Good news in the time of terror attacks, recession and slowing Indian economy! Inflation fell sharply from 8% last week to 6.84%. Experts believe that inflation number may reach 4-5% by June 2009. Though bankers may not be too happy about cutting rates now and then, let's not forget that general election is in May 2009. Government might force public sector banks to lower PLRs.
Shall we gear up for another round of rates cut from RBI?
Friday, December 19, 2008
Thursday, December 18, 2008
Real Estate Industry Bailout
Rohtas Goel, CMD, Omaxe, said unsold property to the tune of Rs 20,000–25,000 crore remains stuck in the country. On the new interest rate regime, Goel said his company was not catering to the under-Rs 20 Lakhs category but added that it could start catering to the segment. “So we will not get any benefit out of this package which has come right now.” He added, “to promote the housing sector and to promote the affordable housing sector, we expected a little more from the government. The rate of interest for loans up to Rs 5 Lakhs should have been at 6.5%. The rate of interest up to Rs 30 Lakhs — and not up to Rs 20 Lakhs (as is currently given) — should be around 7.5%." Goel added that even as many developers were increasingly looking to focus on affordable housing, what happens to the existing projects that are stick now remains to be seen. “To bail out those projects, we need loans up to Rs 30 Lakhs come at a single-digit interest rate.”
Pradeep Jain, Chairman, Parsvnath Developers Ltd, echoed Goel’s views. “The bankers not charging any processing fee for loans up to Rs 5 Lakhs and minimum fee for up to Rs 20 Lakhs is a very welcome move,” he said, adding, “But even the current interest rate regime of 8.5% and 9.25% for the two brackets is too high. The industry was expecting an interest rate of about 6% for loans up to Rs 5 Lakhs.” Jain added that the Rs 5–Rs 20 Lakhs segment should be extended to Rs 30 Lakhs at the upper end. “At the same time, the government also needs to re-look at the interest rates beyond Rs 30 Lakhs. The rate of interest there needs to be cut to single digit,” he said.
Pradeep Jain, Chairman, Parsvnath Developers Ltd, echoed Goel’s views. “The bankers not charging any processing fee for loans up to Rs 5 Lakhs and minimum fee for up to Rs 20 Lakhs is a very welcome move,” he said, adding, “But even the current interest rate regime of 8.5% and 9.25% for the two brackets is too high. The industry was expecting an interest rate of about 6% for loans up to Rs 5 Lakhs.” Jain added that the Rs 5–Rs 20 Lakhs segment should be extended to Rs 30 Lakhs at the upper end. “At the same time, the government also needs to re-look at the interest rates beyond Rs 30 Lakhs. The rate of interest there needs to be cut to single digit,” he said.
Wednesday, December 17, 2008
Realtors want more
Reacting to the the announcement by PSU banks to cut home loan interest rates for small-ticket housing, Sanjay Chandra, MD of Unitech, said the company doesn’t have any benefits on the reduction in interest rates for loans up to Rs 5 lakhs. The good part, Chandra said, was the reduction in rates for the Rs 5–Rs 20 lakhs bracket, “the affordable housing segment, which most developers have been focusing on for the last few months and are looking to expand in.” “It is a big benefit — the rates coming down, no processing fees as well as the fixed nature of it because a lot of people didn’t like the uncertainty with the way interest rates were moving. So I think the fixed rate and also the only option possibility of downward revision is a good thing for the sector and for us in general,” Chandra added.
Reflecting back on what went wrong with the real estate story, Chandra said, “One of the biggest things that were affecting business was rising interest rates and of course the rising property prices, which took away affordability.” With property prices not rising anymore and interest rates coming down, he said real estate companies will now get real, end-user buyers. “This home loan package by the public-sector banks, which is valid till June, will encourage a lot of people to buy within that time frame. The next few months could be fairly good for the sector.”
Reflecting back on what went wrong with the real estate story, Chandra said, “One of the biggest things that were affecting business was rising interest rates and of course the rising property prices, which took away affordability.” With property prices not rising anymore and interest rates coming down, he said real estate companies will now get real, end-user buyers. “This home loan package by the public-sector banks, which is valid till June, will encourage a lot of people to buy within that time frame. The next few months could be fairly good for the sector.”
Monday, December 15, 2008
What does 2009 holds for the sector?
Good news for both industry and buyers! Inflation has come down from its October high of 13% to 8%. RBI since then has announced a series of rates cut- Repo rate has been reduced by over 200bp, while Reverse repo rate saw a 100bp decrease. CRR too was reduced by 150bp to inject liquidity in the market.
Today, which is December 15th 2008, as I write this article, public sector banks hold a press conference to announce major rates cut and other measures to boost real estate sector. The highlights of today’s meeting were:
• Rate for home loans up to Rs 5 lakhs will not be more than 8.5%
• Five-year fixed rate terms on up to Rs 5 lakhs home loans
• Banks to take 10% margin on home loan of up to Rs 5 lakhs
• No process, prepayment fees for home loans
• Home loan rate under package can fall if rates fall more, which is likely to happen
• Home loan of Rs 5-20 lakhs for maximum 20 years at 9.25%
• India banks’ margin for Rs 5-20 lakhs loan will be 15%
• India state-run banks will offer free life insurance cover for home loans
These new home loan rates will be effective Monday, December 15, 2008 and expire on June 30, 2009. This has come as good news to some developers while rest felt disappointed. DLF and Unitech have good presence in sub-20 Lakhs housing segment, which is also called “Affordable Housing”. Those operating in “affordable housing” hailed these rates cuts. Sanjay Chandra, MD of Unitech, said “It is a big benefit — the rates coming down, no processing fees as well as the fixed nature of it because a lot of people didn’t like the uncertainty with the way interest rates were moving. So I think the fixed rate and also the only option possibility of downward revision is a good thing for the sector and for us in general.” This might force and encourage other developers to focus on affordable housing. But the existing home loan borrowers felt dejected because these rates are applicable to new loans only.
However, these measures may not revive the flagging sector conditions because a majority of residential projects cost above Rs. 40 Lakhs i.e. where loans are above Rs. 25-30 lakhs. Industry insiders say that unsold property to the tune of Rs 20,000–25,000 Crores remains stuck in the country. Unless these properties are sold first, developers may not launch new projects or finish the under construction ones. To give a boost to this, developers are demanding an interest rates in the range of 7-8% i.e. back to the days of 2005.
With falling crude prices and global recession, Inflation should come down to the level of 5-6% by June 2009 end. So expect RBI to cut rates further by 100-150bp which we will bring the interest rates in single digit. This will give the much needed boost to the industry. Buyers, who are right now playing wait and watch game, will go for cheaper home loans. Expect another cut in prices in the month of January or February by developers who desperately want to flush out their inventories. More so costs of construction have come down by 10-15% due to decrease in prices of cement and steel. This cost should be passed on the customers as well. I will surely bet my money on real estate companies, especially bigger ones like DLF, Brigade and Unitech.
Today, which is December 15th 2008, as I write this article, public sector banks hold a press conference to announce major rates cut and other measures to boost real estate sector. The highlights of today’s meeting were:
• Rate for home loans up to Rs 5 lakhs will not be more than 8.5%
• Five-year fixed rate terms on up to Rs 5 lakhs home loans
• Banks to take 10% margin on home loan of up to Rs 5 lakhs
• No process, prepayment fees for home loans
• Home loan rate under package can fall if rates fall more, which is likely to happen
• Home loan of Rs 5-20 lakhs for maximum 20 years at 9.25%
• India banks’ margin for Rs 5-20 lakhs loan will be 15%
• India state-run banks will offer free life insurance cover for home loans
These new home loan rates will be effective Monday, December 15, 2008 and expire on June 30, 2009. This has come as good news to some developers while rest felt disappointed. DLF and Unitech have good presence in sub-20 Lakhs housing segment, which is also called “Affordable Housing”. Those operating in “affordable housing” hailed these rates cuts. Sanjay Chandra, MD of Unitech, said “It is a big benefit — the rates coming down, no processing fees as well as the fixed nature of it because a lot of people didn’t like the uncertainty with the way interest rates were moving. So I think the fixed rate and also the only option possibility of downward revision is a good thing for the sector and for us in general.” This might force and encourage other developers to focus on affordable housing. But the existing home loan borrowers felt dejected because these rates are applicable to new loans only.
However, these measures may not revive the flagging sector conditions because a majority of residential projects cost above Rs. 40 Lakhs i.e. where loans are above Rs. 25-30 lakhs. Industry insiders say that unsold property to the tune of Rs 20,000–25,000 Crores remains stuck in the country. Unless these properties are sold first, developers may not launch new projects or finish the under construction ones. To give a boost to this, developers are demanding an interest rates in the range of 7-8% i.e. back to the days of 2005.
With falling crude prices and global recession, Inflation should come down to the level of 5-6% by June 2009 end. So expect RBI to cut rates further by 100-150bp which we will bring the interest rates in single digit. This will give the much needed boost to the industry. Buyers, who are right now playing wait and watch game, will go for cheaper home loans. Expect another cut in prices in the month of January or February by developers who desperately want to flush out their inventories. More so costs of construction have come down by 10-15% due to decrease in prices of cement and steel. This cost should be passed on the customers as well. I will surely bet my money on real estate companies, especially bigger ones like DLF, Brigade and Unitech.
Sunday, December 7, 2008
RBI rates cut since October 2008
October
On October 6, 2008 the Reserve Bank of India announced a reduction of the cash reserve ratio (CRR) for scheduled banks by 50 basis points to 8.5 per cent of net demand and time liabilities (NDTL) with effect from the fortnight beginning October 11, 2008. No change in repo and reverse repo rate
October 10, 2008 RBI decided to reduce CRR by 150 basis points to 7.50 per cent of NDTL with effect from the fortnight beginning October 11, 2008 instead of the 50 basis points reduction announced on October 6, 2008 i.e. an additional 100bp reduction in CRR after October 6.
On October 20, 2008 RBI announced a reduction in the repo rate under the Liquidity Adjustment Facility (LAF) by 100 basis points from 9.0 to 8.0 per cent.
November
On November 1, 2008 RBI took following measures:
1. Reduce the repo rate under the Liquidity Adjustment Facility (LAF) by 50 basis points to 7.5 per cent with effect from November 3, 2008
2. The cash reserve ratio (CRR) of scheduled banks is reduced by 100 basis points from 6.5 per cent to 5.5 per cent of net demand and time liabilities (NDTL). This will be effected in two stages: by 50 basis points retrospectively with effect from the fortnight beginning October 25, and by a further 50 basis points prospectively with effect from the fortnight beginning November 8, 2008
3. RBI has also lowered the statutory liquidity ratio (SLR) by 100 basis points to 24 per cent
December
On December 6th, RBI further announced rates cut. The short-term lending rate (repo) will fall from 7.5% to 6.5% and borrowing (reverse repo) rate to 5 per cent with effect from December 8. RBI has since October reduced the short-term lending rate by 250 basis points. After several months, the central bank has slashed the reverse repo to 5 per cent. The RBI, however, did not change cash reserve ratio, the amount of deposits which banks are required park with the apex bank.
