in Mumbai paying Rs 1 crore per month as rental. This would divert a part of fresh funds seeking to invest in Indian realty.

This is because global fund houses have country-allocations. And as they buyout Lehman’s stake in some of the Indian assets, they will end up diverting some of the fresh funds-in-hand to existing assets rather than investing in new projects.

“Lehman’s departure will impact future cash flows of real estate companies. In a market situation like today’s, it will be all the more difficult for the firms to raise funds,” says Karvy Stock Broking vice-president Ambareesh Baliga.

Lehman invested $200 million in DLF promoter group company DLF Assets last year and bought 50% stake in Unitech’s Mumbai project for $175 million a few months ago. It had also invested $80 million in Bangalore-based SEZ Gandhi City and was likely to hike its share to $300 million.

Lehman’s other investments include a 40% stake in an IT park project of Peninsula Land in Hyderabad for an initial investment of Rs 50 crore. It had also teamed up with Mumbai-based developer HDIL to bid for the redevelopment of Asia’s largest slum Dharavi.

Wherever the developers had received fund, they are safe. But where the funds are yet to come, the developers could get stuck. Some analysts say a distress sale by Lehman will impact the valuation of existing projects.

DLF CFO Ramesh Sanka had earlier told ET that Lehman’s sale of investments in DAL would not impact DAL’s valuation. Unitech MD Sanjay Chandra said that his company had already received funds. So, the company won’t get impacted by Lehman’s bankruptcy.

Some industry executives say that FDI norms of a three-year lock-in period may prevent Lehman from making an immediate sale. But analysts argue that the lock-in period in case of bankruptcy may not hold.

Bank of American buys Merrill Lynch; Lehman Brothers may go bankrupt!

Lehman Brothers has not found a buyer. Both BankAm and Barclays have walked off the deal as the Government has denied any financial support for taking over the fourth largest investment Bank. There are talks of a possible bankruptcy filing for Lehman Brothers which will be clear in a couple of days.

However, coming as a surprise, Bank of America has agreed to buy Merrill Lynch for $44 billion to become a universal bank in the USA which it has been trying to do since a long time. Bank of America talking to Merrill Lynch well before the perception of the disastrous event is a favourable event. Two giants talking well before time is a positive from the markets point of view. BoA stepping in and talking about a possible combination with Merrill leads to protection of the shareholder. Merrill with its high exposure to the subprime mortgages and a number of writedowns was headed in the direction of Bear Stearns and Lehman Brothers.

What's the connection to housing? The bursting of the housing bubble exposed the bad loans that have rocked Lehman Brothers and weakened the numerous banks that otherwise would be in a position to save Lehman. It's all connected. And until housing prices find a bottom, it's going to be difficult to measure the losses these big firms are holding on their books.

Crash Course on Fannie Mae and Freddie Mac Story

What are Freddie and Fannie?
Shareholder owned firms supporting US housing by enabling money flow in mortgage market

What do they do?
Help expand the mortgage market. They bundle loans they buy into securities which are sold, with a guarantee

What went wrong?
Both were required to write down loans held for investment and pay out on guaranteed mortgages. Both have posted nearly $14 billion losses since the housing bubble burst in August 2007. Now, they are unable to buy fresh loans

Why the bailout?
To ward off further damage to the wounded US housing market. The two have a hand in nearly half of the entire $12 trillion mortgage market.

Subbarao, new RBI governor in his first media interview as governor

Duvvuri Subbarao, who took over from Y.V. Reddy as governor last Friday, addressed the media for the first time today. Subbarao's comments were perhaps more moderate than had been expected, with several references to the need for sustaining economic expansion. It seems the monetary tightening period is coming to an end now as he said that inflation expectations must be contained to enable sustained growth.

Some of the points discussed in the media interview, which are indicators of future economic policy for India in his tenure (Background to the topic has been provided for reference)

Inflation As Short-Term Phenomenon
"I believe that even as the monetary authorities are independent there is a need for coordination between fiscal and monetary policy. "If you believe that inflation is a long-term phenomenon and it is going to sustain then we need to take fiscal policy action. But if you believe that inflation is a short term phenomenon as it is now we depend on monetary policy because monetary policy and fiscal policy have different time lags and different implications as they are going through the economy."
(Background: The RBI has said it aims for wholesale price inflation to fall to about 7 per cent by the end of the fiscal year in March 2009)

Interest Rates
"I have been asked whether monetary policy will be tightened further. There are, as they say, several known unknowns. First, we will have to watch the impact of the measures already taken. Second, we will be watching the drivers of demand – in particular which sectors are triggering the growth in demand. Third, in a globalised world, we will also have to be watching developments around the world and make an assessment of their potential impact on our economic management... All I can say is that we will be monitoring the situation closely and continuously, be mindful of the implications of our monetary stance on the growth prospects, and take action as appropriate."
(Background: The key lending rate, the repo, is at a seven-year high of 9.0 percent and the cash reserve ratio (CRR) is at 9.0 per cent)

Growth
"India's remarkable economic expansion from an average of 5 percent in the '90s to close to 9 percent in the recent period has been led by rise in private consumption, rise in private investment and surge in exports. I believe these engines of growth are still on track. The recent moderation is only a cyclical downturn. The structural India growth story is still intact and credible."

