Companies & Sectors
The reality in realty

Vested interests in the real estate market are falsely spiking property prices. Developers and broking firms are creating a false bubble by exaggerating the improved market sentiment

The convergence of vested interests of a few developers, media houses and broking firms is creating an exaggerated bullish atmosphere in the real estate market. While realty prices have indeed moved up, builders themselves are shocked at the extent of rise claimed by the media.

“Some newspapers have been reporting that our rates for the‘Global City’ residential project at Virar have gone up from Rs 1900 per sq ft to Rs 2700 per sq ft but actually our rates have only risen from Rs 1900 per sq ft to Rs 2100 per sq ft because the building is in the process of completion,” said Boman R Irani, chairman and managing director, Rustomjee Builders. 

He also added, “There is no steep spike in the rates especially by credible developers who have got a brand name and brand image to protect.”

Our sources say that property prices have only increased in South Mumbai by 10% - 25%; elsewhere in Mumbai the prices have just started moving up. According to bankers, prices of residential properties across the country are still down by 15%- 25% from their 2008 peak.
 
M D Mallya, chairman, Bank of Baroda said, “There is a brisk sale of flats in the Rs22 lakh-Rs25 lakh range.”

KV Kamath, Chairman, ICICI Bank, said, “People have curtailed the size of home loans and the 20%-30% drop in price has certainly made 800 sq ft-1000 sq ft apartments more popular. That seems to be the new mantra.” He also added, “People are not buying today on the basis of future income.”

Since the past four months, real estate developers have been raising funds through Qualified Institutional Placements (QIPs) and through Initial Public Offerings (IPOs) or follow-on issues so that they can complete old projects which were stuck since November 2008.

Companies like Unitech Ltd, Indiabulls Real Estate Ltd, Housing Development and Infrastructure Ltd, Sobha Developers Ltd and Orbit Corp Ltd have raised funds through the QIP route. Developers such as Emaar MGF Land Ltd, Nitesh Estates, Lodha Developers Ltd and Sahara Prime City are planning to raise a total sum of around Rs9,800 crore through IPOs—Sahara Prime City has filed its draft prospectus for Rs3,450 crore, Emaar MGF Land Ltd for Rs3,850 crore (down from the Rs6,400 crore it planned to collect last year). Ambience Ltd, a Gurgaon-based developer has filed a draft prospectus with BSE to raise approximately Rs1,125 crore. 

Brokerage firms and investment bankers want to create a scenario which depicts a booming market. Angel Broking in a recent real estate analyst report said that some of the developers have increased their prices by 30%. Industry sources say this is exaggerated.

“Speculative buying is not taking place but a pent up buying (demand) is coming back to the market,” said Pranay Vakil, Chairman Knight Frank (India), a property consultancy firm.

He also explained, “Since the past eight months people had resisted from buying, thinking that prices may go down further. But now they have realised that there will be no fall in prices or interest rates, so we are seeing a demand in the market. The demand is one year old.”

Renu Sud Karnad, joint managing director, HDFC Ltd, said, “There is a lot of demand from first-time house buyers. There is a good demand for house prices in the range of Rs30 lakh-Rs50 lakh in metros and about Rs20 lakh to Rs25 lakh in smaller towns.”

She also added, “In India the housing shortage is huge. Therefore in the long run it is important for the developers to focus on affordable housing and see that the property prices do not rise sharply resulting in customers being priced out of the market.”

Many developers believe that fake hype about prices will hurt buyer sentiments. In the long run if the prices keep rising, a lot of customers will be priced out of the market.
–Pallabika Ganguly [email protected]

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Ambani Charges: The numbers don’t add up
In the latest bout of the Ambani vs Ambani fight, Mukesh Ambani has blamed Anil Ambani of attempting to make a profit of Rs3,50,000 crore in 17 years. Anil Ambani does not have his own gas-based power projects, charges RIL. He cannot use this gas for himself and will trade in it to make huge profits. 
 
Last month Anil Ambani had come out with a series of advertisements charging Reliance Industries of trying to make super profits. Interestingly, neither of the two brothers has given calculations behind these huge figures.
 
