Investor Issues
High realty: Investors beware of China and India

A Barclays Capital report sees the skyscraper frenzy as an indicator of impending doom that reflects a widespread misallocation of capital and an impending economic correction

It is a popular belief that when buildings get taller, it foreshadows an economic collapse. Now, a Barclays Capital report reinforces this hypothesis and goes on to warn investors about China, which is witnessing a ‘skyscraper boom’ and India, which has some 14 skyscrapers under construction.

The Barclays report ‘Skyscraper Index—Bubble Building’ says, “Our Skyscraper Index continues to show an unhealthy correlation between construction of the next world’s tallest building and an impending financial crisis. Investors should therefore pay particular attention to China—today’s biggest bubble builder with 53% of all the world’s skyscrapers under construction—and India,  which with just two completed skyscrapers, now has 14 skyscrapers under construction.”

Skyscrapers have largely been testimony to troubling times that follow soon: The Chrysler and Empire State Building in New York in 1930; the Sears Tower in Chicago in 1974; the Petronas Towers of Kuala Lumpur 1997 and the latest wonder—the Burj Khalifa of Dubai in 2010. Dubai, which had gone on a landscaping and architecture frenzy that culminated in the Burj Khalifa—saw a downturn soon after.

Even buildings constructed for companies are not exempt from these rules: Nasdaq’s MarketSite Tower appeared in Times Square in 1999, just three months prior to a 70% crash in Nasdaq Composite Index. Enron’s grand building, complete with its eight-storey high trading floor was  sold off at one-third of its $300 million cost to pay off part of the $50 billion debt the company owed.

According to the Barclays Capital report, China will complete 53% of the 124 skyscrapers under construction over the next six years, expanding the number of skyscrapers in Chinese cities by a staggering 87%. China’s skyscrapers are not only increasing in number—it now has 75 completed skyscrapers above 240 metres in height—but the average height of the skyscrapers that it is building is also increasing as past liquidity fuels the construction boom.

The report says, “Over 70% of China’s skyscrapers are clustered in the more economically advanced coastal areas of the Pearl River Delta and the Yangtze River Delta. Over 50% of China’s skyscrapers are today in Tier 1 cities, and based upon current completion plans, about 80% of China’s new skyscrapers will be built in Tier 2 and Tier 3 cities over the next six years—an evidence of the expanding building bubble.”

The report says that the growth of Asian (excluding Japan) construction in the 1990s is consistent with the region’s completion of the world’s tallest buildings and the onset of the Asian financial crisis. More recently, it has been the Middle East, which now has the world’s tallest building—the Burj Khalifa where the recent concentration of skyscraper building has emerged.

India is not behind her illustrious neighbour and rival. Today India has only two of the world’s 276 skyscrapers over 240m in height, yet over the next five years it intends to complete 14 new skyscrapers, in what will prove to be its largest skyscraper building boom.

India is also constructing the 103-storey Tower of India in Mumbai, scheduled to be completed by 2016. It will then become the tallest building in the world, second only to Burj Khalifa in Dubai. In 2011, the construction was stalled.

“If history proves to be right, this building boom in China and India could simply be a reflection of a misallocation of capital, which may result in an economic correction for two of Asia’s largest economies in the next five years,” concludes the report.

It is widely believed that when people run out of ideas and become too arrogant, they join the skyscraper race to outdo their rivals—a very expensive show of one-upmanship. Such projects are rarely viable—the Burj Khalifa has many empty floors.

India has already seen the massively wasteful Antilia, residence of Mukesh Ambani and reportedly the most expensive private residence in the world. The grotesque structure was completed in 2010, which was soon followed by a downturn next year. Around the same time, property prices escalated in Mumbai and Delhi— India’s realty hotspots. A slew of tall buildings surfaced in these cities, which are presently regarded as extremely inefficient markets in the country.

William J Mitchell, wrote in his essay, ‘Do We Still Need Skyscrapers?’ in Scientific American: “In the 21st century, as in the time of Cheops, there will undoubtedly be taller and taller buildings, built at great effort and often without real economic justification, because the rich and powerful will still sometimes find satisfaction in traditional ways of demonstrating that they’re on top of the heap.” May India cease from demonstrating exactly that.