On 2008/09 Growth
"At the moment our estimate still is the number of the RBI. Of course we will be reviewing that as part of the October policy statement."
(Background: The RBI forecasts 2008/09 growth at around 8.0 percent)

On Currency Management
"The RBI's exchange rate policy has served us well, and I believe we will continue on that policy. The elements of that policy have been to not to take a view on the exchange rate but to manage volatility in a flexible and liquid manner."

On Special Market Operations For Oil Companies
"We are not actively considering that because there are no oil bonds in the market at the moment. Oil bonds might come in to the market after the parliament session. If and when the parliament approves supplementaries for under-recoveries of the oil companies, so we will take a view then."

On Capital Account Convertibility
"A lot has been done on capital account convertibility. I understand on some measures we are ahead of the curve and on some measures we are slightly behind the curve. But that's the way we expect in a real-world situation. Capital account convertibility is a continuous process, we continue to manage that process, it remains important on the agenda of the government and of the RBI and we will take appropriate measures."

Financial Reforms
"While what the financial sector has achieved is impressive, the task ahead is formidable. The financial sector has to become more competitive, efficient and forward looking. This underscores the importance of financial sector reforms. I want to conclude on the subject of financial sector reforms with three short comments. First, the liberalisation and development of the financial sector over the last few years has been a key factor in financing our 9 per cent growth. To sustain and accelerate this growth, financial sector reform, aimed at improved efficiency and financial stability, will remain important. In moving forward, we will draw from the lessons of global experience of the recent period, and be cognizant of the evolving global situation. Second, financial sector reforms are not an end in themselves. They have meaning and relevance only if they are anchored in real sector objectives. Third, financial sector reforms should promote inclusive growth through efficient and easily accessible financial services."

Real estate firms get innovative in raising funds to complete projects - Islamic Banking

Market drying up, low liquidity, skyrocketing interest rates, high inflation, real estate company margins declining, lack of funds etc are news we are hearing daily these days. The scenario is very glum and more so for real estate companies who have been marked down by over 50% in the stock markets. If the liquidity crunch is so high, where are they getting money from.

On talking to a number of experts in the real estate, I have discovered that a number of companies are tapping the Islamic capital. Islamic funding is available from deep pocketed West Asian investors who are sitting with trillions of dollars to invest in high growth assets. However, unless the money is used in a Sharia compliant manner, they are not ready to give the money even if one promises them a 100% return.

Financing based on Sharia, or Islamic Law, requires that gains be derived from ethical and socially responsible investments, i.e, should not be in liquor or cigarattes etc. Moreover, they frown upon interest based banking. Money is available at less that 5-6% from these HNIs who are sitting on a pile of cash.

Banks have scaled their exposure to real estate and have refrained from lending to real estate developers and have increased their interest rates sharply. Equity and bond markets have fallen by the wayside as markets have plunged. Private equity funding come with a large number of clauses that leave the developer with little or no profit.

Some of the real estate developers like Unitech and DLF have been looking to establish fund businesses. But there are issues with investors about potential conflicts of interest if a developer manages its own fund. In India, friction has risen because developers want to sell land at market prices for an instant profit whereas investors, saying that they want to share the risks and rewards, want plots to be injected at a lower acquisition value.

Economics in land deals; Bad Judgement setting a precedence

We all know what is happening in Singur with Tata bailing out of Singur as the Trinamool Congress has been pressurizing the government to return over 400 acres of land back to the farmers that is claimed to have been taken forcefully by the government from the farmers and given to the Tatas to build their Rs 1 Lakh car "NANO". We seem to have not learnt from this imbroglio.

In another case from Andhra Pradesh, the Supreme Court has dismissed a complaint against the government for acquiring land for Andhra Pradesh Infrastructure Investment Corp. The court ruled that any project which generates employment and brings in foreign exchange is for "public purpose", clearing the road for more forceful land acquisitions.

What is a "public good" in economics terms? A public good is a commodity or a service that is non excludable and non rival in nature, i.e, every individual has a right to use that good and the use of one person does not mean another person cannot use it. Lighthouses and defence/ military services are public goods.

Unfortunately, the court in its ruling has specified "public purpose" but does not seem to use it in the economics sense. It assumes investments bringing forex is for "public purpose". This decision has serious ramifications. India follows a common law system where higher court judgements are used as precedents for lower courts. In all future cases, a lower court will ask -
1. Does the investment generate employment
2. Does it bring in foreign exchange?
If the two answers are yes, land acquisition is legal.

This opens the door to unjust acquisition of private property, especially of the poor without a political clout. We can see in Singur that private property needs to be protected and enterpreneurs should directly buy land from owners.