Current Rates Figure
CRR = 5.5%
Repo Rate = 6.5%
Reverse Repo Rate = 5%
On October 6, 2008 the Reserve Bank of India announced a reduction of the cash reserve ratio (CRR) for scheduled banks by 50 basis points to 8.5 per cent of net demand and time liabilities (NDTL) with effect from the fortnight beginning October 11, 2008. No change in repo and reverse repo rate
October 10, 2008 RBI decided to reduce CRR by 150 basis points to 7.50 per cent of NDTL with effect from the fortnight beginning October 11, 2008 instead of the 50 basis points reduction announced on October 6, 2008 i.e. an additional 100bp reduction in CRR after October 6.
On October 20, 2008 RBI announced a reduction in the repo rate under the Liquidity Adjustment Facility (LAF) by 100 basis points from 9.0 to 8.0 per cent.
November
On November 1, 2008 RBI took following measures:
1. Reduce the repo rate under the Liquidity Adjustment Facility (LAF) by 50 basis points to 7.5 per cent with effect from November 3, 2008
2. The cash reserve ratio (CRR) of scheduled banks is reduced by 100 basis points from 6.5 per cent to 5.5 per cent of net demand and time liabilities (NDTL). This will be effected in two stages: by 50 basis points retrospectively with effect from the fortnight beginning October 25, and by a further 50 basis points prospectively with effect from the fortnight beginning November 8, 2008
3. RBI has also lowered the statutory liquidity ratio (SLR) by 100 basis points to 24 per cent
December
On December 6th, RBI further announced rates cut. The short-term lending rate (repo) will fall from 7.5% to 6.5% and borrowing (reverse repo) rate to 5 per cent with effect from December 8. RBI has since October reduced the short-term lending rate by 250 basis points. After several months, the central bank has slashed the reverse repo to 5 per cent. The RBI, however, did not change cash reserve ratio, the amount of deposits which banks are required park with the apex bank.
Current Rates Figure
CRR = 5.5%
Repo Rate = 6.5%
Reverse Repo Rate = 5%
Friday, November 21, 2008
Developers to cut prices by 5-10%
Good news for property buyers! Mr. Rohtas Goel, President of National Real Estate Development Council (NAREDCO) and CMD of Omaxe, announced that real estate developers have decided to reduce the prices by 5-10% across the country. He said that this move will attract buyers who were just waiting for price reduction from developers into the market. Prices of apartments which cost over Rs. 1 crore will come down by 10% while those of affordable houses, in the range of Rs. 20 Lakhs to Rs. 40 Lakhs, will see a modest cut of 5%. They can not drop prices further because developers are already operating at a lower margin thanks to exorbitant land and commodity prices.
However, the big question to ask: Is it enough to attract buyers? hmmm..may be not. Property prices have zoomed to above 100-200% in the last 3 years and have become unaffordable to majority of middle class buyers. The rising interest rates have even more discouraged buyers from looking for properties. Even if interest rates come down from 14% to 11-12%, how many people will like to apply for new home loans or invest in properties in this gloomy world economy and uncertain environment? With private banks resisting to drop PLR and buyers not willing to look for loans, things may not be turn out to be the way developers want. This would be interesting to see how coming months unfolds for the industry.
However, the big question to ask: Is it enough to attract buyers? hmmm..may be not. Property prices have zoomed to above 100-200% in the last 3 years and have become unaffordable to majority of middle class buyers. The rising interest rates have even more discouraged buyers from looking for properties. Even if interest rates come down from 14% to 11-12%, how many people will like to apply for new home loans or invest in properties in this gloomy world economy and uncertain environment? With private banks resisting to drop PLR and buyers not willing to look for loans, things may not be turn out to be the way developers want. This would be interesting to see how coming months unfolds for the industry.
Wednesday, November 19, 2008
FM asks for price cuts; industry ignores
Yesterday, Finance Minister Mr. P. Chidambaram requested industry leaders from automobiles, airlines and real estate to cut prices to boost demand. However, industry leaders have declined to do so or are not committal on the proposal. Mr. Rahul Bajaj, Cahirman Bajaj Auto, said that the two wheeler industry operates at a low margin of 4-5%; hence, it is not possible for them to reduce prices. Even car manufactures are not interested in reducing prices because the current inventories with them and dealers were manufactured at a time when commodity prices were high. They said that only interest rates cut could boost demand in the market.
Real estate firms too have same problems. The current inventories of cement and steel were purchased at a time when raw materials were quite expensive. Hence, they can not sell their properties at a steep discount. It might take few months for the construction costs to come down. Also, they are of the opinion that buyers would not be interested in properties unless interest rates come down to the level of 8-9% from the existing level of 13-14%. Higher interest rates have kept buyers away from the market.
What I believe is that a mix of rates cut and price reduction is the need of the hour. Even buyers with enough cash are not willing to buy houses because they believe prices are either too high or prices may come down soon! Both buyers and developers would be locked in a bridge game for a while!
Real estate firms too have same problems. The current inventories of cement and steel were purchased at a time when raw materials were quite expensive. Hence, they can not sell their properties at a steep discount. It might take few months for the construction costs to come down. Also, they are of the opinion that buyers would not be interested in properties unless interest rates come down to the level of 8-9% from the existing level of 13-14%. Higher interest rates have kept buyers away from the market.
What I believe is that a mix of rates cut and price reduction is the need of the hour. Even buyers with enough cash are not willing to buy houses because they believe prices are either too high or prices may come down soon! Both buyers and developers would be locked in a bridge game for a while!
Tuesday, November 18, 2008
Dip in realty index and real estate stocks since Jan 2008
Decline from 2008 highs (%)
Realty index -86.6843
DLF -81.6571
Indiabulls realestate -88.1458
Puravankara -90.148
Omaxe -90.9091
Ansal Prop -91.3448
Sobha developers -91.3793
Unitech -92.575
Parsvnath -93.495
Realty index -86.6843
DLF -81.6571
Indiabulls realestate -88.1458
Puravankara -90.148
Omaxe -90.9091
Ansal Prop -91.3448
Sobha developers -91.3793
Unitech -92.575
Parsvnath -93.495
Friday, November 14, 2008
Bangalore Property Values
Residential Property Values (Rs. Per sq. ft.)
| Location | Oct 2008 | Jan 2008 | Oct 2005 |
| South | 5,000-9,000 | 4,500-7,000 | 2,900-5,200 |
| South East | 3,000-5,000 | 2,500-3,100 | 1,500-2,500 |
| South West | 3,000-4,500 | 2,800-4,000 | 1,200-2,500 |
| East | 2,800-3,900 | 2,500-2,800 | 1,200-1,800 |
| North | 2,700-3,800 | 2,500-3,000 | 1,200-1,800 |
| North West | 4,200-6,000 | 4,000-5,000 | 2,500-3,500 |
| Central I | 6,000-8,400 | 6,000-8,000 | 3,500-5,500 |
| Central II | 3,900-6,000 | 3,000-4,500 | 2,000-3,500 |
You can see that properties prices have increased by over 100%-150% in the last 3 years depending upon the location. The highest increase has been in South Bangalore due to excess demand by IT professionals residing in these areas. In the last few month land prices have started falling though the fall is not as high as it is for apartments. Developers may not openly admit it but once you are on the negotiating table they are willing to reduce prices. Table above reflects only the prices which developers are quoting openly. Be rest assure that actual prices are around 10-15% below those numbers. Land prices may not come down significantly because of acute shortage of prime properties. This proves the fact that India is a land of opportunities- without any land! Bangalore has an abysmal average FSI of 1.6 which has led to poor development of residential properties across the city. Hence, most of the prime land have single or double storey building or houses. In coming few weeks, you may see significant drop in property prices even from big developers like Sobha, Brigade and DLF, who till now have resisted price reduction.
Retail Property Rental Values (Rs. Per sq. ft. per month)
| Location | Oct 2008 | Jan 2008 | Oct 2005 |
| Koramangala | 375-450 | 400-500 | 200-225 |
| M.G.Road | 175-250 | 200-250 | 100-150 |
| Brigade Road | 300-380 | 320-360 | 150-200 |
| Cunningham Road | 180-225 | 200-250 | 100-150 |
| Commercial Street | 200-250 | 175-225 | 100-150 |
| Vittal Mallya Road | 300-350 | 350-400 | 150-225 |
| Indiranagar | 200-250 | 250-300 | 100-150 |
Good news for retailers! Rental prices have decreased due to a mix of excess supply and lower demand. I believe this is the best time for retailers to engage in long term contract with developers at a lower rate. The developers, who are facing huge financial problem, would be more than happy to do so. Expect another series of price correction soon.
Commercial Property Rental Values (Rs. Per sq. ft. per month)
| Location | Oct 2008 | Jan 2008 | Oct 2005 |
| CBD | 80-85 | 70-75 | 30-35 |
| Suburbs | 50-55 | 45-50 | 25-30 |
| Peripheral Whitefielf | 35-50 | 40-50 | 20-25 |
| Peripheral E-City | 25-30 | 25-30 | 12-15 |
| Outer Ring Road | 45-50 | 40-45 | 20-25 |
IT firms consumes over 80% of commercial/office spaces in Bangalore. With the economic slowdown across the world, IT sector has taken a severe beating. Businesses are down and so is the demand for office space. There may not be much addition of commercial space in Bangalore in the next 6-12 months due to global slowdown. Our research shows a drop in demand by over 60%. Realty firms may not undertake new projects in the coming months especially on Outer Ring road where there is already an excess supply of properties.
For the above table, I categorized different zones such as East and South based on following locations.
• South Bangalore includes Kormangala, Jakasandra
• South East Bangalore includes Sarjapur Road, Outer Ring Road, HSR Layout
• South West Bangalore includes Jayanagar, JP Nagar, Kanakpura Road, Bannerghatta Road, BTM Layout
• East Bangalore includes Marathhalli, Whitefiled, Airport Road
• North Bangalore includes Hebbal, Bellary Road, Yelahanka, Dodballapur Road
• North West Bangalore includes Malleshwaram, Rajajinagar
• Central I Bangalore includes Brunton Road, Artillery Road, Ali Askar Road, Cunningham Road
• Central II Bangalore includes Frazer Town, Benson Town, Richards Town, Dollars Colony, Indiranagar
• Suburbs includes Kormangala, Indiranagar, CV Raman Nagar
Sources
ABN Amro Research Reports
Cushman & Wakefield
Deutsche Bank Research Reports
Sunday, November 9, 2008
Good time for retailers?
With the prices coming down, I believe this is a great opportunity for retail companies to expand their footprints. Commercial property prices and rentals have come down in all metros. They should plan to lock-in their ventures with the developers for the next few years. This would help them to improve their profit margin due to lower rentals until they are able to achieve decent economy of scale.
Thursday, November 6, 2008
Price corrections on its way?
I believe poor demand for properties, higher interest rates and US slow down is significantly hurting real estate developers. I attended Bangalore Real Estate Expo on October 25 & 26 and unfortunately found poor response from :( My analyst friends in Mumbai told me that there were no bidders for MMRDA's Wadala Land and Railways properties as well. Investors believe property rates are too high in this uncertain and slowing economy. Even IT/ITES firms, who are the biggest consumers of commercial properties, have reduced hiring by over 50% and not looking for newer properties. I believe there would be lower consumption of both residential and commercial properties in the next couple of years, much below the estimate of developers. This has already led to a miss match between demand and supply. Hence, prices has to come down if developers do not want to hold on to their properties (inventories) forever.
