Published in The Hindu - Sunday Magazine on Oct 26, 2008The fallout of global financial turmoil is a potential bargain hunting opportunity in Indian Real Estate. The patient homebuyer may be able to avail cheaper property rate as well as lower interest loan going forward.
Opening Scene, India
Take any newspaper…this Diwali, there are more ads from real estate companies than from retail shops. “Assured 21.47% Return on Investment” claims one ad. Another claims the builder will pay your full home loan EMI for the first 18 months. Yet another builder promises to buy back your apartment after two years, at an assured higher price – “just make your booking today with 15% down payment”. Are these hard sell campaigns telltale signs of desperation among developers?
Occupancy levels in many recently completed residential complexes in key metros hover around 50%. Those who have bought homes in last few years have seen interest rates gallop faster than an Arabian purebred. Many middle class families that stretched themselves to buy a home are barely able to make ends meet.
Banks have turned paranoid that the Indian economy would slow down and loan defaults would increase due to high interest rate levels. Consumer loans have trickled down…you might have stopped getting those annoying tele-marketing calls for personal loans. Some bankers don’t even want to speak to real estate or infrastructure companies anymore (it’s an irony that the same companies, until a few months back, were the focus segment). Many on-going real estate projects are hanging in mid-air due to lack of capital, both from buyers and from bankers. Some builders have already defaulted on delivery date commitments made to advance reservation customers.
The fund situation turned so grim over the last two weeks that it appears Banks don’t even believe each other any more; Inter bank lending rate (the rate at which banks lend money to each other) touched 20% p.a. (on Oct 10, 2008). Many leading banks are just hoarding cash and playing a wait & watch game.
Scene 2, Rest of the World
Loan defaults in U.S. housing market has increased to unanticipated levels. Investors, Investment Banks, Commercial Banks (those that give loans to companies), Consumer Banks (those that give loans to you and me) and Managed Funds across the world with stakes in U.S. mortgages, are grappling huge losses that threaten their survival. Financial Institutions have started collapsing like a deck of cards.
Global banks have drastically slowed down lending due to lack of trust and lack of cash. Even genuine companies are not getting funding from banks – resulting in a slow down in new investments. Leading Investment Banks and other International Financial Institutions have embarked on a desperate survival attempt by selling their holdings in stocks, bonds, and commodities markets in order to release cash. The Federal Reserve (equivalent to our own RBI) sensing trouble has lowered interest rates rapidly to make money cheaper and more easily available – but the damage doesn’t seem to ease.
Massive job losses have been triggered by the global services sector – dominated by financial services. The fear of job loss has taken a toll on consumer spending as well. The combination of a rapid sell off by financial institutions and the prospect of economic slowdown have pulled down the stocks and commodities market world over to new lows. The Dow Jones Index (New York Stock Exchange) has retreated to year 2002 levels.
Scene 3, following the dots to India
Prolonged FII (Foreign Institutional Investors) selling and conversion of their holdings from rupees to dollars for repatriation (English translation: selling lock, stock and barrel and running back to their country with the money) – has resulted in the rupee falling to nearly Rs 49/ dollar as against a high of Rs 39/ dollar. The Sensex has dropped below 10,000 as I write – because of an expected slowdown in earnings growth by Indian companies, disproportionate FII selling, Indian Investors panic or all of the above.
Due to the fall in rupee, Indian companies that had borrowed overseas are suddenly faced with higher repayment in rupees for their dollar loans. Foreign banks have drastically reduced fresh lending to Indian companies, because of their perceived risk. Indian companies, particularly real estate ventures now look to Indian Banks to fulfill 100% of their loan requirements.
But the Banks in India have displayed a knee jerk reaction to the global crisis and significantly curtailed lending to corporates and individuals. Defaults in personal loans have reached 10%-15% levels compared to earlier levels of 2%-5%. As a result, many Banks and NBFC’s have stopped lending in this segment – including biggies such as Reliance Consumer Finance.
With access to funds drying up for our companies, job loss, hit in export demand due to problems in U.S./ European economy, rise in cost of imports due to rupee depreciation (as importers will have to pay more in rupees for the same dollar value), loss in investors confidence in the stock markets, and drop in real-estate demand – the Indian economy seems headed for a slowdown
Real estate companies seem to be among the worst hit in the current situation. Developers who got used to selling out even before the project started (the trend that prevailed during the past few years) are now facing the prospect of investing significant amount of their own money to complete the project. Unfortunately, banks are not too eager to fund the developers at this point.
I guess the dots across the world economy are connected after all.
* Epilogue* What is in store for the future?
There are only two exit routes from the current deadlock. One, the real estate developers will reduce the pricing. Two, the RBI will ease money supply. The latter has already started happening with the recent announcement that allows banks to use a larger portion of their money for lending purposes. Going forward one can reasonably expect interest rates to come down.
