Companies & Sectors
Foreclosure after real estate bubbles burst in EMs

A burst real estate bubble in emerging markets would be far more severe and would last much longer. The reason is simple. The legal plumbing in these countries, including foreclosures and bankruptcy laws, is either deficient at best or nonexistent at worst

It took some time, but they are finally beginning to get it. Leading financial analysts, money managers and economists have commenced to comprehend that real estate bubbles in many emerging markets could crash. The Nobel Laureate economist Paul Krugman wrote in his New York Times column that China was another emerging danger as its credit fuelled real estate bubble burst. The same concept has at last dawned on hedge funds A hedge fund owned by the famous private equity firm Carlyle sent an elite strike team to do a “deep-dive research trip” to China. It won’t help. They might find what is, but they have no idea of what is to be.

To find out we have to look at what was. The US state of Texas had a real estate bubble in the late 1980s. When the bubble collapsed, banks were stuck with massive bad real estate loans. To solve the problem the US created one of the first “bad banks”, the Resolution Trust Company (RTC). The banks transferred the bad loans to the RTC along with the job of foreclosing on and selling the property.

The RTC tried to do its job, but was stopped when local real estate interests complained loudly that sales of foreclosed property were depressing the market. When the RTC stopped selling, the market froze. The buyers stopped buying, because they knew the RTC would eventually have to clear its inventory. After a time economics overcame politics and the sales restarted.

Today the US has a similar problem. Almost 30% of houses sold in the US in 2011 were the result of foreclosures. Over 3 million homes have been foreclosed since the real estate market collapsed. But the market still has not cleared. Although many of the foreclosed homes do get sold, they make up less than one-third of the houses that the banks actually repossess. The banks are slowly leaking these properties on to the market, because they are terrified that too much distressed inventory would depress prices further. The result is that the recovery has been slow. But at least the process is going forward, which is a lot better than nothing at all.

The US is not the only country that has experienced a real estate bubble. The easy credit sloshing around emerging markets has had a dramatic effect on property. Luxury homes in Mumbai and Singapore have increased by 138% and 144% respectively over the past five years. Real estate in India grew 400% from 2003 to 2008 before the crash and now in some places it is 30% higher than its 2008 peaks.

Prime office rents in Rio de Janeiro are higher than anywhere in either North or South America including New York. House prices in Sao Paulo have nearly doubled since 2008. Some areas of Rio’s fashionable Ipanema district have risen over 30% since last year.

Then there is China. Home prices in Beijing have risen by about 150% in the past four years. Like India, they have increased 400% since 2001. Beijing theoretically began to tighten lending especially to real estate two years ago, but their efforts have not been rewarded until the last few months when property prices started to decline.

Contrary to some true believers, all markets go down as well as up, even emerging markets. Prices are beginning to fall and the falling prices have begun to accelerate.

The consequences of a real estate bust in emerging markets would create quite a different situation than the real estate bust in developed markets. The rules are much different and so would the outcome. A burst real estate bubble in emerging markets would be far more severe and would last much longer.

The reason is simple. The legal plumbing in these countries, including foreclosures and bankruptcy laws, is either deficient at best or nonexistent at worst. There isn’t even information on it. Despite diligent search in all financial news sources and general internet search, I have found few if any references to emerging market foreclosures.

Many economists like to point out that mortgage lending in these countries is still quite small and often requires large down payments. True, but it has been growing at 20% a year in places like India. In China bank-financed construction makes up twice the percentage of the gross domestic product (GDP) as it does in developed countries.

For a country to grow after the crash of a real estate bubble, the market has to reach equilibrium. To do so requires that over priced homes with delinquent mortgages have to be foreclosed and sold. If the procedure for foreclosure doesn’t exist, then the entire economy gets stuck with massive dud loans and zombie banks as occurred for over a decade in Japan. So when the emerging markets collapse, the recovery will take years.

(The writer is president of Emerging Market Strategies and can be contacted at [email protected] or [email protected]).

 

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COMMENTS

Grant

5 years ago

We all realize that much of China real estate is worthless and falling apart. This is why no one who has real money wishes to live in these buildings. Everyone wishes to emigrate to a far better clime. We all know this to be true.

Grant

5 years ago

Perhaps now is the best time for some of the real estate developers to take a few deep dives of the rooftops of the worthless buildings they build. What about this?

Budget as scheduled not a problem: CEC, FM share the view

“The Union Budget is usually presented on the last date of February. Next year being a leap year, the budget is likely to be placed on 29th February. The elections to all the state assemblies, except in Goa, will be over by that date. So, I don't think there will be any problem,” finance minister Pranab Mukherjee told reporters in Kolkata

New Delhi/Kolkata: The Union Budget for 2012-13 may be presented as usually scheduled on the last day of February next with both the government and Election Commission not foreseeing any problem due to assembly polls in five states which would not have been completed by that date in Goa, reports PTI.