I spoke to several Tier-2 &3 developers at Bangalore Expo who admitted to reducing rates by Rs. 200-300 per sq. ft. on their properties in South Bangalore. Same was true with those who were launching projects in other areas of Bangalore. Many developers are offering freebies such as cars, plasma TV, and wood work. One developer was offering Honda Civic on his 1 crore+ property in Electronic City! Big boys like Mantri Realty and Brigade haven't lowered the prices till date. I spoke with an analyst in Mumbai who said property prices have already come down by 5% in some areas but not everwhere. He said the market should see many distressed assets in near future as many of youngsters are fully leveraged and if they see any cut in salary or loose job, it would be difficult for them to servive. This will be another harsh reality if there is slowdown in our economy or corporates trim employees in future.
Another important factor that I would like to discuss is the financial condition of real estate developers. Most of them are over leveraged i.e. have huge amount of debt that they raised to fund their aggressive growth. Nobody even in his wildest dream would have imagined of this bleak scenario a year back, when our developers were busy planning and launching projects after projects. With the slowdown in the demand, developers will face severe pressure to honor their interest payments on debt. They have to trigger the demand by lowering prices in this higher interest rate environment, if they do not want to default on the payments. However, big firms so far have resisted the idea of lowering prices. I find this strategy quite strange because this might aggravate the situation even further. They are willing to hold on to inventories with high cost debts , hoping markets to improve further. But once they start defaulting on debt payouts they will have to offload or dump the inventory in the markets leading to chain reaction and a overall loss of confidence.
I spoke to several Tier-2 &3 developers at Bangalore Expo who admitted to reducing rates by Rs. 200-300 per sq. ft. on their properties in South Bangalore. Same was true with those who were launching projects in other areas of Bangalore. Many developers are offering freebies such as cars, plasma TV, and wood work. One developer was offering Honda Civic on his 1 crore+ property in Electronic City! Big boys like Mantri Realty and Brigade haven't lowered the prices till date. I spoke with an analyst in Mumbai who said property prices have already come down by 5% in some areas but not everwhere. He said the market should see many distressed assets in near future as many of youngsters are fully leveraged and if they see any cut in salary or loose job, it would be difficult for them to servive. This will be another harsh reality if there is slowdown in our economy or corporates trim employees in future.
Another important factor that I would like to discuss is the financial condition of real estate developers. Most of them are over leveraged i.e. have huge amount of debt that they raised to fund their aggressive growth. Nobody even in his wildest dream would have imagined of this bleak scenario a year back, when our developers were busy planning and launching projects after projects. With the slowdown in the demand, developers will face severe pressure to honor their interest payments on debt. They have to trigger the demand by lowering prices in this higher interest rate environment, if they do not want to default on the payments. However, big firms so far have resisted the idea of lowering prices. I find this strategy quite strange because this might aggravate the situation even further. They are willing to hold on to inventories with high cost debts , hoping markets to improve further. But once they start defaulting on debt payouts they will have to offload or dump the inventory in the markets leading to chain reaction and a overall loss of confidence.
Tuesday, November 4, 2008
Banks to cut rates
Yesterday I wrote about the effect of RBI rates cut. I was wondering whether banks will cut rates or not. Today after the meeting between FM and bankers, public sector units have decided to reduce rates by up to 75bp. Moreover, FM promised to provide adequate liquidity to the real estate sector. RBI would soon take a decision on extending a line of credit of Rs 10,000 crore to the National Housing Bank to ensure that adequate funds were available for the housing sector. Privates banks such as ICICI and HDFC have hinted on lowering rates as well. This might has brought some smile on the faces of Mr. K.P. Singh and Mr. Chnadra who were active lobbying for the same.
These development gave positive news to the market. Investors showed interests in beleaguered real estate companies. The BSE Realty index turned best performer among sectoral indices, with a hefty rise of 12.14%. The next thing to ponder over is whether banks will lower risk aversion for developers.
These development gave positive news to the market. Investors showed interests in beleaguered real estate companies. The BSE Realty index turned best performer among sectoral indices, with a hefty rise of 12.14%. The next thing to ponder over is whether banks will lower risk aversion for developers.
Alternate funding for developers
Due to the ongoing crisis, the real estate sector has seen a 60% fall in the demand for properties. Banks are quite reluctant to lend loans to firms even for ongoing projects. Hence, developers are looking at alternative instruments of funding such as lease discounting for completing ongoing projects, especially the commercial ones.
Under a lease or rent discounting agreement, banks lend to developers for new projects against rents they directly realize for completed projects, which also is mortgaged with the bank. Thus, banks are assured of guaranteed cash flows and also have physical assets in case of defaults. Lease discounting is a much safer mode of lending, as the entire loan amount is covered through the rent agreement, and the banks are cushioned against defaults. The risk averse banks are more willing to lend under this arrangement as it is safe. Also, the rate of interest charged by banks for loan against rent, generally for a tenure of five-six years, is generally 1-2 per cent lower than the benchmark lending rate.
But the question remains how many banks are willing to lend to developers? Most of the bankers say that they have limited headroom for real estate sector and have already exhausted the stipulated limit for real estate lending.
Monday, November 3, 2008
RBI reduces rates - Lifeline for developers?
On Saturday, November 1st, RBI slashed CRR by 100bp and repo rate by 50bp. Will it help the developers or buyers? Lets examine this.
Real estate developers are struggling with a number of factors such as low demand, high interest rates and credit crunch. RBI's recent move to lower CRR and Repo rate may inject more than Rs. 60,000 crores in the market. But this may not percolate into a lower interest rates either for buyer or corporate. This is because of "risk aversion" attitude adopted by the banks. The yeild spread (difference between govt bond and AAA corporate bonds rating) is around 400bp, which is extremely high. This shows that banks are still wary of lending to corporates. Situation is worse for real estate companies which do not come under AAA rating. For example DLF's credit rating is AA, Omaxe's is A- whil other developers'ratings are BBB or less. This put them in extremely risky category pushing corporate borrowing rates of moe than 16%. Developers such as Unitech, HDIL, Omaxe, Orbit Corporation and Sobha Developers have borrowed aggressively in the last three years to support their ambitious expansion plans. Now they are facing a slowdown in the demand for the properties, which would serioussly affect their cash flows in the coming month. They are now over-leveraged; thus have limited option to raise debt.
So unless the risks aversion reduces, I see little chances of interest rates or corporate borrowing rates to come down. Moreover, banks have not decided on the lending rates yet. So RBI's recent move may or may not lower housing loans.
Real estate developers are struggling with a number of factors such as low demand, high interest rates and credit crunch. RBI's recent move to lower CRR and Repo rate may inject more than Rs. 60,000 crores in the market. But this may not percolate into a lower interest rates either for buyer or corporate. This is because of "risk aversion" attitude adopted by the banks. The yeild spread (difference between govt bond and AAA corporate bonds rating) is around 400bp, which is extremely high. This shows that banks are still wary of lending to corporates. Situation is worse for real estate companies which do not come under AAA rating. For example DLF's credit rating is AA, Omaxe's is A- whil other developers'ratings are BBB or less. This put them in extremely risky category pushing corporate borrowing rates of moe than 16%. Developers such as Unitech, HDIL, Omaxe, Orbit Corporation and Sobha Developers have borrowed aggressively in the last three years to support their ambitious expansion plans. Now they are facing a slowdown in the demand for the properties, which would serioussly affect their cash flows in the coming month. They are now over-leveraged; thus have limited option to raise debt.
So unless the risks aversion reduces, I see little chances of interest rates or corporate borrowing rates to come down. Moreover, banks have not decided on the lending rates yet. So RBI's recent move may or may not lower housing loans.
Real Estate - What next?
This is a terrible time for real estate developers, who have excess inventory, are short of capital and very low demand, but a great time for buyers with cash at their disposal. In a bearish market, where there is a poor demand for products, customer is the king! The same is true for property buyers. Remember the time when developers were asking exorbitant (ridiculous is the right word!) high prices for their properties. Their greed is over now but it is the time for YOU, the buyers, to be greedy.
This sector has already seen price corrections and will see another correction soon. Developers are in deep trouble because not only funds have dried up but also demand has gone down. People who booked properties this year are delaying or canceling their orders. These firms are facing acute problem of servicing their debt obligations (They raised huge capitals to fund their ambitious pan-India projects). There is some fear in the market that even big developers are on the verge of defaulting loan payments.
Bangalore Real Estate Expo-2008
I went to attend Real Estate Expo in Bangalore on October 25th and 26th. Mantri Developer was the only big developer out there while rests were Tier-2 and -3 developers, which had only couple of projects to their credit. As expected I found very few people compared to last year. It appeared to me that things are not going great for the big as well as local developers. Most of their completed projects are yet to be sold. If you remember the scene in the last few years, projects used to get sold the day it was launched! Alas, those days are over. When I spoke to these developers, however, none of them was willing to accept it. They appeared confident, at least were pretending to be, and optimistic about their new projects, which they were planning to launch soon. But, one thing was clear that most of their projects were behind schedule, at least by six months.
Do’s and Don’ts in the market
Ask for heavy discount on finished apartment. You could ask for up to 30% discount. Real estate developers are in deep red and will want to sell off all the finished products as soon as possible. However, buy ready to handover properties only. If you can delay your plan, wait for another 4 to 5 months. Prices would come down by another 15-20% over this period.
Do not buy any under construction property because the chances are high these developers may not have enough fund to complete these projects. Mid-tier developers are the worst affected because they may not have enough resources to fund their projects. Expect to see a delay of 2 to 3 years on most of the projects that were announced this year. “Over the night flyers” have quit the market and this is a great news for the consumers.
Employment scenario in the sector
Diwali sales are down amid the ongoing financial crisis. Buyers have adopted wait and watch approach which I believe is the right thing to do in the bear market. Some analysts believe the sector would see layoffs in the coming years. In the current scenario, developers can not sustain a huge workforce that was created during the boom time. So top realtors like DLF and Unitech might be forced to reduce their workforce by 5-10% to cut costs while mid-tier developers may layoff around 15-20% of their manpower. Moreover, executives at these firms got huge salary increments previous years which may now be reduced. There will be some effect on ancillary businesses as well. Consulting or Investment Banks or Private Equity firms which specialize in providing real estate specific advisory services would face the heat as well. So we will see lesser recruitment by these firms.
However, some analysts believe that there won’t be many layoffs in this sector because there is a scarcity of real estate professionals (compared to mature markets) in India. Second, new areas to work for especially for real estate i-banking people (REITS and real estate derivatives, the latter will take perhaps some more time). Third, fundamentals of Indian economy are still strong that will lead to higher growth, create more people with high disposable income, retail revolution, etc.
Outlook
The next couple of years would be slow for the industry. There is a genuine excess supply in the market which needs to be absorbed quickly to match it with the demand. This will lead to further price correction. Interest rates have started coming down which might ease some pressure on buyers’ shoulders to borrow from banks. This would give some boost to the demand for the residential properties. However, as long as there is a negative sentiment among buyers, both domestics and internationals, the demand would grow slowly, forcing speculators out of the market. The demand for commercial properties will depend on the outlook of US and European countries. If they go into deep recession, IT/ITES companies (which consumes 75% of commercial real estates) will have lesser growth and hence less demand for commercial space. Hence, both global as well as domestic factors will decide the future of industry.
This sector has already seen price corrections and will see another correction soon. Developers are in deep trouble because not only funds have dried up but also demand has gone down. People who booked properties this year are delaying or canceling their orders. These firms are facing acute problem of servicing their debt obligations (They raised huge capitals to fund their ambitious pan-India projects). There is some fear in the market that even big developers are on the verge of defaulting loan payments.