Trends in real estate in Indian Metros

Positive buzz continues amid realty
The real estate sector may not be in its ‘golden phase’ right now, but the buzz surrounding the market still remains. Industry bodies such as Ficci and Assocham say that a 10-15% fall in property prices has been witnessed over the last six months, with further corrections in the offing. In fact, a recent Ficci-E&Y report also observed that slowdown or not, a majority of developers see an upward growth curve for Indian real estate. The positive buzz continues despite the slowdown or high interest rate worries. Global real estate consultancy Jones Lang LaSalle Meghraj (JLLM) made some key findings on the top trends in prime property markets in metros for residential stock.

Delhi: Left A-loan
The increase in home loan rates has caused the residential market in Delhi to slow down to quite an extent, according JLLM. Many prospective buyers are deferring their purchases, though this is true only in the mid-income segment — the demand for high-end residences remains unaffected. A correction of around 10% has been seen in Delhi’s property market. Also, DDA’s initiative to develop 6,000 flats for the mid-income group has seen a tremendous response. The Greater Noida Development Authority has launched a similar initiative. This has made homes in the Rs 15 lakh range a possibility again. Says Kunal Banerji, president, marketing, Ansal API, “It’s a fact that the high-end segment has not been affected and the demand is still as strong. Even the mid-income segment is seeing good demand with the coming of schemes in the market. For instance, our EMI holiday scheme has been getting an encouraging response from the mid-segment.”

Mumbai:
Going Slow In the financial hub, the sales of residential properties has slowed down dramatically, especially in key areas from Santa Cruz up to Andheri, Goregaon and Kandivali. There has been a 40% dip in sales since the slowdown began and intending buyers are deferring their decisions until after November. However, it is a different scenario in the Bandra-Khar area, where the cash-cheque component in transactions has been far higher. The dip there has been to the tune of 25%. There have been no transactions in south Mumbai since the last four months, even though investor flats are now selling at cheaper rates than builder flats. In areas like Byculla and Prabhadevi, builders are asking for rates like Rs 44,500-45,000/ sq.ft while investors are asking for Rs 43,000-44,000/ sq.ft.

Bangalore:
Supply’s Drying Up JLLM finds out that in Bangalore, even though the residential market has slowed down, the true impact of the slowdown is yet to be seen. There is a wait-and-watch situation in many areas which include mostly Central Business District (CBD) locations. Rates in CBD areas such as MG Road, Lavelle Road and Richmond Road range between Rs 14,000 and Rs 16,000 per sq ft. However, in high-demand areas such as Koramangala, Indiranagar and Sadashivnagar, there is a dearth of supply being seen.

Amit Bagaria, chairman of Bangalore-based Asipac Projects, however, feels the slowdown has impacted the city. “Overall, there has been a dip of 20-25% in sales. Locations such as Whitefield, Sarjapur Road, Bannerghatta Road and JP Nagar are seeing this dip. There is a price correction in the resale market to the tune of 15-25%. However, there is hardly any correction in the primary supply coming from developers.”

Chennai:
No More Construction In Chennai, there is a new supply coming in but primarily in the upper income segment with prices between Rs 75 lakh and Rs 1 crore. No fresh constructions are happening in the mid-segment, since land rates have moved beyond developers’ affordability. The accent is now on larger properties of 1,000-2,000 sq.ft. and above, with supply in smaller properties considerably lower. Premium locations in the city such as Poes Garden, Boat Club Road and Aryapuram are still seeing strong demand. While prices in Poes Garden are in the range of Rs 18,000 and Rs 20,000/ sq ft, it varies between Rs 20,000-Rs 22,000/ sq ft in Boat Club Road. Speaking of lower-to-middle income group destinations, Moggapair, which is close to Anna Nagar is witnessing rates ranging from Rs 2,800-Rs 3,200/sq ft. There has been no fresh supply for the lower income groups in this and similar areas, with new projects catering mostly to the middle segment. However, the OMR area and Sriperumbudur will see low-income housing supply in the next few years.

Recent Real Estate Regulatory News

• Mar-08 Industrial Parks exempt from restrictions on FDI in real estate [Press Note 2(2005)] provided 66% of area is allocated for industrial activity and no single unit occupies more than 50% of the area
• Apr-08 SEBI (Security & Exchange Board of India) permits mutual funds to launch REMFs
• Apr-08 Tax benefits for Software Technology Parks has been extended by 12 months to March 31 2010
• May-08 MMRDA (Mumbai Metropolitan Region Urban Development Authority) has increased FSI (Floor Space Index) to 4 from 2 in G Block of BKC (Bandra Kurla Complex) subject to payment of premium
• Jun-08 Maharashtra government has increased FSI (Floor Space Index) for slum rehabilitation to 3 for low density slums and 4 for high density slums
• Aug-08 Cap on space for Financial Institutions in IT Parks in Mumbai Metropolitan Region increased to 80% from 30%
• Aug-08 Delhi government plans to rope in private players for slum redevelopment (Read more)
• Aug-08 Developers will have to provide double parking space in all upcoming residential and commercial buildings in Mumbai

Recent land/ notable transactions across key cities; Realty slowdown indicated

(Click on picture to view clearly) Take a look at the recent land deals that have happened in various parts of the country. We are hearing a lot about the slowdown and this chart makes it amply clear that there is a clear trend. Look at the deals done in the MUMBAI BKC (Bandra Kurla). Clearly and surprisingly, a deal struck in March 2008 by Jet Airways got land at Rs. 5666 million per acre compared to a recent deal in August when Talim Research got the land at only Rs 635 million per acre in the same region. Over 80% discount to the price paid by Jet Airways in March!! The slowdown is very evident from the above example.
Surprisingly, the August deal had just 1 bidder!!

