Real Estate Update

Indian realty majors have been reeling under a severe cash crunch for a long time now. Will the crisis subsiding (atleast seeming to subside), real estate players have started taking prudent measures to improve their financial condition. Capital Intensive projects have been scrapped/ deferred and affordable housing has become the buzz word.

Players are looking at deleveraging their business with asset monetisation and equity stake sales. Sobha is looking at raising PE funds (in talks with Actis, JPMorgan, and IL&FS Private Equity), DLF is planning to sell its non core assets, Unitech has done a QIP, Parsvnath is planning a 2500 crore QIP and others have been also been following the same path.

With prices down ~30% from the peak, genuine buyers are returning to the market, albeit only in the housing segment. In the last three months, Unitech and DLF have sold 3.2msf and 2.5msf of launched properties. Demand is bound to accelerate over the next 12 months as the economy revives and interest rates stay soft, though commercial demand would come only after the

oversupply is absorbed.

Rentals at Saket for commercial/ retail property have fallen to Rs 120 (who would have imagined that last year). In Gurgaon, rates for new apartments have been cut by over 30% by builders. A lot of construction activity seems to have restarted with the realty players having consolidated their finances.

However, there is a lot of dirt and debt in the balance sheet of most of the realty players which will need prudent financial decisions to clear. Real estate is still away from recovering. Real estate stocks though have shown a decent bounceback in the recent rally of the Sensex. Most of the stocks are up over 50% from its March lows.

The IPO market has seen some activity with Mahindra Holidays coming out with a public offering at a conservative price. The issue has been subscribed 20% on the first day itself, though the pre IPO placement to SBI and Jacob Ballas have taken a 32% haircut on their price!

Education sector the next target for Real Estate players!

At a time when the biggies of real estate are divesting non core businesses, a clutch of mid-level developers are chalking up plans to invest in the ‘recession proof’ education sector. In the last one month, four real estate developers have announced plans of setting up business schools across the country with the combined investment exceeding Rs 500 crore. The Chennai based R. R Industries, Ahmedabad based Omega Realty, Delhi based Ansal Plaza and Kolhapur based Sanjay Ghodawat group are betting heavily on the `business of education’ to diversify their businesses; a model that has worked successfully in some countries like US and Canada.

With diminished demand for housing and a cash constraint, it’s a natural progression for many developers with available land banks. The reason for the rush into education is the burgeoning demand supply gap and also a logical extension into an adjacent category for builders who have the necessary wherewithal.

Ansal has tied up with Educomp and has leased out its three operational schools in Gurgaon to Educomp. The realty major also plans to build school in townships being developed by them. Similarly, the Ahmedabad based Omega Realty plans to get into business schools - to be named as United World School of Business - with a proposed investment of Rs 105 crores. The three proposed schools in Mumbai, Delhi and Ahmedabad will commence operations in academic session 2009-10.

Sanjay Godhwat Group plans to offer courses in engineering, management and also in the pipeline is an international school. The development of the 150 acre Sanjay Godhwat Institute will happen in three phases with an investment of over Rs 250 crore. The trend is being seen amongst the builders in south too. Chennai based real estate firm R. R Industries has tied up with National Management School (NMS) which is being set-up by US academics to start 25 business schools across the country with an estimated cost of Rs 9 crore.

It is only time before which the biggies, i.e, DLF, Unitech, Sobha get into education.

DLF surrenders 5 IT/ ITES SEZs

Notwithstanding, the relief rally in the stock market , the real estate sector has not much to cheer about yet. The country's largest property firm DLF which has been facing credit crunch like most of its smaller peers, is now said to have approached the government to surrender five of its nine IT-ITeS notified special economic zones (SEZ), according to a PTI report quoting a senior Commerce Ministry official.

As per the SEZ Act, the tax-free enclaves cannot be surrendered once they become operational. DLF, however, has not started work on the five SEZs that it wants to surrender. Its nine notified SEZs are located in various states. 

According to official data, the land bank of DLF's nine notified SEZs include 10.61 hectares near Hyderabad, 10.12 hectares in Gandhinagar, 12.06 hectares and 10.73 hectares in Gurgaon, 10.24 hectares in Sonepat, 10.33 hectares in Pune, 10.23 hectares in Bhubaneswar, 13.29 hectares in Kanchipuram and 10.48 hectares in Kolkata. It is not clear which SEZs are now sought to be cancelled.