Bangalore Real Estate Expo-2008
I went to attend Real Estate Expo in Bangalore on October 25th and 26th. Mantri Developer was the only big developer out there while rests were Tier-2 and -3 developers, which had only couple of projects to their credit. As expected I found very few people compared to last year. It appeared to me that things are not going great for the big as well as local developers. Most of their completed projects are yet to be sold. If you remember the scene in the last few years, projects used to get sold the day it was launched! Alas, those days are over. When I spoke to these developers, however, none of them was willing to accept it. They appeared confident, at least were pretending to be, and optimistic about their new projects, which they were planning to launch soon. But, one thing was clear that most of their projects were behind schedule, at least by six months.
Do’s and Don’ts in the market
Ask for heavy discount on finished apartment. You could ask for up to 30% discount. Real estate developers are in deep red and will want to sell off all the finished products as soon as possible. However, buy ready to handover properties only. If you can delay your plan, wait for another 4 to 5 months. Prices would come down by another 15-20% over this period.
Do not buy any under construction property because the chances are high these developers may not have enough fund to complete these projects. Mid-tier developers are the worst affected because they may not have enough resources to fund their projects. Expect to see a delay of 2 to 3 years on most of the projects that were announced this year. “Over the night flyers” have quit the market and this is a great news for the consumers.
Employment scenario in the sector
Diwali sales are down amid the ongoing financial crisis. Buyers have adopted wait and watch approach which I believe is the right thing to do in the bear market. Some analysts believe the sector would see layoffs in the coming years. In the current scenario, developers can not sustain a huge workforce that was created during the boom time. So top realtors like DLF and Unitech might be forced to reduce their workforce by 5-10% to cut costs while mid-tier developers may layoff around 15-20% of their manpower. Moreover, executives at these firms got huge salary increments previous years which may now be reduced. There will be some effect on ancillary businesses as well. Consulting or Investment Banks or Private Equity firms which specialize in providing real estate specific advisory services would face the heat as well. So we will see lesser recruitment by these firms.
However, some analysts believe that there won’t be many layoffs in this sector because there is a scarcity of real estate professionals (compared to mature markets) in India. Second, new areas to work for especially for real estate i-banking people (REITS and real estate derivatives, the latter will take perhaps some more time). Third, fundamentals of Indian economy are still strong that will lead to higher growth, create more people with high disposable income, retail revolution, etc.
Outlook
The next couple of years would be slow for the industry. There is a genuine excess supply in the market which needs to be absorbed quickly to match it with the demand. This will lead to further price correction. Interest rates have started coming down which might ease some pressure on buyers’ shoulders to borrow from banks. This would give some boost to the demand for the residential properties. However, as long as there is a negative sentiment among buyers, both domestics and internationals, the demand would grow slowly, forcing speculators out of the market. The demand for commercial properties will depend on the outlook of US and European countries. If they go into deep recession, IT/ITES companies (which consumes 75% of commercial real estates) will have lesser growth and hence less demand for commercial space. Hence, both global as well as domestic factors will decide the future of industry.
Thursday, October 9, 2008
Effect of global financial crisis
Stock market and real estate
Most of the real estate developers are publicly listed companies and trade on stock exchanges. This is because real estate development is capital intensive business and developers need cash to develop properties which is then sold or rented to customers. The investors in the stock market provide these developers cash for their projects. Hence, if the market is going down, these companies would get affected as well.
A large number of financial institutions (Banks, Mutual Funds and Hedge Funds) buy or sell these companies’ securities on the exchange. If these FIs start heavily selling their investments for one reason or other, it will negatively affect companies’ stock price, which is an attractive currency for the firms in the bull market. Firms may sell (issue) these stocks in the market to raise capital to fund their expansion plan without the headache of interest payments that accompany debt. So any downward movement in the stock market might decrease the stock price of these firms and hence reduce their ability to raise sufficient capital.
Some macroeconomic factors such as inflation and recession also affect these companies and their stock prices. As we know inflation in India is around 11.5% which is quite high compared to last year’s figure of 3-4%. RBI and Banks had to increase interest rates to counter high inflation. For real estate companies higher interest rates environment is not suitable because customers avoid taking home loans (higher EMI) which decreases the demand for properties. A bad prospect of growth in the earnings of the firms gets reflected in their stock prices.
Are blockbuster deals over?
Indian real estate sector was darling of foreign investors until six months back. Did you ever hear about mega real estate deals that happened in Mumbai in 2008? If not here they are: London-based banking major Barclays Bank created history in May when it took space at Cee Jay House, a landmark office complex in Worli, for Rs. 725 a square foot (sq ft) per month. Yesteryear movie star Vinod Khanna and his wife set a reality record in Mumbai by buying an apartment in Malabar Hills for Rs. 30 crore after paying a mind boggling Rs. 1,20,000 per square foot. But those days are over now. The sub-prime crisis has taken its heavy toll on the sector.
As we know real estate is a capital intensive industry. Firms need to buy land, which is extremely expensive these days, raw materials such as cement and steel, and hire manpower for the construction activities. All of these require huge amount of money. Developers generally raise capital either by borrowing or issuing stocks. RBI has made extremely difficult for the firms to raise debt in domestic market and through external commercial borrowing (ECB). Hence, the best way for them was to go to stock market or private funding. Unfortunately, the global financial crisis has taken a heavy toll on not only the Indian stock market but also global financial market, which was the major source of funding for the last 3-4 years for developers. In less than a year Sensex has gone down from 21,000 to 10,000 levels. Most of the real estate stocks are down by over 70% w.r.t to their 52-weeks high. This is because of higher interest rates, global slowdown and heavy selling by financial institutions, seriously cutting down these companies expansion plans. They are stuck with their existing projects while investors have pulled out. Lehman had around $1.3Billion of investments in Indian real estate market. Several developers such as Unitech had planned to raise money through Special Purpose Vehicle (SPV) to fund their projects. Even REITs traded on Singaapore exchange are not funding any major projects in India. This caused DLF to postpone its plan of raising capital in Singapore. Now, after the bust of Lehman, firms may seek PEs help to raise capital. But, how many global funds would be interested to invest these days is the million dollar question!
Company Current Price (Rs.)* 52-weeks high(Rs.) % drop
DLF 304.65 1225 75
UNITECH 86.8 546.8 84
PURAVANKARA 123.95 535 77
SOBHA 132 1060 88
* As of October 16th 2008
Outlook
From the above table we can derive the outlook for these companies is not so good. Over 70% of their market value has been wiped out in less than a year; thus, putting brakes on their expansion plans. They might have to look for alternative source of capital or delay their projects. The global financial crisis and impending US recession have severely affected a large of industries such as IT/ITES and Financial Services. Both these industries were creating huge demand for A-grade commercial properties in Metros and Tier-1 cities. Now, that demand has been reduced by over 50% and it may decrease further if the US goes into deep recession. So the next one year would not bring good news for the firms in the realty sector.
However, the consumers have great opportunities even in this bear market and higher interest rate environment. With the decrease in demand for both commercial and residential properties, prices/rentals have come down. We have already seen a correction in the range of 5-10% across the properties and believe prices may go down further by another 3-5% in the next 2 to 3 months. Also, the prices in the secondary market have fallen more compared to that in the primary market. We believe inflation might cool off by June 2009 which might push the demand for residential properties. Though the long term outlook looks good, the short-term outlook is very bad for the industry. So if you plan to buy a house, either buy now or wait for couple of months but definitely before inflation falls below double digit and banks gradually start rolling off hike in rates.
Most of the real estate developers are publicly listed companies and trade on stock exchanges. This is because real estate development is capital intensive business and developers need cash to develop properties which is then sold or rented to customers. The investors in the stock market provide these developers cash for their projects. Hence, if the market is going down, these companies would get affected as well.
A large number of financial institutions (Banks, Mutual Funds and Hedge Funds) buy or sell these companies’ securities on the exchange. If these FIs start heavily selling their investments for one reason or other, it will negatively affect companies’ stock price, which is an attractive currency for the firms in the bull market. Firms may sell (issue) these stocks in the market to raise capital to fund their expansion plan without the headache of interest payments that accompany debt. So any downward movement in the stock market might decrease the stock price of these firms and hence reduce their ability to raise sufficient capital.
Some macroeconomic factors such as inflation and recession also affect these companies and their stock prices. As we know inflation in India is around 11.5% which is quite high compared to last year’s figure of 3-4%. RBI and Banks had to increase interest rates to counter high inflation. For real estate companies higher interest rates environment is not suitable because customers avoid taking home loans (higher EMI) which decreases the demand for properties. A bad prospect of growth in the earnings of the firms gets reflected in their stock prices.
Are blockbuster deals over?
Indian real estate sector was darling of foreign investors until six months back. Did you ever hear about mega real estate deals that happened in Mumbai in 2008? If not here they are: London-based banking major Barclays Bank created history in May when it took space at Cee Jay House, a landmark office complex in Worli, for Rs. 725 a square foot (sq ft) per month. Yesteryear movie star Vinod Khanna and his wife set a reality record in Mumbai by buying an apartment in Malabar Hills for Rs. 30 crore after paying a mind boggling Rs. 1,20,000 per square foot. But those days are over now. The sub-prime crisis has taken its heavy toll on the sector.
As we know real estate is a capital intensive industry. Firms need to buy land, which is extremely expensive these days, raw materials such as cement and steel, and hire manpower for the construction activities. All of these require huge amount of money. Developers generally raise capital either by borrowing or issuing stocks. RBI has made extremely difficult for the firms to raise debt in domestic market and through external commercial borrowing (ECB). Hence, the best way for them was to go to stock market or private funding. Unfortunately, the global financial crisis has taken a heavy toll on not only the Indian stock market but also global financial market, which was the major source of funding for the last 3-4 years for developers. In less than a year Sensex has gone down from 21,000 to 10,000 levels. Most of the real estate stocks are down by over 70% w.r.t to their 52-weeks high. This is because of higher interest rates, global slowdown and heavy selling by financial institutions, seriously cutting down these companies expansion plans. They are stuck with their existing projects while investors have pulled out. Lehman had around $1.3Billion of investments in Indian real estate market. Several developers such as Unitech had planned to raise money through Special Purpose Vehicle (SPV) to fund their projects. Even REITs traded on Singaapore exchange are not funding any major projects in India. This caused DLF to postpone its plan of raising capital in Singapore. Now, after the bust of Lehman, firms may seek PEs help to raise capital. But, how many global funds would be interested to invest these days is the million dollar question!
Company Current Price (Rs.)* 52-weeks high(Rs.) % drop
DLF 304.65 1225 75
UNITECH 86.8 546.8 84
PURAVANKARA 123.95 535 77
SOBHA 132 1060 88
* As of October 16th 2008
Outlook
From the above table we can derive the outlook for these companies is not so good. Over 70% of their market value has been wiped out in less than a year; thus, putting brakes on their expansion plans. They might have to look for alternative source of capital or delay their projects. The global financial crisis and impending US recession have severely affected a large of industries such as IT/ITES and Financial Services. Both these industries were creating huge demand for A-grade commercial properties in Metros and Tier-1 cities. Now, that demand has been reduced by over 50% and it may decrease further if the US goes into deep recession. So the next one year would not bring good news for the firms in the realty sector.