Read more on the story I had written earlier

Recent real estate private equity deals

(Click on picture to view clearly)

Real estate company news over past week

Puravankara subsidiary to raise Rs7.5bn through private equity
Puravankara’s wholly owned subsidiary, Provident Housing and Infrastructure, is in talks with four overseas private-equity funds to raise ~Rs7.5bn to acquire land for its affordable housing projects. – Business Standard, Aug. 26

DLF seeks shareholder approval to raise Rs100bn; plans overseas foray
DLF plans to seek shareholder approval to raise up to Rs100bn from institutional investors (Business Standard, Aug. 27). The company has clarified that this is only an enabling resolution and there are no near-term plans to issue fresh capital. The company in fact intends to place back the bought back equity shares at a steep premium to the bought back price.



Merrill Lynch hikes stake in Ansal Properties
Merrill Lynch Capital Markets Espana SA SV acquired as much 1.163m equity shares, representing a 1.03% stake, in Ansal Properties through the secondary market purchase route on August 20, thereby increasing its stake to 5.96%. – Financial Express, Aug. 23

HDIL to raise Rs10bn for slum land swap
HDIL plans to raise debt of Rs10bn within a year to buy land and relocate slum dwellers for the Mumbai airport modernization project. The company intends to buy land within 1km from the airport. – Mint, Aug. 27

Kolte-Patil, UK’s Arora Intl may call off hotel JV
The proposed joint-venture between Kolte-Patil Developers and Arora International Hotels, a UK-based hotelier, is learnt to be in trouble and is likely to be called off. However, Kolte-Patil has denied any such development. Kolte-
Patil had announced plans to enter a JV with Arora International Hotels to develop two hotel properties in Nagar Road at Pune and Hosur Road in Bangalore. – Economic Times, Aug. 25

UAE-based Emke group to build Rs12bn mall in Kochi
The UAE-based Emke Group is setting up one of India’s largest malls, including a 300-room hotel, in Kochi with an investment of Rs12bn. The project will have a built-up area of 2m sq ft and is to be completed by 2010. – Mint, Aug. 25

Plaza Centers, Elbit Imaging to develop India projects
Plaza Centers has entered into an agreement to acquire a 47.5% stake in Elbit India Real Estate Holdings to develop three projects with a total area of ~3.8m sq ft in Bangalore, Chennai and Kochi. – Economic Times, Aug. 26

Jain Heights to raise UD$25m
Jain Heights plans to raise up to US$25m from foreign investors to develop a mid-segment residential and a luxury hotel project in Bangalore. The company has tied up land for both projects and detailed plans for the residential project are in place. – Economic Times, Aug. 28

DLF annual report highlights

Highlights from DLF’s FY08 Annual Report

• DLF sees FY09 as a challenging year given the liquidity and inflationary issues in the economy. It expects FY09 to be a year of consolidation.
• Targets: 1) Maintain gearing at 51% to ensure that the company can easily tide over any downcycle in the business; 2) be FCF-positive by FY11; 3) plans to develop ~25m sq ft of retail space in the leased mall category over the next five years; plans to have 4,000 hotel rooms under construction in FY09; and 4) aims at increasing projects under construction to ~100m sq ft by end-FY09, from 63m sq ft in 1Q FY09.
  
• DLF’s rental earnings, which were Rs2.8bn in FY08, are set to grow further with an increase in leased office space and retail malls.
• To ensure adequate replenishment of land resources, DLF has carved out a land replenishment fund, wherein 15% of the sale value of its real estate development is credited – should ensure consistent development pipeline.

DLF has announced both a buyback of Rs1,100 crore to prop up its dangling share price. Next, surprisingly in the next month of buyback, it announced capital raising of Rs. 11,000 crore. Isn't it a conflicting strategy. DLF has failed to list DLF Assets which had plans to raise Rs 9,500 crore from Singapore REIT. Lets see what else is DLF upto in the coming months.

Land and property prices skyrocket in Howrah, Hoogly ; Kolkata

Land prices have skyrocketed on Kona Expressway and stretches of National Highway-2 and National Highway-6. Call it the Singur ripple effect or impact of other projects like the DLF township project in Dankuni and logistic hub on Kona Expressway, land prices have risen at least six fold in the past four years.