“Ideally, I should not comment on it on what the government does. We did try to ... as it is we have a lot of problems... seven to eight considerations like climate, exams, law and order and festivals were taken into account.

“Except in Goa, we will be completing the elections in all four states by 28th February, leaving 29th February for the budget. I have nothing to do with it. Our feeling was that if the budget does not have anything special for Goa, then there is no problem (about presentation of budget),” he told PTI in New Delhi.

However, he added that it is not as if budget has not been postponed. “There has been a precedent once in the past of budget having been shifted to mid-March. But, if there are no announcements specific for Goa, there is no problem. It is for the government,” he said.

Mr Quraishi was responding to a question whether presentation of the general budget would be deferred in view of elections whose schedule was announced yesterday.

The assembly elections for Goa are scheduled to be held on 3rd March.

Finance minister Pranab Mukherjee said he did not think there was any problem in presenting the Budget for 2012-13 on schedule in the wake of the announcement of assembly elections in five states.

“The Union Budget is usually presented on the last date of February. Next year being a leap year, the budget is likely to be placed on 29th February. The elections to all the state assemblies, except in Goa, will be over by that date. So, I don't think there will be any problem,” he told PTI in Kolkata.

Mr Mukherjee, however, said the date for the presentation of the budget will be fixed after discussions at various levels.

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Oil ministry says no provision for penalty in RIL’s KG-D6 contract

The Parliamentary Committee in its report expressed surprise at the lack of specific penalty stipulations in PSC and asked the government and its upstream technical arm, DGH “to review PSC contracts entered with various operators and incorporate stringent provisions therein for any breach in approved plan”

New Delhi: As it gets ready to take action against Reliance Industries (RIL) for the dip in output at the KG-D6 fields, the oil ministry has told a Parliamentary Committee that the Production Sharing Contract (PSC) for the block does not provide for penalty in case of shortfall in production targets, reports PTI.

“There are no specific penalty stipulations in PSC in case of shortfall in achieving production targets envisaged in either the approved Field Development Plan (FDP) or Annual Work Programme and Budget, except termination of the contract,” the ministry told Standing Committee on Petroleum and Natural Gas, whose report was tabled in Parliament last week.

Irrespective of the submission made to the committee, the ministry wants to limit the amount of expenditure RIL can recoup in proportion to the gas production from KG-D6, as it feels the 40% drop in output was because of the company did not drill the committed number of wells.

Fearing such a move, RIL had on 24th November slapped an arbitration notice seeking to address the issue legally.

The ministry last week sought time till 31st January to reply to the notice.

The panel in its report expressed surprise at the lack of specific penalty stipulations in PSC and asked the government and its upstream technical arm, Directorate General of Hydrocarbons (DGH) “to review PSC contracts entered with various operators and incorporate stringent provisions therein for any breach in approved plan.”

The PSC allow operators to recover 100% of their exploration and production costs and do not link cost-recovery to output.

The ministry told the panel that annual production targets are first approved by the operator (RIL)-led operating committee (OC). These are reviewed technically by DGH and “subsequently deliberated, reviewed and approved in the Management Committee” which comprises representatives of not just the operator but also the ministry and DGH.

Gas output from Dhirubhai-1 and 3 gas fields in the KG-D6 block has fallen from 54 million metric standard cubic meters per day (mmscmd) achieved in March 2010 to 32.94 mmscmd this month instead of rising to the planned 61.88 mmscmd.

RIL has so far drilled 22 well on the fields instead of 31 committed by April 2012. DGH, the ministry told the panel, is asking “the operator (RIL) to expeditiously drill wells in line with approved FDP during the year 2011-12, which may help to revive the falling gas production from these fields.”

The company had to shut down four wells due to water ingress/other problems, it told the panel adding the DGH was carrying out well-wise performance analysis to ascertain the reasons of decline in gas production from existing wells.

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COMMENTS

Shadi Katyal

5 years ago

Why is any body surpise of such lack of any penality clause. After all it is Reliance and the company very foundation stone is laid on buy and buy the Govt officials and cheat the people.
We talk of Lok Pal and what not but have never looked into the true foundation.
When a nation has 35% Mp with charge sgeets f rape,kidnapping ,killing and what not and expect any rules from such rouge people and than talk of Lok Pal etc.
It is well known that RIL bought lot of oiland gas reserve where the ONGC could not find any minerals and yet after RIL bought the same wells ,suddenly gas came oozing. Was the report of non existance made after proper payments to officers incharge?
This is a good example and both the Govt and RIL were aware and maybe it was RIL who wrote the contract.
Add another SCAM, the national pride

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