However, the consumers have great opportunities even in this bear market and higher interest rate environment. With the decrease in demand for both commercial and residential properties, prices/rentals have come down. We have already seen a correction in the range of 5-10% across the properties and believe prices may go down further by another 3-5% in the next 2 to 3 months. Also, the prices in the secondary market have fallen more compared to that in the primary market. We believe inflation might cool off by June 2009 which might push the demand for residential properties. Though the long term outlook looks good, the short-term outlook is very bad for the industry. So if you plan to buy a house, either buy now or wait for couple of months but definitely before inflation falls below double digit and banks gradually start rolling off hike in rates.
Saturday, October 4, 2008
Sub-prime Crisis: What is it all about?
Sub-prime crisis is the current financial crisis (considered as the worst ever since World War II) characterized by acute credit crunch in the global capital markets. This liquidity crunch is not only because of shortage of funds or higher interest rates but also because of mistrust among banks that have forced banks to stop lending to each other. Banks do not know whether other banks have enough cash and liquidity to survive to pay back the loan; thus, affecting the critical inter-banking operation in the economy. This has affected the liquidity in the market and made highly leveraged banks difficult to operate and survive.
Inter-Banking market operationOpen market operations is a tool used by Fed (RBI’s equivalent in the US) to regulate money supply in the economy. U.S. banks and thrift institutions are obligated by law to maintain certain level of reserves, which is determined by the outstanding assets and liabilities of each depository institution, as well as by the Fed itself, but is typically 10% of the total value of the bank's demand accounts.
For example, assume a particular U.S. depository institution, in the normal course of business, issues a loan. This dispenses money and reduces the bank's reserves. If its reserve level falls below the legally required minimum, it must add to its reserves to remain compliant with the regulation. The bank can borrow the requisite funds from another bank that has a surplus in its account with the Fed. Thus, this operation is an extremely powerful tool not only to regulate liquidity in the economy but also for the survival of these banks.
Now imagine what will happen if banks stop lending to each other. Banks will not be able to match their assets and liabilities by borrowing from banks having surplus. Thus banks that have high liabilities or are highly leveraged (e.g. Lehman, Wachovia and Washington Mutual) will go bust!
Sub-prime home loan
Let me explain what does sub-prime loans mean. Prime home loans market refers to individuals with very good or excellent credit records or ratings and to whom banks lend directly. Sub-prime market refers to individuals, who have poor credit record characterized by unstable income. Thus, banks or other lending institutions would not lend money to such individuals. So, how will such individuals get home loans to fulfill their great American dreams? Here enters- financial institutions (FIs), which have excellent creditworthiness. These FIs take loan from banks at lower interest rates and break these loans into a lot of small home loans and lend them to “sub-prime” lenders at much higher interest rates. Thus, FIs make profits on the spread (difference between the lending and borrowing interest rates) by taking higher risks. This home loan market is called “Sub-prime home loan market”.
How this crisis started?
Many believe that sub-prime crisis is direct fallout of the US credit culture. i.e. borrow as much as possible way beyond the means. In 2008 the average household debt was 130% of the average income and average household owned 12 to 13 credit cards. Mind blowing! Isn’t it? The problem primarily began with the US keeping its interest rates very low for a very long time, thus encouraging Americans to go in for housing loans, or mortgages. Lower interest rates encouraged buyers to take on bigger loans, and thus bigger and better homes. Subprime borrowing was a major contributor to an increase in home ownership rates and the demand for housing. The overall U.S. home ownership rate increased from 64% in 1994 (about where it was since 1980) to a peak in 2004 with an all-time high of 69.2%. This was fostered by federal government to increase ownership among minorities and poor.
With the American economy doing well at that time and housing prices soaring on the back of huge demand for real estate and bigger and better homes, financial institutions saw a great opportunity in the mortgage market. In their zeal to make a quick buck, these institutions relaxed the strict regulatory procedures before extending housing loans to people with unstable jobs and poor credit records. Few controls were put in place to handle the situation in case the housing bubble' burst.
The crisis began with the bursting of the United States housing bubble. A slowing US economy, high interest rates, unrealistic real estate prices, high inflation and rising oil tags together led to a fall in stock markets, growth stagnation, job losses, lack of consumer spending, a virtual halt to new jobs, and foreclosures and defaults. The sub-prime loans were given by FIs at floating rates. With rising interest rates in the US, EMIs for these individuals also started increasing (what we see today in Indian market) and sub-prime homeowners began to default as they could no longer afford to pay their EMIs. A deluge of such defaults inundated these institutions and banks, wiping out their net worth. Their mortgage-backed securities were almost worthless as real estate prices crashed.
The moment it was found out that these institutions had failed to manage the risk, panic spread. Investors realized that they could hardly put any value on the securities that these institutions were selling. This caused many a Wall Street pillar to crumble. As defaults kept rising, these institutions could not service their loans that they had taken from banks. So they turned to other financial firms to help them out, but after a while these firms too stopped extending credit realizing that the collateral backing this credit would soon lose value in the falling real estate market.
Why Investment Banks like Lehman Brothers went bust?
Earlier I talked about how FIs like Investment Banks made profits on the spread (difference between the lending and borrowing interest rates) by taking high risks on the money borrowed. This provided huge incentive to these FIs to borrow and lend as much as possible creating huge “leverage” on the books. During the time of housing boom, this was considered as Mortgage Backed Securities (MBS) portfolios typically received high credit ratings with minimal defaults. Since Investment Banks do not have the same capital reserve requirement as Depository Banks, they borrowed and lent amounts exceeding 30 to 50 times their net worth i.e. their leverage on the books were between 30 to 50 compared to depository banks’ leverage of less than 15.
Now, housing market started declining by the end of 2005 and went bust in 2007. This along with increasing delinquencies and foreclosures by worried customers led to the decline of housing prices and in turn the value of MBS. Investors became concerned and in some cases demanded their money bank, resulting in margin calls (immediate need to sell the MBS portfolios at fire-sale prices) to pay them. At such high leverage (between 30 and 50), many FIs suffered huge losses, bankruptcy and merger with other banks. With this, MBS portfolios became extremely risky and hence “untouchable” and banks stopped buying or trading them. Their values plummeted further and all those institutions who have bought them suffered huge losses and created panic and acute liquidity concern in the market across the globe. Lehman Brothers had a leverage of 31 and hence went bust because it didn’t have enough cash to service margin calls by its creditors.
Effect on the economy
This severe liquidity crunch led to several negative effects on the economy. This ripple effect was seen not only in the US but also in the European Union because all these rich and big banks in the US and Europe invested heavily in these Mortgage Backed Securities (MBS) during the boom time. Banks stopped or became extremely reluctant to lend money to companies which have to either delay or stop their investment plans.
This has led to increase in unemployment and drop in the consumption. The financial crisis as we know caused a panic in the market and stock market declined heavily. Most of the US people have their investments either in real estate or stocks. As both these investment tools suffered heavy losses, average household value/income decreased sharply causing panic among citizens. In the coming years we might see major world economies such as US and Europe in recession.
Why India market fell?
Once investments by the FIs in the US turned bad, more money had to be invested back, to maintain that fixed proportion i.e. to match assets and liabilities on their books. In order to invest more money in the US, money had to come in from somewhere. To make up their losses in the sub-prime market in the US, they went out to sell their investments in emerging markets like India where their investments have been doing well.
So they started selling their investments in India and other markets around the world to maintain enough liquidity in the US economy and for their own operation. Since the amount of selling in the market was much higher than the amount of buying, the Sensex began to tumble. Additionally, crude prices were in the range of $120-150 which caused inflation to rise in double digit forcing banks to raise their interest rates. Thus, higher rates seriously affected real estate, automobile and banking firms’ operations and their stock crashed. Moreover, there were some rumors that even Indians banks had some exposure to these risky MBS and hence, banking stocks were among the worst hits. The flight of capital from the Indian markets also led to a fall in the value of the rupee against the US dollar. The stock market will continue to tumble as long as there is huge selling pressure from these FIs.
Bail-out
This crisis is now spreading from sub-prime to prime mortgages, home equity loans, to commercial real estate, to unsecured consumer credit (credit cards, student loans, auto loans), to leveraged loans that financed reckless debt-laden leveraged buy outs, to municipal bonds, to industrial and commercial loans, to corporate bonds, to the derivative markets whose risk are indeterminate and underlying assets value is hundreds of trillions of dollars.
Monday, September 15, 2008
Problems with the real estate firms
If you are a developer, I am sure you are a worried man! Things are not at all rosy for the industry, which was a darling of foreign and domestic investors for the last few years. So what went wrong with the sector? why has it started loosing it shine? I believe there are many a factors hurting the developers and all at the same time. I will discuss few of them here.
1. Liquidity crunch
Real estate firms have depended hugely on foreign investors to raise capital to fund their expansion plans. Now the crumbling financial sector has forced investors to either pull out of the ventures or stop lending to firms (Rumor is Lehman Brothers has over $1 Billion of investments in Indian real estate sector!!). This has put a brake on the expansion plan of the developers. Additionally, RBI has strict lending conditions for Indian banks for real estate sector. With the stock market showing signs of southward movement across the global, developers plan to raise capital by IPO or issuing additional stocks has now no taker.
2. High interest rates
RBI's aggressive policy to control inflation over the last six months or so has led to higher interest rates in the market. Interest rates on home loans have shot up from 7.5% in 2005 to 14% in mid-2008. Residential properties buyers are shying away from borrowing loans because EMI has shot by tremendously. Thus, demand for residential properties has come down significantly. This is hurting developers who are left with lot of invesntory and stuck with ongoing projects. Moreover, borrowing rates for developers have shot up as well. Indian banks are putting a yield spread of over 400bp on real estate firms' bonds.
3. Global slowdown
There is a constant fear that US and EU might slip into recession due to the ongoing financial crisis. This will seriously hurt India's flagship Outsourcing industry. Given the fact that IT/ITES firms consume around 75% of all commercial properties in India, any slowdown in this industry will seriously hurt developers. Real estate firms have lauanched numerous projects (some eof them are under ccoinstruction).
All these will have a spiral effect on Indian economy. Global slowdown and higher interests mean lower growth for IT industry, exports sector, automobile industry, banking system etc. This may lead to lesser hiring in the coming months or years or layoffs to cut costs. All these will lead to negative sentiment in the market and among consumers; thus, lowering the demand for properties or in general on most of goods and services. I believe demand for properties in FY'09 would be 30-40% lower than that of in FY'08.
1. Liquidity crunch
Real estate firms have depended hugely on foreign investors to raise capital to fund their expansion plans. Now the crumbling financial sector has forced investors to either pull out of the ventures or stop lending to firms (Rumor is Lehman Brothers has over $1 Billion of investments in Indian real estate sector!!). This has put a brake on the expansion plan of the developers. Additionally, RBI has strict lending conditions for Indian banks for real estate sector. With the stock market showing signs of southward movement across the global, developers plan to raise capital by IPO or issuing additional stocks has now no taker.
2. High interest rates
RBI's aggressive policy to control inflation over the last six months or so has led to higher interest rates in the market. Interest rates on home loans have shot up from 7.5% in 2005 to 14% in mid-2008. Residential properties buyers are shying away from borrowing loans because EMI has shot by tremendously. Thus, demand for residential properties has come down significantly. This is hurting developers who are left with lot of invesntory and stuck with ongoing projects. Moreover, borrowing rates for developers have shot up as well. Indian banks are putting a yield spread of over 400bp on real estate firms' bonds.