User

COMMENTS

rprtr

6 years ago

Skyscrapers are eyesores. Without adequate infrastructure like ample availability of good drinking water, effective drainage systems, reliable electricity and good transportation systems, they add to the woes of human society.

yt

6 years ago

One shouldn't forget a very important thing : The fact that skyscrapers are "good generic shapes" to increase density at the scale of a city is simply a false myth, that is a lie (and especially true for housing, less for offices).
This was "formalized"(even if in a too simplified way at the time, basic results still stand) in the sixities by Leslie Martin and Lionel March in Cambridge, that is if you compare generic urbanism made of towers, slabs or courtyard buildings, using the same natural light constraints and with varying number of floors, it is false that the tower shape provides the best results, and all this is asymptotic anyway.

Or in other words, skyscrapers only "make sense" as a singularity, and the "increasing density mantra, the higher the better" is simply a "false moral excuse" in order to build them.

So wouldn't be surprised at all of this synchronicity between building some and financial crisis.

for details check two articles linked below(in english as pdf):
http://iiscn.wordpress.com/2011/05/15/de...

Deepak vyas

6 years ago

In the Article the writer is only Talking about skyscrapers.The Report only talk about the History.
But I feel there are Short Comings in the report.
1. It doesnt take into account the Population Growth of China & India. It doesnt state how much is the demand & Supply.
2. Doesnt Consider the Age Group of Population entering the Income earning group Annually.
Though it would have been better for the Publisher/Moneylife to question barclays about the potential demand/Supply annualy for next ten years. Then find out whether there is going to be a big Crash in Prices. If There is crash, then for how long market will go down.
Further Pricing falling/ Crashing is good News for Common Indian. Further when Prices of Common Commodities rise every Media/ Newspaper lot of Noise. But when Prices of Realty rises . All Media/ News Papers are happy????.

Taking the investor for a ride—with government sanction

With accounting standards that keep changing from hour to hour, the balance sheets become irrelevant pieces of garbage. Yes, you will have statutory compliance, but the investor is thoroughly misled

There is wonderful news for companies that are sitting on liabilities in foreign currency. The corporate affairs ministry has put its foot in the domain of the guild called the Institute of Chartered Accountants of India (ICAI) and said that these liabilities can be ignored from the accounting statements till 2020. Effectively, losses on foreign exchange can be taken directly to the balance sheet, without going through the profit and loss account! 

This is very much like the ministry of health changing the name of a terminal disease from, say, cancer, to a minor disorder like ‘fever’. Everyone should be happy.

It is amazing how the government comes in to fool the investing public. The Reserve Bank of India (RBI) comes in and relaxes norms relating to recognition of bad debts. It permits banks to ‘reschedule’ loans so that they do not have to reduce their profits on account of doubtful loans. And the stupid banks will report ‘higher’ profits and pay taxes on it too! And the brokerages will come out with research reports that will end up comparing apples with tomatoes.  

The length to which the government bodies connive with industry bodies to hide things from investors is amazing. And the body called ICAI just keeps it mouth shut.

Now, the accounting standards are supposed to be the sole domain of the ICAI. If the RBI or the corporate affairs ministry permits laxity in accounting norms, should the former toe the line? Is it not the job of the ICAI to qualify the accounts and quantify precisely the impact on the bottomline due to changes brought about by some fiat issued by a third party? If they do not do this, they are not being true to their profession and the investors have a right to seek explanations from the auditors. The auditors should simply ignore the change in reporting standards permitted by some unrelated entities and expose the scam for what it is.

It is no wonder that Indian equities are viewed with suspicion. With accounting standards that keep changing from hour to hour, the balance sheets become irrelevant pieces of garbage. Yes, you will have statutory compliance, but the investor is thoroughly misled.

In case, the rupee gains and there are exchange profits, will the companies stop reporting these? Why are rules and norms being designed to simply pretend that things are fine when they are not? There seems to be a concerted effort between various government agencies and the industry associations to fool the investing public at large. And in this, bodies like the ICAI have become a ‘handmaiden’, who does not care about the fact that it owes legal allegiance to the shareholders and not to the promoters.