The implication for the retail homebuyer is that home prices may not appreciate for some time to come. Those who wait for the current situation to pan out may not only be able to negotiate a discount on property rate but also get a lower interest loan. So watch out before you hastily book a home this Diwali. Happy Diwali!
* The End*
Opening Scene, India
Take any newspaper…this Diwali, there are more ads from real estate companies than from retail shops. “Assured 21.47% Return on Investment” claims one ad. Another claims the builder will pay your full home loan EMI for the first 18 months. Yet another builder promises to buy back your apartment after two years, at an assured higher price – “just make your booking today with 15% down payment”. Are these hard sell campaigns telltale signs of desperation among developers?
Occupancy levels in many recently completed residential complexes in key metros hover around 50%. Those who have bought homes in last few years have seen interest rates gallop faster than an Arabian purebred. Many middle class families that stretched themselves to buy a home are barely able to make ends meet.
Banks have turned paranoid that the Indian economy would slow down and loan defaults would increase due to high interest rate levels. Consumer loans have trickled down…you might have stopped getting those annoying tele-marketing calls for personal loans. Some bankers don’t even want to speak to real estate or infrastructure companies anymore (it’s an irony that the same companies, until a few months back, were the focus segment). Many on-going real estate projects are hanging in mid-air due to lack of capital, both from buyers and from bankers. Some builders have already defaulted on delivery date commitments made to advance reservation customers.
The fund situation turned so grim over the last two weeks that it appears Banks don’t even believe each other any more; Inter bank lending rate (the rate at which banks lend money to each other) touched 20% p.a. (on Oct 10, 2008). Many leading banks are just hoarding cash and playing a wait & watch game.
Scene 2, Rest of the World
Loan defaults in U.S. housing market has increased to unanticipated levels. Investors, Investment Banks, Commercial Banks (those that give loans to companies), Consumer Banks (those that give loans to you and me) and Managed Funds across the world with stakes in U.S. mortgages, are grappling huge losses that threaten their survival. Financial Institutions have started collapsing like a deck of cards.
Global banks have drastically slowed down lending due to lack of trust and lack of cash. Even genuine companies are not getting funding from banks – resulting in a slow down in new investments. Leading Investment Banks and other International Financial Institutions have embarked on a desperate survival attempt by selling their holdings in stocks, bonds, and commodities markets in order to release cash. The Federal Reserve (equivalent to our own RBI) sensing trouble has lowered interest rates rapidly to make money cheaper and more easily available – but the damage doesn’t seem to ease.
Massive job losses have been triggered by the global services sector – dominated by financial services. The fear of job loss has taken a toll on consumer spending as well. The combination of a rapid sell off by financial institutions and the prospect of economic slowdown have pulled down the stocks and commodities market world over to new lows. The Dow Jones Index (New York Stock Exchange) has retreated to year 2002 levels.
Scene 3, following the dots to India
Prolonged FII (Foreign Institutional Investors) selling and conversion of their holdings from rupees to dollars for repatriation (English translation: selling lock, stock and barrel and running back to their country with the money) – has resulted in the rupee falling to nearly Rs 49/ dollar as against a high of Rs 39/ dollar. The Sensex has dropped below 10,000 as I write – because of an expected slowdown in earnings growth by Indian companies, disproportionate FII selling, Indian Investors panic or all of the above.
Due to the fall in rupee, Indian companies that had borrowed overseas are suddenly faced with higher repayment in rupees for their dollar loans. Foreign banks have drastically reduced fresh lending to Indian companies, because of their perceived risk. Indian companies, particularly real estate ventures now look to Indian Banks to fulfill 100% of their loan requirements.
But the Banks in India have displayed a knee jerk reaction to the global crisis and significantly curtailed lending to corporates and individuals. Defaults in personal loans have reached 10%-15% levels compared to earlier levels of 2%-5%. As a result, many Banks and NBFC’s have stopped lending in this segment – including biggies such as Reliance Consumer Finance.
With access to funds drying up for our companies, job loss, hit in export demand due to problems in U.S./ European economy, rise in cost of imports due to rupee depreciation (as importers will have to pay more in rupees for the same dollar value), loss in investors confidence in the stock markets, and drop in real-estate demand – the Indian economy seems headed for a slowdown
Real estate companies seem to be among the worst hit in the current situation. Developers who got used to selling out even before the project started (the trend that prevailed during the past few years) are now facing the prospect of investing significant amount of their own money to complete the project. Unfortunately, banks are not too eager to fund the developers at this point.
I guess the dots across the world economy are connected after all.
* Epilogue* What is in store for the future?
There are only two exit routes from the current deadlock. One, the real estate developers will reduce the pricing. Two, the RBI will ease money supply. The latter has already started happening with the recent announcement that allows banks to use a larger portion of their money for lending purposes. Going forward one can reasonably expect interest rates to come down.