3. Global slowdown
There is a constant fear that US and EU might slip into recession due to the ongoing financial crisis. This will seriously hurt India's flagship Outsourcing industry. Given the fact that IT/ITES firms consume around 75% of all commercial properties in India, any slowdown in this industry will seriously hurt developers. Real estate firms have lauanched numerous projects (some eof them are under ccoinstruction).
All these will have a spiral effect on Indian economy. Global slowdown and higher interests mean lower growth for IT industry, exports sector, automobile industry, banking system etc. This may lead to lesser hiring in the coming months or years or layoffs to cut costs. All these will lead to negative sentiment in the market and among consumers; thus, lowering the demand for properties or in general on most of goods and services. I believe demand for properties in FY'09 would be 30-40% lower than that of in FY'08.
Thursday, September 4, 2008
Bangalore Real Estate Sector
Office sector
Demand in 2008 (1st half) was 7million sq ft compared to 6.6 million sq ft in the same period last year. I have divided Bangalore commercial areas in to three different zone:
1. Central Business District (CBD)
It includes areas near MG Road, Vittal Mallaya Road, Residency Road and Richmond Road. CBD remains the most attractive and suitable micro-markets for new companies entering Bangalore. The central locations offer ease of accessibility and visibility for these new companies and allow established companies to retain brand equity by being in the heart of the city. There is less supply of office space.
2. Non-CBD areas
It includes Indira nagar, Old Madras Road, Airport Road, CV Raman nagar, Inner ring road, Koramangala. The Non CBD area is being observed as the most preferred location for setting up office for high end engineering companies for setting up R&D centers/labs as well as high end support functions. High levels of absorption activity continued to be witnessed even in the Non CBD areas of the city where many corporates chose to relocate/expand due to availability of quality options offering adequate infrastructure and lower rental values compared to CBD. However, land bank is limited in these regions, which might put upward pressure on the real estate in near future.
3. Suburban and peripheral areas
This includes Whitefield, Outer ring road, Electronic city, Bannerghatta road and North Bangalore. The Suburban micro market is another zone that has witnessed high level of space intake by corporate over the year. Scarcity of space in the Non CBD area is furthering the case for location of corporate in the micro markets. The Peripheral areas remain preferred by the corporate for building their campus style facilities. Consequently these locations have witnessed frenzied construction activity from both developers and also individuals possessing large land banks.
Whitefield is now gaining favor as a viable micro market due to decongestion of the airport road, completion of the Marathahalli flyoverand availability of mid to low end housing infrastructure. The area between Marathalli and Sarjapur on the outer ring road has a fair amount of STP, SEZ and grade-A office supply. The excess supply along with low occupancy has put downward pressure on the prices.
With development of BIA and coming up of Peripheral Ring Road (PPR), properties prices in north Bangalore look to go up in the near future. PPR will connect Tumkur road, Magadi road, Mysore road, Bellary road, Old Madras road, Hosur road and Kanakapura road. This region has seen interests from leading IT firms, property developers for residential areas and hospitality sectors to set up star hotels.
Residential Properties
There has been a noticeable demand for prime residential properties and developers are targeting residential areas in the outskirts of Bangalore such as Whitefield, Sarjapur road, Banerghatta Road and Kanakpura Road. Demand is also high for leased apartments in prime areas of central Bangalore by company executives, due to limited supply there is upward pressure on rentals.
New developments are shifting away from the central Bangalore due to close proximity to IT and ITES areas and availability of land for lifestyle projects. Nearly six mega townships promoted by reputed developers are on the anvil in Bangalore. The proposed mega townships will have thousands of housing units and will be a mix of apartments, row houses and villas. Moreover the townships will include educational, commercial, retail and medical facilities.
Capital values for apartments in prime residential areas of Bangalore are in between INR 3000-4000 / Sq. Ft while rental values are in the range of INR 25-30/sq ft. p.m. Absorption rates for prime and quality residential apartments is very high thus demand is exceeding the supply in the areas of Outer ring road, Whitefield and Airport road. There is scarcity of luxury apartments thus in last one year capita; values in suburbs have increased around 35-50% due to high demand. Yield on Residential property in Bangalore is ranging between 6-7%.
Outlook
To check the trend in the residential properties find out from the local authorities on the trend in stamp duty and registration fees.
Improved connectivity between Bangalore and Mysore has led to gradual development of residential properties in and around Bidadi (southwest of Bangalore)
Upcoming DLF townships
NICE corridor
Upcoming BMIC (Bangalore-Mysore Infrastructure Corridor) project
Planned theme parks and resort in Bidadi
Demand in 2008 (1st half) was 7million sq ft compared to 6.6 million sq ft in the same period last year. I have divided Bangalore commercial areas in to three different zone:
1. Central Business District (CBD)
It includes areas near MG Road, Vittal Mallaya Road, Residency Road and Richmond Road. CBD remains the most attractive and suitable micro-markets for new companies entering Bangalore. The central locations offer ease of accessibility and visibility for these new companies and allow established companies to retain brand equity by being in the heart of the city. There is less supply of office space.
2. Non-CBD areas
It includes Indira nagar, Old Madras Road, Airport Road, CV Raman nagar, Inner ring road, Koramangala. The Non CBD area is being observed as the most preferred location for setting up office for high end engineering companies for setting up R&D centers/labs as well as high end support functions. High levels of absorption activity continued to be witnessed even in the Non CBD areas of the city where many corporates chose to relocate/expand due to availability of quality options offering adequate infrastructure and lower rental values compared to CBD. However, land bank is limited in these regions, which might put upward pressure on the real estate in near future.
3. Suburban and peripheral areas
This includes Whitefield, Outer ring road, Electronic city, Bannerghatta road and North Bangalore. The Suburban micro market is another zone that has witnessed high level of space intake by corporate over the year. Scarcity of space in the Non CBD area is furthering the case for location of corporate in the micro markets. The Peripheral areas remain preferred by the corporate for building their campus style facilities. Consequently these locations have witnessed frenzied construction activity from both developers and also individuals possessing large land banks.
Whitefield is now gaining favor as a viable micro market due to decongestion of the airport road, completion of the Marathahalli flyoverand availability of mid to low end housing infrastructure. The area between Marathalli and Sarjapur on the outer ring road has a fair amount of STP, SEZ and grade-A office supply. The excess supply along with low occupancy has put downward pressure on the prices.
With development of BIA and coming up of Peripheral Ring Road (PPR), properties prices in north Bangalore look to go up in the near future. PPR will connect Tumkur road, Magadi road, Mysore road, Bellary road, Old Madras road, Hosur road and Kanakapura road. This region has seen interests from leading IT firms, property developers for residential areas and hospitality sectors to set up star hotels.
Residential Properties
There has been a noticeable demand for prime residential properties and developers are targeting residential areas in the outskirts of Bangalore such as Whitefield, Sarjapur road, Banerghatta Road and Kanakpura Road. Demand is also high for leased apartments in prime areas of central Bangalore by company executives, due to limited supply there is upward pressure on rentals.
New developments are shifting away from the central Bangalore due to close proximity to IT and ITES areas and availability of land for lifestyle projects. Nearly six mega townships promoted by reputed developers are on the anvil in Bangalore. The proposed mega townships will have thousands of housing units and will be a mix of apartments, row houses and villas. Moreover the townships will include educational, commercial, retail and medical facilities.
Capital values for apartments in prime residential areas of Bangalore are in between INR 3000-4000 / Sq. Ft while rental values are in the range of INR 25-30/sq ft. p.m. Absorption rates for prime and quality residential apartments is very high thus demand is exceeding the supply in the areas of Outer ring road, Whitefield and Airport road. There is scarcity of luxury apartments thus in last one year capita; values in suburbs have increased around 35-50% due to high demand. Yield on Residential property in Bangalore is ranging between 6-7%.
Outlook
To check the trend in the residential properties find out from the local authorities on the trend in stamp duty and registration fees.
Improved connectivity between Bangalore and Mysore has led to gradual development of residential properties in and around Bidadi (southwest of Bangalore)
Upcoming DLF townships
NICE corridor
Upcoming BMIC (Bangalore-Mysore Infrastructure Corridor) project
Planned theme parks and resort in Bidadi
Sunday, August 17, 2008
Capitalization Rate
Capitalization Rate is a ratio used to estimate the value of income producing properties. Investors, lenders and appraisers use the cap rate to estimate the purchase price for different types of income producing properties. Hence, it is decided by buyers and NOT sellers. Theoretically, Cap rate is the larger return expected by buyers when investing in high risk income properties. The Cap rate may vary in different areas of a city for many reasons such as desirability of location, level of crime and general condition of an area. Few things to note about Cap Rate:
• It defines the percentage number used to determine the current value of a property based on estimated future operating income i.e.
Cap Rate = Annual Cash Flow / Value of property
• Capitalization rates are an indirect measure of how fast an investment will pay for itself in net cash flows; each year, the percentage amount of the cap rate will be repaid
i.e. Payback period = 100% / Cap Rate
• In real estate appraisal in the U.S., a stylized measure of cash flow is often used, called net operating income. It is essentially the same as net cash flow, except that debt service and income taxes are not included while a reserve for replacements is included
• One advantage of capitalization rate valuation is that it is separate from a "market-comparables" approach to an appraisal (which only compares what other similar properties have sold for based on a comparison of physical characteristics). Given the inefficiency of real estate markets, multiple approaches are generally preferred when valuing a real estate asset
• Cap rate could be determined based on an appraisal and/or the cap rates of similar properties that have sold recently i.e. by taking another property that sold recently, determining its rental income, divide the income by the sold price to get the cap rate
Thus, if cap rate in a given property increases, the value for that particular property reduces and vice versa.
• It defines the percentage number used to determine the current value of a property based on estimated future operating income i.e.
Cap Rate = Annual Cash Flow / Value of property
• Capitalization rates are an indirect measure of how fast an investment will pay for itself in net cash flows; each year, the percentage amount of the cap rate will be repaid
i.e. Payback period = 100% / Cap Rate
• In real estate appraisal in the U.S., a stylized measure of cash flow is often used, called net operating income. It is essentially the same as net cash flow, except that debt service and income taxes are not included while a reserve for replacements is included
• One advantage of capitalization rate valuation is that it is separate from a "market-comparables" approach to an appraisal (which only compares what other similar properties have sold for based on a comparison of physical characteristics). Given the inefficiency of real estate markets, multiple approaches are generally preferred when valuing a real estate asset
• Cap rate could be determined based on an appraisal and/or the cap rates of similar properties that have sold recently i.e. by taking another property that sold recently, determining its rental income, divide the income by the sold price to get the cap rate
Thus, if cap rate in a given property increases, the value for that particular property reduces and vice versa.
Thursday, August 14, 2008
Affordability
The affordability index, although at a reasonable 40% (EMI/net monthly disposable income), has risen about 50% over the past two years, suggesting a price run-up faster than income growth. The affordability is also affected by mortgage rates, which has risen by 400bp during the same period. Lending institutions managed to limit the EMI increase to a certain extent by adjusting the loan tenure, thereby controlling the affordability as well. Currently, the domestic real estate market has an affordability levels (Property costs / Annual Income) of 4.5 to 5.0x compared to global level of 3.5x.
Tuesday, August 12, 2008
Profitability analysis of properties - Developers perspective
Residential properties
From an IRR (Internal Rate of return) perspective, the residential segment is the highest return earner. This is possible due to the unique way in which the payment for residential properties is structured, where the buyer pays some upfront money and the balance by way of installments, which allows the builder to block less capital in the project. IRRs for residential projects range between 30% and 35%.