The end result would be financial results that are boosted by heavy doses of ‘steroid’ and even the analyst body would not do anything about this. The promoters will use these fairy-tale accounts to raise more money from the public and the banking system. The banking system will in turn use these fairy-tale customers to boost their numbers and fool the public.

It is best to avoid all companies with any kind of foreign exchange liabilities. One simply does not know whether the company is already bust or just bluffing.

 

User

COMMENTS

Nagesh Kini FCA

6 years ago

Apparently Vinod Arora is new to the audit profession. Just by saying AS 11 he simply cannot validate his stand.
The auditors not only winked at but connived in Satyam, allowing the fraud to go on for seven long years.The punishment is meted out not to the lead partner or the one who has signed but the lowest in the team.
The partner was stated to be the Chairman of ICAI's Ethics Committee! And they are out on bail.
The SEC has come out heavily no the company, our SEBI, and Courts are still mulling over the issue.
Our auditors merrily attest the accounts that are neither true nor fair, nor fairly true or at best neither for the right price.What has happened to GTB?
Our so-called Regulators SEBI, RBI and IRDA are toothless watchdogs that can not bite leave alone growl.
The new Companies Bill ought to remedy the malady.

REPLY

Vinod Arora

In Reply to Nagesh Kini FCA 6 years ago

These kind of baseless allegations and discussions are the only reasons which make the virtual platforms on internet, useless and less trustworthy. I dont know you want to discuss AS 11, Satyam, GTB, ICAI or something else, but I am sure that this portal is also surrounded with fake identities and discussions. Although I am in CA Profession for more than 20 years, but it does not make difference if the discussion is on logical grounds even if i am a fresh CA. It also does not make sense, if someone who pretends to be seasoned but utters invalid comments. Its no wonder in India that there are people, those who have never been to Politics or to any School/College, discussing about competence of PM or President !! They also dont find takers except in election days. However when the things are legal, only logic prevails.

nagesh kini

In Reply to Vinod Arora 6 years ago

There is absolutely nothing baseless or invalid comments whatsoever.
Thanks for letting me know that you are a CA of 20 years, I've put in double that period and all of it in corporate audit both in the private and public sectors. I can very claimed to be more 'seasoned' a term you have chosen to use.
When we are talking of Balance Sheets and Investor Protection, pray how does politics and going to school arise at all?
Satyam and GTB were gross audit failures. Why don't you comment on that?

Narendra Doshi

6 years ago

Dear Bala,
Well said and THIS IS THE ETERNAL TRUTH. NEVER FORGET IT IS YOUR OWN HARD EARNED MONEY WHEN you INVEST ANYWHERE.

Prakash

6 years ago

I suggest that this article (link given below) be read to understand and know the plight of investors in this country.

http://www.firstpost.com/investing/dear-...

REPLY

Narendra Doshi

In Reply to Prakash 6 years ago

Dear Prakash,
This sentence from the link summarizes aptly for ALL TIMES to come.
"The only way an investor can protect himself is by learning to take care of his money himself."
NEVER FORGET THIS and then INVEST.

Vinod Arora

6 years ago

Its disgusting to read such Articles which are based on a highly narrow approach about ICAI and Audit Profession. Probably there is a lack of understanding of the Author on the Role of ICAI and the Auditors. Still the Auditors will quantify the impact on the accounts and disclose in due course so that investors can understand the impact of deferment by MCA/NACAs of implementation of AS 11 of ICAI. ICAI and Auditors will be doing their role, where is the doubt? Would request Author to look into the broader picture before stepping into passing wrong judgements. Rgds.

Investors not to pay for maintaining KYC data: SEBI

SEBI, which is working on simplifying the Know Your Customer (KYC) process for easy investing, said there will be no burden on investors for maintaining their data with the KYC Registration Agency (KRA). In case of demat, an investor has to pay annual maintenance and usage charges for their account with the two depositories. In case of single KYC data, the KRA will do the record-keeping. SEBI...

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