The implication for the retail homebuyer is that home prices may not appreciate for some time to come. Those who wait for the current situation to pan out may not only be able to negotiate a discount on property rate but also get a lower interest loan. So watch out before you hastily book a home this Diwali. Happy Diwali!
* The End*
9 comments:
Hi shyam,
Article reflects the present scenario out there in lucid terms.
U are really good at making things easier understand. Congrats, again.
Can u plz explain why this dollar vis-a-vis rupee is appreciating so much.. wat is the underlying phenomenon...??
Plz replya at knchaitanya@gmail.com
Waiting for ur mail...
Chaitanya K N
Hi Chaitanya, I am sure analysts can come up with a million reasons as to why the rupee has dropped in value. But as they say - hindsight is 20/20. I will do my bit by offering two simple reasons 1) foreign funds are selling their indirect investments (made in rupees) in our country (through shares etc..) , selling the rupee to convert it into their local currency, and transferring the money back to their home country. This inturn could be to infuse cash into their core operations in the 'Head Quarters' after the recent losses. 2) New foreign funds in the form of direct or indirect investments entering the country have trickled down, thereby reducing inflow of foreign currency.
This sudden demand for foreign currency vis-a-vis the rupee , without additional inflow of foreign currency could be attributed to the drop in value of rupee vs key foreign currencies.
Whether this is a temporary imbalance or is the depreciated rupee here to stay for a while - is open for debate.
Shyam
We are hearing the real estate prices have come down all over the country , but as far as i know , i hear most of the people and my friends say "They have just made a fuss , that prices have come down!! , We cant find flats cheaper than earliar , even rents are almost same as earliar , even higher , This is not true for some rare locations and cases .. 90% it appears to be same ... "
can you explain this ?
- manish
http://finance-and-investing.blogspot.com/
Hi Shyam
Your articles related to the downturn are really intresting and are making lot of sense.I appreciate your work very much.
Please keep giving even more realistic insights in future.
Thank you
Surya
Manish, Humans are generally very bad a forecasting...our forte seems to be in connecting the dots looking backwards.
But, the fact is many small/ mid-rung real estate developers are in a tight funding situation currently and are going all out to attract homebuyers. Many of them are trying to overcome the fact that Banks don't give them direct loans anymore, by asking you - the buyer, to take a home loan for which the builder would furnish the EMI - until construction is complete. This way they are able to tide over the funding situation at relatively low interest rates of 13-14% as against the alternative of paying 20-25% to institutional financiers/ private equity guys.
Some builders are assuring 25% p.a. return by committing a buy back at higher price after 2 yrs, when construction is completed - if the returns are really "assured", why don't they invest their own money? if the answer to this is that they don't have enough money, then how are they going to get the money after 2yrs to buy back from you?
do all these developments point to a reduction in realty price - i guess it depends on how the RBI handles the interest rates over the next few months. But rest assured, the homebuyer can atleast get a lower interest loan, going forward.
In addition to Shyam's explanation, you have to note that US$ is strengthening against Euro (and most other currencies)also. What this tells us is US is perceived as a "safer" place to invest, thereby the funds are coming in.
Once this pattern gains momentum, this will lead to another cycle of boom and bust. The way I see it, Rupee has a long way to go before it hits the bottom.
Another point to note here, the hiatus between these cycles of boom followed by bust is getting smaller. And every successive bubble is getting bigger than the previous one.
What I (or anyone for that matter) would be interested in is, knowing where the next bubble going is to be. Is it commodities? Green Energy? I don't think dotcom/Realty will be back in favor.
Shyam, would you please throw some linght on this?
About a decade back, a bank will offer housing loan only for 20% of the property value the rest 80% has to be brought by customer. Further loan was provided only upto 10 years. This trend was reversed by MNC bank in the last 10 years.
The younger generation got used future money (credit) like the US, but what they forgot was when Citizen in developed country lose his Job, country takes care and pays his 'unemployment allowance'. What do we have here??? probably, the IT Dept might question you as why your return for the year was "Nil".
People working in MNC work hard taking all the abuses from there Masters and governed by SLA's(back to East india company regime, prior Independence) and pay through the nose to real estate developer(no SLA's) who in turn enjoy family vacation annually at exotic locations.
I saw one more advertisement from real estate company in THE HINDU stating "Chennai is like New Jersy" , in what sense?? . We have poor infrastructure, high interest rate & finally there is no plan about maintenance post handover by the Builder /government agencies..... probably the building is comparing the price with New Jersy.....
I also see a question in most of the blog/website, try to compare real estate with Stock,Petrol and even Gold. The general claim is that when stock, Petrol and gold is coming down real estate is not. why?.
Simple, commodities like Stock, Petrol & Gold are day to day affair and hence we will know the price rise and reduction next day.
Real estate are different, which is run on parallel economy(read as "Black Money") and nexus with politicians. Hence Builders can hold on the price for about 6 months to year or till the time they have sufficient liquidity, so will always take time....
very popular site you have done good maintained to this site.
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