Commercial projects
The return from commercial property is always lower compared with the residential project due to the following reasons.
• There is no cash inflow until the property is completely developed and in a handover stage
• No outright sale of the property occurs; the developer must contend with only lease rentals
As a result, the developer must invest far greater capital of his own before he sees any cash inflow, and due to lease rentals, his payback period increases, in turn reducing his returns from the project compared with the residential project.
From an IRR (Internal Rate of return) perspective, the residential segment is the highest return earner. This is possible due to the unique way in which the payment for residential properties is structured, where the buyer pays some upfront money and the balance by way of installments, which allows the builder to block less capital in the project. IRRs for residential projects range between 30% and 35%.
Commercial projects
The return from commercial property is always lower compared with the residential project due to the following reasons.
• There is no cash inflow until the property is completely developed and in a handover stage
• No outright sale of the property occurs; the developer must contend with only lease rentals
As a result, the developer must invest far greater capital of his own before he sees any cash inflow, and due to lease rentals, his payback period increases, in turn reducing his returns from the project compared with the residential project.
Wednesday, August 6, 2008
Floor Space Index (FSI)
The Floor Area Ratio (FAR) or Floor Space Index (FSI) is the ratio of the total floor area of buildings on a certain location to the size of the land of that location, or the limit imposed on such a ratio i.e. Floor Area Ratio is the total building square footage (building area) divided by the site size square footage (site area).
Floor Area Ratio = (Total covered area on all floors of all buildings on a certain plot)/(Area of the plot)
Thus, an FSI of 2.0 would indicate that the total floor area of a building is two times the gross area of the plot on which it is constructed, as would be found in a multiple-story building.
India has a notoriously low FSI ( rarely above 1.6, even in CBD) which has led to shortage of quality land banks. Someone rightly said the other day "India is a land of opportunities, without any land".
Floor Area Ratio = (Total covered area on all floors of all buildings on a certain plot)/(Area of the plot)
Thus, an FSI of 2.0 would indicate that the total floor area of a building is two times the gross area of the plot on which it is constructed, as would be found in a multiple-story building.
India has a notoriously low FSI ( rarely above 1.6, even in CBD) which has led to shortage of quality land banks. Someone rightly said the other day "India is a land of opportunities, without any land".
Monday, July 21, 2008
SPV - Special Purpose Vehicle
As developers increase their footprint and expand their business five-fold, execution capabilities and finance have emerged as big challenges. Project related SPV have, in this scenario, emerged as viable options that are investment-related only to the project.
In an SPV, the developer ties up with a private equity fund who provides capital, or alternately, ties up with foreign developers who not only have capital but also bring in technical and execution capabilities. Several developers in Mumbai, Delhi, Pune, Chennai are looking at tying up with foreign developers. SPVs have picked up as every developer needs financial backing and the overall capability to manage, says Sanjay Dutt, Deputy Managing Director, Cushman &Wakefield. It is much easier to establish the forecasted profits in an SPV as opposed to when it is pooled into the entity.
Many developers are diluting a minority stake in their entity organization, or going in for specific FDI compliant SPVs for different projects. Dutt explains that there are developers developing SEZs/ retail/ hospitality / mixed townships who will accordingly choose partners who can bring in the requisite expertise in the different real estate segments. Then there are developers who have taken too much land but do not have the financial backing or expertise and are hence looking for partners in an SPV.
SPVs are the only way out in FDI projects, where you have a clear shareholder agreement and control in the project and exits becomes easier. According to Gautam Hora, Senior Manager, India Capital Market, Jones Lang LaSalle Meghraj, the foreign investor or fund wants to join hands with the local developer and an SPV is formed, so that any unsettled claims, litigations with respect to the existing entity are not carried forward.
Most large builders today have either tied up with funds or are scouting for joint venture partners overseas. Prominent real estate companies like DLF and Ansal API, have recently tied up with Dubai-based firm Nakheel and Deyaar, and are looking at more such deals. Through its joint venture with Nakheel, India's largest real estate developer DLF is planning to invest $10 billion in two integrated townships spread across 40,000 acres.
One of the earliest SPVs was the Emaar-MGF, joint venture company formed by Emaar Properties PJSC Dubai, the world's largest listed real estate company, and Delhi based MGF Developments Limited for an FDI project amounting to over half a billion dollars for projects with a capital outlay of US$4 billion (Rs 18,000 crore). Today there are SPVs galore, and some examples include the Runwal CapitalLand venture in Mumbai, Oberoi Constructions tie-up with Morgan Stanley, Keystone Group and Trikona Capital SPV for a Thane project of 127 acres.
The popularity of SPV in future will depend on lot of factors such global funding and domestic demand. However, both of these things appear to be not so encouraging.
In an SPV, the developer ties up with a private equity fund who provides capital, or alternately, ties up with foreign developers who not only have capital but also bring in technical and execution capabilities. Several developers in Mumbai, Delhi, Pune, Chennai are looking at tying up with foreign developers. SPVs have picked up as every developer needs financial backing and the overall capability to manage, says Sanjay Dutt, Deputy Managing Director, Cushman &Wakefield. It is much easier to establish the forecasted profits in an SPV as opposed to when it is pooled into the entity.
Many developers are diluting a minority stake in their entity organization, or going in for specific FDI compliant SPVs for different projects. Dutt explains that there are developers developing SEZs/ retail/ hospitality / mixed townships who will accordingly choose partners who can bring in the requisite expertise in the different real estate segments. Then there are developers who have taken too much land but do not have the financial backing or expertise and are hence looking for partners in an SPV.
SPVs are the only way out in FDI projects, where you have a clear shareholder agreement and control in the project and exits becomes easier. According to Gautam Hora, Senior Manager, India Capital Market, Jones Lang LaSalle Meghraj, the foreign investor or fund wants to join hands with the local developer and an SPV is formed, so that any unsettled claims, litigations with respect to the existing entity are not carried forward.
Most large builders today have either tied up with funds or are scouting for joint venture partners overseas. Prominent real estate companies like DLF and Ansal API, have recently tied up with Dubai-based firm Nakheel and Deyaar, and are looking at more such deals. Through its joint venture with Nakheel, India's largest real estate developer DLF is planning to invest $10 billion in two integrated townships spread across 40,000 acres.
One of the earliest SPVs was the Emaar-MGF, joint venture company formed by Emaar Properties PJSC Dubai, the world's largest listed real estate company, and Delhi based MGF Developments Limited for an FDI project amounting to over half a billion dollars for projects with a capital outlay of US$4 billion (Rs 18,000 crore). Today there are SPVs galore, and some examples include the Runwal CapitalLand venture in Mumbai, Oberoi Constructions tie-up with Morgan Stanley, Keystone Group and Trikona Capital SPV for a Thane project of 127 acres.
The popularity of SPV in future will depend on lot of factors such global funding and domestic demand. However, both of these things appear to be not so encouraging.
Thursday, July 17, 2008
Different Interest Rates in Indian monetary system
Repo (Repurchase) Rate
Repo rate is the rate at which banks borrow funds from the RBI to meet the gap between the demands they are facing for money (loans) and how much they have on hand to lend. If the RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate.
Reverse Repo Rate
This is the exact opposite of repo rate. The rate at which RBI borrows money from the banks (or banks lend money to the RBI) is termed the reverse repo rate. The RBI uses this tool when it feels there is too much money floating in the banking system.
If the reverse repo rate is increased, it means the RBI will borrow money from the bank and offer them a lucrative rate of interest. As a result, banks would prefer to keep their money with the RBI (which is absolutely risk free) instead of lending it out (this option comes with a certain amount of risk). Consequently, banks would have lesser funds to lend to their customers. This helps stem the flow of excess money into the economy. Reverse repo rate signifies the rate at which the central bank absorbs liquidity from the banks, while repo signifies the rate at which liquidity is injected.
Bank Rate
This is the rate at which RBI lends money to other banks (or financial institutions. The bank rate signals the central bank’s long-term outlook on interest rates. If the bank rate moves up, long-term interest rates also tend to move up, and vice-versa.
Banks make a profit by borrowing at a lower rate and lending the same funds at a higher rate of interest. If the RBI hikes the bank rate (this is currently 6 per cent), the interest that a bank pays for borrowing money (banks borrow money either from each other or from the RBI) increases. It, in turn, hikes its own lending rates to ensure it continues to make a profit.
Call Rate
Call rate is the interest rate paid by the banks for lending and borrowing for daily fund requirement. Since banks need funds on a daily basis, they lend to and borrow from other banks according to their daily or short-term requirements on a regular basis.
CRR
Also called the cash reserve ratio, refers to a portion of deposits (as cash) which banks have to keep/maintain with the RBI. This serves two purposes. It ensures that a portion of bank deposits is totally risk-free and secondly it enables that RBI control liquidity in the system, and thereby, inflation by tying their hands in lending money
SLR
Besides the CRR, banks are required to invest a portion of their deposits in government securities as a part of their statutory liquidity ratio (SLR) requirements. What SLR does is again restrict the bank’s leverage in pumping more money into the economy.
Repo rate is the rate at which banks borrow funds from the RBI to meet the gap between the demands they are facing for money (loans) and how much they have on hand to lend. If the RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate.
Reverse Repo Rate
This is the exact opposite of repo rate. The rate at which RBI borrows money from the banks (or banks lend money to the RBI) is termed the reverse repo rate. The RBI uses this tool when it feels there is too much money floating in the banking system.
If the reverse repo rate is increased, it means the RBI will borrow money from the bank and offer them a lucrative rate of interest. As a result, banks would prefer to keep their money with the RBI (which is absolutely risk free) instead of lending it out (this option comes with a certain amount of risk). Consequently, banks would have lesser funds to lend to their customers. This helps stem the flow of excess money into the economy. Reverse repo rate signifies the rate at which the central bank absorbs liquidity from the banks, while repo signifies the rate at which liquidity is injected.
Bank Rate
This is the rate at which RBI lends money to other banks (or financial institutions. The bank rate signals the central bank’s long-term outlook on interest rates. If the bank rate moves up, long-term interest rates also tend to move up, and vice-versa.
Banks make a profit by borrowing at a lower rate and lending the same funds at a higher rate of interest. If the RBI hikes the bank rate (this is currently 6 per cent), the interest that a bank pays for borrowing money (banks borrow money either from each other or from the RBI) increases. It, in turn, hikes its own lending rates to ensure it continues to make a profit.
Call Rate
Call rate is the interest rate paid by the banks for lending and borrowing for daily fund requirement. Since banks need funds on a daily basis, they lend to and borrow from other banks according to their daily or short-term requirements on a regular basis.
CRR
Also called the cash reserve ratio, refers to a portion of deposits (as cash) which banks have to keep/maintain with the RBI. This serves two purposes. It ensures that a portion of bank deposits is totally risk-free and secondly it enables that RBI control liquidity in the system, and thereby, inflation by tying their hands in lending money
SLR
Besides the CRR, banks are required to invest a portion of their deposits in government securities as a part of their statutory liquidity ratio (SLR) requirements. What SLR does is again restrict the bank’s leverage in pumping more money into the economy.