Realty firms have been facing credit crunch which had forced them to shelve some projects. DLF had earlier surrendered its 40-acre IT SEZ in central Delhi and Parsvanath had put on hold its 12 IT/ITeS SEZ projects.

The government has till date given formal approval to 571 SEZ projects and notified about 270. Firms cutting across sectors rallied to announce SEZ projects when the economy was growing very fast and stock markets were on a high. Many analysts saw it as a mere strategy to profit by procuring cheap land to be sold later.

It all changed last year after the market crash followed by serious liquidity problem. Most of the promoters of SEZs have either dropped plans of further development or postponed plans indefinitely as there are no takers for setting up greenfield units in these zones nor are there lenders who are ready to provide debt.

Personal Financial Planning!

At what stage in life where should the money go and how best to plan my taxes.

1. Don’t confuse investments with tax planning. First decide in which financial instrument you want to park your money. This is because whether you want insurance, property, FD/bonds or mutual funds, there is always some tax saving instrument to help you.

2. At any given point of time have liquid assets to cover for 6 months of expenses. This could be parked in savings bank, or FDs or other financial instruments that can be prematurely encashed instantly without attracting much penalty. This cash often comes handy when you are between jobs, during emergencies esp. medical and when family/friends need you. I strongly advise that an individual should not dip into it and also refrain from any long term investments until this reserve has been created.

3. Work towards reducing your loans. If you have a education loan which costs you more than the Bank Fixed deposit (even after accounting for the tax break it provides) then it is advisable to retire it before doing any financial planning.

4. I would recommend you to keep your personal finances separate from that of the parents. However, what good of is all the money if it is not there for those who need it, when they need it. If your parents/family needs money or has taken a high cost debt, work towards retiring that.

5. After taking care of all these, I would recommend you to read this amazing book “Rich Dad, Poor Dad”. This simple book gives a remarkably different insight about how one should classify various assets and investment options.

Now some serious stuff……. 
6. FDs are a good place to park the money. You can be sure that your money is safe and will be there when you need it. However the returns this generates is hardly sufficient and inflation eats into it. Hence One should invest in the Stock Market linked instruments (Shares, Mutual Funds, ULIPs etc.) Early on when your savings are small and risk appetite sufficient, then one should park upto 50% of the money these instruments.
However it is also advisable to reduce it as you age. The best way I found is to put an artificial cap of 3 years of Salary on your Market portfolio. 3 years of salary is large enough that it will be a substantial part of your investment. Yet at 15% p.a. expected returns, it won’t be able to generate half of what you earn from 8-10 hours of labor. Hence the market performance will not be a major distraction from work.

7. Now comes property/home: Some people who want to take less risk want to buy a property immediately after graduating. However I would recommend you to push off this decision by a couple of years. The reason for this is that even if land prices don’t fall, it often involves taking a EMI on floating rate. With EMI payments exceeding 50% of the salary, the financial flexibility one has to cope up with unexpected events is severely limited. Once you have sufficient savings and/or a working spouse, then investing in property is advised.

8. Insurance: It is one of the most mis-sold financial instrument. An insurance is neither an investment avenue, nor a tax saving instrument. It is taken to enable a person to take care of the unexpected. The best times in life to buy a life insurance are:
a. When you take a long term loan (for property/education etc.)
b. Marriage (esp. to a non working home-maker)
c. Planning for Kids
Also whenever possible, please buy Term Insurance (huge insurance cover for a small premium) and medical insurance.

So to summarize we have covered liquid assets, market linked portfolio, property and insurance. Last is tax.

9. Most tax savings happen under 80c. If you buy an insurance, its contributes under this segment.
If you plan to go for bonds: then NSC, Infrastructure bonds, PPF are few of the avenues
If you want to invest in market then ELSS (Equity Linked Savings Scheme)
If you want to invest in property then Home Loans give you tax shields.
Hence you should first look into what lock in period you are looking for and what risk/return profile you fall into and then select the tax saving instrument accordingly.

I hope this really long and boring post helps. How different is your investment philosophy?

Got this off a blog that I follow...Hope it helps

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!