Here are our calculations that both the brothers are hugely exaggerating the numbers. Reliance Industries controlled by Mukesh Ambani was contracted to supply 28 million cubic metres of gas (which is equal to one million MMBTU) everyday to Anil for 17 years at a price of $2.4 per MMBTU. RIL says that he has to follow government pricing of $4.2 per MMBTU. In fact, calorific value of one MMBTU is equal to 28 cubic metres of natural gas. The production, demand and supply are measured in cubic metres whereas pricing is done as per MMBTU. As per Anil Ambani, he has to pay $2.4 per MMBTU and his daily expenses are $2.4 million per day. As per the agreement between the two brothers, he will pay $876 million per year. For 17 years, Anil will pay $ 14.89 billion which is equal to Rs 74,450 crore at a conversion price of even Rs50 a dollar. This is nowhere near the figure RIL alleges Anil of making. Clearly, both the brothers are charging each other of trying to make highly exaggerated sums. .
Dhruv Rathi [email protected]
 

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‘India is getting back to speed. We had merely taken our foot off the accelerator’

Debashis Basu/ Sucheta Dalal (MLD): The last time we had met, in February, you were quite bullish about the economy, in contrast to the general gloom and doom. You have been proved right. What is your sense now?
KV Kamath (KVK): I believe the India story is intact. What has happened in Japan and South East Asia, and then China, is valid for India too. And that is, once structural change happens, it is difficult to reverse it, unless there is a major shock. We’re getting back to speed as it were. Last year, we took our legs off the accelerator; we didn’t really brake. Clearly, we’re back onto 7%-7.5% target for the year. It should then be easy to take up to whatever the Government wants —9%-10%.

MLD: What should happen to take us to a higher growth path?
KVK: Looking around the world, I would have wished for lower interest rates. I’ll benchmark two countries—Thailand and The Philippines. In Thailand, just a few years back, the exchange rate was same as ours. It’s 33 baht to a dollar today. I am not saying the rupee should be 33. I’m saying that’s an interesting benchmark to look at. The interest rates in Thailand are 4%-6%. Interest rates are out of skew in India, primarily because the bond market is worried about how the deficit would be funded. This is because the government is not articulating the wealth we have. Look at this way. That’s a simple yardstick, Rs15 lakh crore listed value of government companies. ...Cash balance of PSU companies with banks is Rs3,00,000 crore, adding somewhere around Rs60,000 crore a year. Dividend payout ratio is 25%. Nobody will then talk of deficit. You don’t have to actually release, say very forcefully— this is available. It is a fact that the poor are asked for collateral and the rich get away with no collateral. This will probably have a solitary impact on interest rates.
 
MLD: On the other hand, if you really measure inflation properly, is it really reflective of the prices?
KVK: Have we as a nation done what is required to bring that inflation rate down? For example, we are letting sugar prices get out of hand. The problem is not now; it will come six months from now. What have we done about it? Here, proactive action was required. We are being reactive.
 
MLD: But that’s not going to change, is it? It’s a government attitude and I don’t think it is going to change.
KVK: No, it’s not going to change.
 
MLD: So, ideally we should have 3% inflation and maybe 2% real interest rates, adding to 5% nominal interest.
KVK: Yes, 5%-6% would be ideal.
 
MLD: What are the other key factors that would determine our future?
KVK: One important issue is how China handles its economy. I am not believing the China story this time for certain. I did not believe it in 2000-2002 when they had huge bad loans. But they managed it. This time again nobody is clear as to who’s going to pay for the subsidies being given to get rural China buy. Whether it is banks or industrial companies or government direct intervention, it’s not very clear. Looks like ultimately it’s the banks which will take the hit. They will try another cleaning-up exercise down the line, like they did last time. Last time, they were running surpluses. Now, with this sort of pump-priming against the backdrop of budget deficit, nobody knows that they will do. What is happening is very opaque.
 
MLD: You are just back from a trip to the US. What were your observations?
KVK: American bankers are extremely wary of what’s happening in the US. I have not seen such pessimism at all. I thought that the worst is over and what happens next (would be) a slow return to growth. They have bad loans and they of course, know what to do. They have handled bad loans in the past. But somebody told me that of the 8,000 banks in the US, 1000 banks, that is 12%, have commercial real estate exposure equal to five times their tier1 capital. These are all suspect. All it needs is 20% of these to go bad for that entire capital to be wiped out. The number of banks that may go down is the issue being raised and what does it do to the whole system? If China and the US as growth engines come under pressure, what happens? We are fairly insulated because we are still by and large domestic. But we are getting globalised more and more by the day. For the moment, though, the prognosis seems to be we are going strong domestically. But if China and US both have problems, sentiment will get hit very badly.

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