Wednesday, July 16, 2008
Definition Of Market Value
The “market value” is the most probable price that an income property should bring in a competitive and open market under all conditions necessary for a fair sale presuming the buyer and seller each act prudently, knowledgeably, and assuming the price is not affected by undue stimuli. Implicit in this definition the consummation of a sale as of a specified date and the title from seller to buyer under condition by:
1. Buyer and seller are typically motivated.
2. Both parties are well informed or well advised and each of them is acting in what one considers one’s own best interests.
3. A reasonable time is allowed for exposure in the open market
4. Payment is made in terms of cash of the same currency which the income property has adopted as their accounting standard or in terms of financial arrangements comparable thereto.
5. The price represents the normal consideration for the income property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
A fair market transaction must be a “win-win” for all parties concerned. The fair market value of an “active” income property, in its specific market, is that price at which:
1. The investors located within the market, will receive the current market rate of return for similar investments within the property’s market area.
2. The spendable income stream generated from the property will be adequate to pay the structured debt service that the sale of the property would create under the current market rates and terms offered at the current market down payment percentages.
3. The spendable income stream generated from the property will be adequate to pay all of the property’s expenses including a market wage, salary or fee to the property managers.
1. Buyer and seller are typically motivated.
2. Both parties are well informed or well advised and each of them is acting in what one considers one’s own best interests.
3. A reasonable time is allowed for exposure in the open market
4. Payment is made in terms of cash of the same currency which the income property has adopted as their accounting standard or in terms of financial arrangements comparable thereto.
5. The price represents the normal consideration for the income property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
A fair market transaction must be a “win-win” for all parties concerned. The fair market value of an “active” income property, in its specific market, is that price at which:
1. The investors located within the market, will receive the current market rate of return for similar investments within the property’s market area.
2. The spendable income stream generated from the property will be adequate to pay the structured debt service that the sale of the property would create under the current market rates and terms offered at the current market down payment percentages.
3. The spendable income stream generated from the property will be adequate to pay all of the property’s expenses including a market wage, salary or fee to the property managers.
Monday, July 14, 2008
Criteria for FDI in real estate
The government allows 100% FDI under an automatic route for development of townships, housing, built-up infrastructure, and construction-development projects (including commercial premises, hotels, resorts, hospitals, educational institutions, and recreational facilities), subject to the following guidelines:
Project criteria
• Minimum area of 10 hectares in the case of servicing housing plots
• Minimum area of 50,000 sqm in the case of construction development projects
• For combination projects, any one of the above two conditions will suffice
Project development
• 50% of project must be developed within five years, from the date of obtaining all statutory clearances
• Not permitted to sell undeveloped plots Capital requirement
Capital requirement
• Minimum capitalization of US$10m for wholly-owned subsidiaries and US$5m for JVs with Indian partners
• Capital to be brought within six months of the incorporation of JV or subsidiary
• Original investment cannot be repatriated before a period of three years from completion of minimum capitalization
• Repatriation allowed only after prior approval from the government
Project criteria
• Minimum area of 10 hectares in the case of servicing housing plots
• Minimum area of 50,000 sqm in the case of construction development projects
• For combination projects, any one of the above two conditions will suffice
Project development
• 50% of project must be developed within five years, from the date of obtaining all statutory clearances
• Not permitted to sell undeveloped plots Capital requirement
Capital requirement
• Minimum capitalization of US$10m for wholly-owned subsidiaries and US$5m for JVs with Indian partners
• Capital to be brought within six months of the incorporation of JV or subsidiary
• Original investment cannot be repatriated before a period of three years from completion of minimum capitalization
• Repatriation allowed only after prior approval from the government
Friday, July 4, 2008
REITS
Real estate investment trusts (REITs) are companies that own and often actively manage income-generating commercial real estate, such as shopping centers, apartments, offices and warehouses.
A REIT is a company that buys, develops, manages and sells real estate assets and allows participants to invest in a professionally managed portfolio of properties. Some REITs make or invest in loans and other obligations, which are secured by real estate collateral. A REIT operates like a mutual fund, where investments of individual investors are invested in real estate rather than in the equities market. REITs also help raise funds for the real-estate business – i.e. to fund construction of new offices, factories, residential flats, shopping malls, etc. Many private real-estate companies used REITs to access capital through the public marketplace.
A REIT is a company that buys, develops, manages and sells real estate assets and allows participants to invest in a professionally managed portfolio of properties. Some REITs make or invest in loans and other obligations, which are secured by real estate collateral. A REIT operates like a mutual fund, where investments of individual investors are invested in real estate rather than in the equities market. REITs also help raise funds for the real-estate business – i.e. to fund construction of new offices, factories, residential flats, shopping malls, etc. Many private real-estate companies used REITs to access capital through the public marketplace.
Wednesday, July 2, 2008
Indian Real Estate Sector
I published an article on Indian Real Estate couple of months back in a leading magazine. Two days back, I revisited this article and decided to start a blog on Indian real estate sector - What it was, where it is now and where will it go from here. A small piece of the entire article is here:
India Real Estate
The size in terms of total economic value of real estate development activity of the Indian real estate market is currently US$40-45bn (5-6% of GDP) of which residential forms the major chunk with 90-95% of the market, commercial segment is distant second with 4-5% of the market and organized retail with 1% of the market. Over next five years, Indian real estate market is expected to grow at a CAGR of 20%, driven by 18-19% growth in residential real estate, 55-60% in retail real estate, and 20-22% in commercial real estate.
Long-term outlook
Long term industry outlook remains attractive: We believe that long term industry outlook remains attractive, on account of increasing urbanization, growing nuclear families and the increasing number of Indian middle class. Fundamentally, strong GDP growth, increasing tourism traffic and increase in per capita income coupled with lower interest rates shall improve the outlook of the sector in the medium to long term.
Key Drivers of Real Estate
1) Economic Growth
- GDP growth rate of ~8-8.5%
- Double-digit income growth rate for the next 3-4 years
- Income growth should improve affordability, driving demand for residential units
- Lower interest rates
2) Demographics and Urbanization
- Positive demographic trends - middle class or the aspirers to show a CAGR of 10.4% to reach 124m in 2013 compared to 46m in 2003
- Urbanization – UNDP forecasts urban population will constitute about 40% of total population by 2030 from the current about 28%
- Indian household families moving from joint families to nuclear families
3) Favorable Interest Rate and Fiscal Incentive
- Housing loan interest rate, despite the recent rise, continue to remain low compared to 15-16% in the 1990s
- Easy availability of finance
- Fiscal incentives offered on owing a residential house is also a significant demand driver
4) IT/ITES Growth
- Strong IT/ITES growth should drive demand for commercial space – FY07-10 CAGR of 23% as a result of 568 000 employee additions; Indirect contribution to residential demand as well
- They consume about 75% of the commercial space
5) Organized Retail and Hospitality Demand
- Organized retail penetration level at 4.1% is lowest compared to other emerging markets
- Economic growth and changing demographics should increase retail penetration levels
- Strong tourist arrivals should spur demand for hotels across India. Foreign Tourist inflow is forecasted to show a 20%+ CAGR to reach 10m by 2010 compared to 4.4m in 2006
- Room shortages have resulted in a sharp jump in average room rates – Rs7,559 at end-FY07 vs. Rs2,004 in FY03; Approx. 105,000 hotel rooms are available in India
Future outlook of the sector
The real-estate sector offers a US$80bn-100bn opportunity over the next three years. Higher economy growth and rising income level will lead to higher demand for both residential and commercial properties. An easy and huge availability of capital will enable real estate developers to meet the demand.
Growth in the next decade should come from Tier II/III cities
- Higher real-estate prices in Tier I cities coupled with manpower and infrastructure issues may force companies to look at Tier II and Tier III cities for expanding their operations
Tier I cities- Mumbai, Delhi and Bangalore
Tier II cities- Kolkata, Hyderabad, Pune
Tier III cities- Nagpur, Ahmedabad, Indore, Lucknow, Jaipur
- Within the next three to six years, towns and cities such as Chandigarh, Jaipur, Mysore, Indore, Coimbatore, Vishakhapatnam, etc are likely to see an increase in real-estate demand from the IT/ITES sector
- According to Nasscom’s projections, Tier II and Tier III cities, which account for about 29% and 5% of the total commercial space in FY07, respectively, will increase to 44% and 20% at the end of FY17
India Real Estate
The size in terms of total economic value of real estate development activity of the Indian real estate market is currently US$40-45bn (5-6% of GDP) of which residential forms the major chunk with 90-95% of the market, commercial segment is distant second with 4-5% of the market and organized retail with 1% of the market. Over next five years, Indian real estate market is expected to grow at a CAGR of 20%, driven by 18-19% growth in residential real estate, 55-60% in retail real estate, and 20-22% in commercial real estate.
Long-term outlook
Long term industry outlook remains attractive: We believe that long term industry outlook remains attractive, on account of increasing urbanization, growing nuclear families and the increasing number of Indian middle class. Fundamentally, strong GDP growth, increasing tourism traffic and increase in per capita income coupled with lower interest rates shall improve the outlook of the sector in the medium to long term.
Key Drivers of Real Estate
1) Economic Growth
- GDP growth rate of ~8-8.5%
- Double-digit income growth rate for the next 3-4 years
- Income growth should improve affordability, driving demand for residential units
- Lower interest rates
2) Demographics and Urbanization
- Positive demographic trends - middle class or the aspirers to show a CAGR of 10.4% to reach 124m in 2013 compared to 46m in 2003
- Urbanization – UNDP forecasts urban population will constitute about 40% of total population by 2030 from the current about 28%
- Indian household families moving from joint families to nuclear families
3) Favorable Interest Rate and Fiscal Incentive
- Housing loan interest rate, despite the recent rise, continue to remain low compared to 15-16% in the 1990s
- Easy availability of finance
- Fiscal incentives offered on owing a residential house is also a significant demand driver
4) IT/ITES Growth
- Strong IT/ITES growth should drive demand for commercial space – FY07-10 CAGR of 23% as a result of 568 000 employee additions; Indirect contribution to residential demand as well
- They consume about 75% of the commercial space
5) Organized Retail and Hospitality Demand
- Organized retail penetration level at 4.1% is lowest compared to other emerging markets
- Economic growth and changing demographics should increase retail penetration levels
- Strong tourist arrivals should spur demand for hotels across India. Foreign Tourist inflow is forecasted to show a 20%+ CAGR to reach 10m by 2010 compared to 4.4m in 2006
- Room shortages have resulted in a sharp jump in average room rates – Rs7,559 at end-FY07 vs. Rs2,004 in FY03; Approx. 105,000 hotel rooms are available in India
Future outlook of the sector
The real-estate sector offers a US$80bn-100bn opportunity over the next three years. Higher economy growth and rising income level will lead to higher demand for both residential and commercial properties. An easy and huge availability of capital will enable real estate developers to meet the demand.
Growth in the next decade should come from Tier II/III cities
- Higher real-estate prices in Tier I cities coupled with manpower and infrastructure issues may force companies to look at Tier II and Tier III cities for expanding their operations
Tier I cities- Mumbai, Delhi and Bangalore
Tier II cities- Kolkata, Hyderabad, Pune
Tier III cities- Nagpur, Ahmedabad, Indore, Lucknow, Jaipur
- Within the next three to six years, towns and cities such as Chandigarh, Jaipur, Mysore, Indore, Coimbatore, Vishakhapatnam, etc are likely to see an increase in real-estate demand from the IT/ITES sector
- According to Nasscom’s projections, Tier II and Tier III cities, which account for about 29% and 5% of the total commercial space in FY07, respectively, will increase to 44% and 20% at the end of FY17
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