Many brokers had even purchased land in the area hoping for the price to shoot up further. An acre of land which cost Rs 24 lakh even five years ago, fetches around Rs 2 crore today.

Property prices have shot up even further on Kona Expressway that serves as a gateway to Singur from Kolkata. Even in 2001, the price per acre there stood at Rs 12 lakh per acre.

“With projects like the Tata Motors small car plant in Singur, the DLF township in Dankuni, Kolkata West International City and the logistic hub on Kona Expressway coming up, it is obvious that property prices would soar. But the delay in these projects and the Singur stalemate are a matter of concern for many,” said Ram Ratan Chowdhury, managing director of Panchadeep Constructions Ltd (PCL). He has been a pioneer in bringing mega projects to Howrah.

If poor infrastructure and lack of development held back real estate prices on the western front of the Hooghly even a few years ago, the upcoming projects are changing the industrial landscape in the Howrah-Hooghly belt, thus pushing up property prices.

Less commuting time, excellent connectivity and ventures by big houses like the Tatas, DLF and the Salim-Ciputra group have made realtors make a beeline for land in the area. The Singur plant is just around 10 kilometre from the point where the Kona Expressway meets NH-6 and NH-2.

Real estate developers and brokers, who have invested in the stretch, are keeping their fingers crossed. For, they feel that the growth of price in real estate will be at a much slower pace if the Tata project shifts from Singur to an alternative location.

“The price of real estate does not change overnight, though there will be an impact on the price of land in that belt in case the Tatas leave. We hope that the Singur stalemate will be solved in a week or so at the most. If the Tatas stay, the price of land is bound to shoot up. Even if they leave, real estate prices will still go up but at a slower pace and rate,” said real estate developer Sumit Dabriwala, managing director of Riverbank Holdings Private Ltd.

FIIs reduce holding in real estate companies

Foreign institutional investors (FIIs) have reduced their holding in real estate companies, particularly Unitech and Parsvnath Developers by over 2 percentage points and by 0.8 percentage point respectively, year-on-year. According to shareholding data available on BSE, the financial institutions and banks have increased their holding in Unitech Ltd by just over 1.5 percentage points, even as the stake of FIIs has come down.

In the case of Parsvnath, there were marginal changes in the institutional shareholding within the non-promoter category, even as the ‘individual’ holding rose by just less than a percentage point. “The FII stake in Parsvnath had almost doubled between June 2007 and December 2007, but came down subsequently, in line with market trend,” a market observer said. When it comes to ‘public shareholding’ in Unitech, the stake held by various mutual funds and UTI stood at 0.51 per cent on June 30, 2008 — a tad higher than 0.25 per cent in the year-ago period. According to market sources, while FIIs have trimmed their holding in Unitech, the shares sold by them may have been picked up by private Indian insurance firms.

Agricultural Units of Measurements Used for land in India

1 Pucca Bigha = 1 sq. Jareeb = 3 Kaccha Bigha = 20 Bissa = 3025 Sq. Yard = 2529 Sq. Meters = 27225 Sq. Feet 1 Acre = 4840 Sq. Yard = 4046.8 Sq.Meters = 43560 Sq. Feet = 0.4047 Hectare =20 kanal 1 Hectare = 2.4711 Acre = 10000 Sq meters 1 Kaccha Bigha = 6 2/3 Bissa = 1008 Sq.Yard and 3 Sq Feet = 843 Sq. Meters 1 Bissa =20 Biswansi = 20 Sq.Gattha 1 Gaz/yard = 1 Yard = 0.91 Meters = 36 Inch 1 Hath =½ Gaz = 18 Inch 1Gattha = 5 ½ Hath = 2.75 Gaz = 99 Inch 1 Jareeb = 55 Gaz/yard 1 kanal = 500 sq mt = 5380 sq ft = 597 sq yd

What is DLFs strategy? First buyback spending 1100 crore and now fundraise of 10000 crore?

DLF has approached its shareholders for an approval to raise Rs 10000 crore ($2.3 billion) through a placement to qualified institutional investors. This is quite surprising given that DLF is still on with a buyback process where it shelled out Rs 1100 crore to prop up its shares. If DLF had significant amount of money to buyback shares, why is it now looking to raise capital. Proves that the earlier strategy was simply to increase the share price of DLF which is currently below the IPO price of 525 at Rs. 487? The buyback price is Rs 600.(Read about the buyback)

The problem that DLF will face while raising funds is that it has to wait for six months after the buyback closes before raising money from the capital market. But the buyback hasn’t even begun and would take at least three months to be completed. In which case, the fund-raising is still some time away and the company is merely using the annual general meeting to arm itself with the necessary approvals. The DLF stock has lost over 60 per cent from its peak of Rs 1,205.

Another thought on why the company could have gone for a buyback was that the buy back will help increase the EPS. This will also lead to a reduction in the price earning (PE) ratio, hence helping to push up stock prices. High stock prices always work to a company’s advantage when it wants to raise funds. However, the buyback hasnt really helped DLF share prices given the market sentiment.

DLF’s June 2008 quarter results were disappointing with the net debt increasing to Rs 13,200 crore from Rs 10,000 crore in the March 2008 quarter, while receivables (net of customer advances) were up at Rs 5,800 crore from Rs 5,000 crore. Operating profit margins fell around 1000 basis points to 61.5 per cent. Sales were up 24 per cent y-o-y at Rs 3,850 crore but were down sequentially. The net profit, too, was up 23 per cent y-o-y but down sequentially. The company’s revenues from DAL (a company owned by the promoters of DLF) have been coming down over the past few quarters and now account for 40 per cent of the total revenues.

These tactics clearly show the pain that India's largest real estate developer is in terms of funds. We can only imagine the plight of the smaller developers who are now at the mercy of moneylenders and other sources that charge over 30% that too with safety conditions to avoid any downsides.


* Akruti City stock continues to outperform the other stocks. The stock was up over 10% in yesterday's trade :)

DLF Buyback desperate attempt to floor share price

DLF Assets and DLF

DLF puts REIT listing on hold

Retailers Take a Slower Road in India because of realty slowdown

India's expected retail boom hasn't taken off, leaving companies large and small to rethink their expansion plans because of the economic slowdown and the real estate bust.

Wal-Mart Stores Inc., which unveiled plans to enter India with a joint-venture partner two years ago amid great fanfare, will open its first wholesale store next year, but it won't comment on future plans. Three Build-A-Bear Workshop Inc. franchises in India opened by Murjani Group have closed. Straps, a chain run by India's Oswal Group that featured Wonderbra lingerie from U.S.-based Hanesbrands Inc., has closed its more than 20 stores. Big German retailer Metro AG, after five years here, operates only four wholesale stores; the company says it is taking its time developing its Indian business.

India's retail industry -- including everything from carrots to cars -- clocks around $350 billion a year in sales. That figure had been expected to double in the next seven years. But now, some retail executives are taking a closer look. Growth is less than hoped for. And thousands of new shops have sprouted in the past few years, so there are more players competing for the same consumer.

Just three years ago, an explosion of conferences, analyst reports, Web sites and magazines predicted the arrival of a new Indian consumer who would change the global retail landscape. The first modern retail stores here were so popular that many entrepreneurs thought people would buy almost anything at any price. They were wrong, as both large and small retailers are discovering. For some, the forecast retail boom that promised jobs for Indians and a new market for global retail giants is already a bust.

Most retailers say they are grappling with the same problems: rising costs and fewer buyers. In the early days of the boom, retail rents and salaries soared, though recently they have started to come down a bit. Many outlets discovered that consumers didn't really want their products. And unlike shoppers in Asia's other booming economy, China, Indians are rarely willing to pay three to 10 times more for an international brand than for its domestic equivalent. The average Chinese consumer has more disposable income, and more than a decade extra of experience with international brands.

Nevertheless, India still generates excitement among some investors. Earlier this month, both British retailer Tesco PLC and Vornado Realty Trust, one of the largest mall developers in the U.S., announced plans to enter the country with local partners.

Shoppers Stop Ltd., one of the first companies in India to attempt modern clothing and houseware chains, has posted net losses for the past two quarters. Some companies that still have big plans, including Indiabulls Financial Services Ltd. and Aditya Birla Group, have changed tack, closing some stores and making management changes.

If retail growth sputters, India will lose an important avenue for growth to trickle down to the masses: the jobs retail provides.

The country's recent economic expansion has been fueled largely by its service sector, and hasn't created millions of manufacturing and export jobs in the way China's boom has. But the Indian government had counted on retailing to soak up millions of rural and young job seekers. Two years ago, Mukesh Ambani, chairman of Reliance Industries Ltd., projected that thousands of his new stores would provide jobs for "500,000 young boys and girls in the next few years." Since that speech, the company has built around 700 stores, an impressive number but far from earlier targets.

Indian Real Estate Roundup : The mood swings in the last year

In a recent report, HSBC predicted that house prices across most Indian cities could fall by 25-30%.

Less than a year ago India’s property market was smouldering with excitement fuelled by unprecedented economic growth. Companies demanded high-quality office space and a growing clique of upwardly mobile, middle-class buyers wanted swanky new homes. The industry had also been given a boost in 2005, when the government eased rules on foreign investment in the construction industry. Property developers were among the biggest winners in India’s economic boom. When DLF, India’s best-known developer, floated on the stock exchange last summer, it was India’s biggest-ever initial public offering at the time. The company has played a leading role in transforming Gurgaon, on the edge of Delhi, from a scrubby plain into a posh satellite city that is a symbol of India’s ballooning self-confidence.

In recent weeks, however, inflation has tipped over 12%, largely driven by surging oil prices. This has pushed up interest rates and turned property companies into the biggest corporate losers of India’s slowing economy. They have been kicked from several sides. Homebuyers are put off by expensive or elusive credit; banks are rationing credit to developers; prices of building materials like cement and steel have soared. The share prices of property firms are down by 40-70% from their highs earlier this year.

In July DLF announced it would buy back part of its equity—a move some saw as a sign of alarm among its controlling shareholders at the falling share price. The company has shelved plans to list its real-estate investment trust on the Singapore stock exchange, as has Unitech, India’s second-biggest developer. “We’ll have to wait for the market. Isn’t everyone?” remarks Rajeev Talwar, DLF’s executive director.

Part of the problem is that when the market was strong, developers piled into the most expensive properties where the biggest profits were to be made. One upmarket enclave in Gurgaon, which boasts a nine-hole golf course and a “cigar lounge,” has sold fewer than half the houses built in the first phase of development, even though it is now more than a year since they went on sale. HSBC reports that sales in the luxury segment have fallen by up to 70% in Gurgaon.

Until there is a sharp fall in interest rates, developers are focusing on more affordable homes, and ones that are bought to be lived in rather than speculated upon. Gary Garrabrant, chief executive of Equity International, an American property firm which has invested in mass housing in Mexico and Brazil, says he is looking for investment opportunities in affordable housing in India. He cautions, however, that infrastructure, especially roads, will have to improve “before record-breaking speed can be achieved.”

Like so much else, India’s property market hinges on confidence. Even when property prices and interest rates fall, buyers will be slow to catch on, reckons Ashutosh Narkar of HSBC. “It’s not like buying a car,” he notes. “House buyers tend to wait for much longer before they think about spending so much money.”

The Big Bull, Rakesh Jhunjhunwala optimistic of the future of stock markets

The Indian stock market is a function of the country’s economic growth, return on equity and return on capital employed, said Mr Rakesh Jhunjhunwala, Partner, RARE Enterprises and eminent equity investor.

Delivering a lecture organised by Confederation of Indian Industry titled ‘Sensational Sensex – Retrospect and Prospect’ he said: “Also, infrastructure to attract local money, growth of the Indian financial savings, correction of Indian under-exposure to equities are some of the other factors that will drive the markets,” he said.

He said the movement of the Sensex from 3,000 to 21,000 over a five-year period (2003-2007) and now back to 14,000 was no mean achievement.

“In this entire journey, we have had a few significant price-wise corrections but almost no time-wise correction. This is the first significant time-wise and price-wise correction being witnessed,” he said.

Analysing the genesis of the Indian downturn, Mr Jhunjhunwala said, until now we have had three bear markets. “In April 1992, the peak PE was at 63.1 per cent and we have the scam of Mr Harshad Mehta, then in 1994 we peaked at 42 times the earnings, then in December 1999 we peaked at 30 times the earning and had the Ketan Parekh scam. In 2008, we peaked at 21 times the earnings with no scams. While there was euphoria and mania, this time we have peaked at a far more reasonable valuation and are still below peak PE levels of the past,” he said.
Factors to watch

According to Mr Jhunjhunwala, the key factors to watch for are the US economy and world slowdown, global financial system stability, commodity prices, local and global inflation. “Also political elections, the performance of the Indian IT sector, base forming patterns in equity indices and Indian and foreign fund flows are other key factors to watch for the markets,” he said.

He noted that the aftermath of the 25-year-old US bull market cannot be pretty and the end of the easy money era in the financial markets will shake many out of complacency.

Delhi based Realty player in big debt. May go down!!!

A Delhi based real estate company, which claims to have transformed the dreams of several of its customers to reality, is being trampled by a leading Mumbai-based NBFC.

The promoters of the real estate company had pledged its shares with the NBFC and accepted a funding of Rs 300 crore to meet its short-term working capital. But as a result of the prolonged bearish phase and constant pounding of realty shares, the promoters are unable to meet margin calls that are triggered when share prices slide.

If market sources are to be believed, the company is not in a position to even meet the interest due on its borrowings. Fearing that the loan would end up as bad debt, the NBFC has started dumping the shares of the real estate developer, triggering a further slide in the stock price.

The stock is already down 80% from its peak price seen some months ago. But market circles feel the hammering is not yet over, and the stock may test new lows in the coming days.

Developers giving late delivery of homes

Realty slowdown is delaying delivery of homes. Several developers have postponed execution of their housing projects as funds become scarce, demand softens and raw material prices rise. While some others are deliberately delaying projects in order to reduce supply as demand weakens.

Several projects across the country are getting delayed as developers aren’t able to generate enough cash to continue construction work. Projects are delayed by as much as 6 months to over a year. “Funding is largely unavailable. Those developers who can access funds are also shying away from it since it has become very expensive. In addition, income from sales of housing units has declined with the softening of demand,” says Cushman & Wakefield MD Sanjay Verma.

All developers are facing the heat on account of high interest rates, which the country’s central bank has been hiking in order to tame inflation. Mid and small developers are faring worse as banks have almost shut their door on them.

“It is a tough time for real estate firms. A weak demand is affecting cash flow. Moreover, the cost of debt and construction has risen. How can one continue construction with the same pace in this environment,” says a senior executive at Omaxe

Some developers cite usual reasons such as delayed government sanction and unavailability of men and material for the current unusual delays. “Till the last month, steel was difficult to procure even at a very high rate delaying execution of projects,” says Gaursons joint MD Manoj Gaur.

Not all delays are forced by just funding or material constraint. Says Sanjay Verma of Cushman & Wakefield, “Some developers are not minding delaying projects as they feel a reduced supply of homes will help them sustain prices in the face of slowing demand.”

In such cases, early buyers in the project are surely going to suffer as they will have to wait for a much longer time for delivery of their dream homes. Verma feels the scenario in real estate is unlikely to improve for at least one year as interest rates are expected to remain high.

There are rumours that a Delhi based real estate developer is going down and is badly in debt.

Is America headed towards Japanese fate of 1990's? Housing bust = Stagflation

Will America follow Japan into a decade of stagnation?

AS FALLING house prices and tightening credit squeeze America’s economy, some worry that the country may suffer a decade of stagnation, as Japan did after its bubble burst in the early 1990s. Japan’s property bubble was also fuelled by cheap money and financial liberalisation and—just as in America—most people assumed that property prices could not fall nationally. When they did, borrowers defaulted and banks cut their lending. The result was a decade with average growth of less than 1%.

Most dismiss the idea that America could suffer the same fate as Japan, but some of the differences are overstated. For example, some claim that Japan’s bubble was much bigger than America’s. Yet average house prices nationwide rose by 90% in America between 2000 and 2006, compared with a gain of 51% in Japan between 1985 and early 1991, when Japanese home prices peaked (see left-hand chart). Prices in Japan’s biggest cities rose faster, but nationwide figures matter more when gauging the impact on the economy. Japanese home prices have since fallen by just over 40%. American prices are already down by 20%, and many economists reckon they could fall by another 10% or more.

What about commercial property? Again, average prices rose by less in Japan (80%) than in America (90%) over those same periods. Thus Japan’s property boom was, if anything, smaller than America’s. Japan also had a stockmarket bubble, which burst a year earlier than that in property. This hurt banks, because they counted part of their equity holdings in other firms as capital. But its impact on households was modest, because only 30% of the population held shares, compared with over half of Americans.

Nor were Japanese policymakers any slower than American ones to cut interest rates and loosen fiscal policy after the bubble burst, contrary to popular misconceptions. The Bank of Japan (BoJ) began to lower interest rates in July 1991, soon after property prices began to decline. The discount rate was cut from 6% to 1.75% by the end of 1993. Two years after American house prices started to slide, the Fed funds rate has fallen from 5.25% to 2% (see right-hand chart). A study by America’s Federal Reserve concluded that Japanese interest rates fell more sharply in the early 1990s than required by the “Taylor rule”, which establishes the appropriate rate using the amount of spare capacity and inflation

Japan also gave its economy a big fiscal boost. The cyclically adjusted budget deficit (which excludes the automatic impact of slower growth on tax revenues) increased by an annual average of 1.8% of GDP in 1992 and 1993—similar to America’s budget boost this year. Japan’s monetary and fiscal stimulus did help to lift the economy. After a recession in 1993-94, GDP was growing at an annual rate of around 2.5% by 1995. But deflation also emerged that year, pushing up real interest rates and increasing the real burden of debt. It was from here on that Japan made its biggest policy mistakes. In 1997 the government raised its consumption tax to try to slim its budget deficit. And with interest rates close to zero, the BoJ insisted that there was nothing more it could do. Only much later did it start to print lots of money.

America’s inflation rate of above 5% is an advantage. Not only are real interest rates negative, but inflation is also helping to bring the housing market back to fair value with a smaller fall in prices than otherwise. But in another way America is more exposed than Japan was. When its bubble burst in 1991, Japan’s households saved 15% of their income. By 2001 saving had fallen to 5%, which helped to prop up consumer spending. America’s saving rate of close to zero leaves no such cushion.

Over the past year, American banks have been quicker than those in Japan in the 1990s to disclose and write off losses and raise new capital. In Japan it took a long while before the political will was there to use taxpayers’ money to plug the banking system. A big test for America’s Treasury will be how quickly it recognises the need to nationalise Fannie Mae and Freddie Mac, the teetering mortgage giants.

One advantage over Japan is that America is spreading the costs of its housing bust across other countries. Foreigners hold a large slice of American mortgage-backed securities. Sovereign-wealth funds have provided new capital for American banks. And America’s booming exports have helped to support its economy, thanks to the cheap dollar. In contrast, the yen’s sharp appreciation after Japan’s bubble burst hurt exports at the same time as domestic demand was being squeezed.

By learning from Japan’s mistakes, America can avoid a dismal decade. However, it would be arrogant for those in Washington, DC, to assume that Japan’s troubles simply reflected its macroeconomic incompetence. Experience in other countries shows that serious asset-price busts often lead to economic downturns lasting several years. Only a wild optimist would believe that the worst is over in America.