GalaTime

DNA India: Can’t find the link, but the paper edition said that Sobha’s cutting apartment rates for most of its projectsi n Bangalore & Pune by 8%.

Also, via Business Standard: Emaar MGF cuts home prices

Emaar MGF Land, the Indian unit of the West Asia’s largest real-estate developer, has cut prices of apartments to make them more affordable and tide over a slump in demand for higher-priced homes.

The company is building apartments that cost between Rs 3000,000 and Rs 4000,000 near New Delhi and in Chandigarh ss market “We would have used the land to build more premium homes where margins are higher but we are utilising it to build homes for the mass market,’

The words Sobha used were - “these price cuts should help propel demand”. I say - good luck with that, but I don’t think so. Cut rates by 40%, maybe then you have a hope.

• Bloomberg: Berkshire’s Credit Risk Soars on $37 Billion Bet

The cost of protecting against default by Warren Buffett’s AAA rated Berkshire Hathaway Inc. has almost tripled in two months.

The cost to protect against Berkshire being unable to meet its debt payments, based on credit-default swaps, is more than four times that of rival insurer Travelers Cos. At those levels, the swaps are typical of companies rated Baa3 by Moody’s Investors Service, one level above junk. The price may have risen on concern that the billionaire’s firm could lose a $37 billion bet on world stock market values more than a decade from now.

2019! Heck,  given Buffett’s probabilistic thinking, he has considered the (slim) chances that he’ll still be around in 2019 when (and if) these payments come due.

• Pensions & Investments: Excellent timing: Face to Face with John Paulson (July 2007)

Watch the downside, the upside will take care of itself. That’s been a very important guiding philosophy for me. Our goal is to preserve principal, not to lose money. Our investors will forgive us if our returns don’t beat the S&P in a given year, but we are not forgiven if we have significant drawdowns.

The other saying really drives the same point from a different angle: Risk arbitrage is not about making money, it’s about not losing money. If you can minimize the downside, you get to keep all your earnings and that helps performance.

The performance of these subprime pools will not be decided over one month or two months. They will be decided over the next three years. Our investment (commitment is not based on) looking at what these bonds trade at today or tomorrow, but what the losses in these pools will be two or three years from now. Our estimates are that the losses will be well in excess of 6% or 7% and that as time goes on and these losses are realized, the bonds will be downgraded and they will fall much further.

• Express India: Bought for a fortune, stuck in realty slump

. . . according to information from the International Property Consultants (IPC), clients such as Reliance Mutual Funds and Aditya Birla Group, which have only signed letters of intent, are now demanding renegotiations on the lease rent. The last deal transacted was as long back as April. 

Banga concedes that the rates have come down from Rs 275 per sq ft per month, but only up to Rs 225-250. IPC, however, says that even at Rs 195, there are no takers today. 

Bought over by DLF at Rs 704 crore, the 17-acre plot stands testimony to the country’s costliest land deal till then. Since its moment of glory, the changing market dynamics has forced the Delhi-based realty player to go back to the drawing board more than once. Plans for a business hotel, mall and multiplex were modified to make way for an IT park. For more than a year now, the massive cranes on site have been at rest and work has not proceeded beyond the basement. 

Still in denial.

Via The Big Picture, Trader’s Narrative on Global Real Estate Ratios Show Extent Of Bubble

I guess the great Indian 2BHK/3BHK apartment bubble out-performed Spain, in terms of Price/Rent ratio.

• Business Standard: Demand slump hits RIL’s Jamnagar plan

Reliance Petroleum, a subsidiary of Reliance Industries, is likely to commission only half of its refinery’s capacity at Jamnagar by December-end as demand for fuels such as naphtha and fuel oil has dropped across the world.

Reliance Petroleum’s 29 million tonne per annum refinery, being constructed in a special economic zone, will export almost all of the fuels it produces. These exports are primarily aimed at the US and Europe.

The refinery, which will add nearly 20 per cent to the nation’s refining capacity and make Reliance the largest crude oil refining company in India, will produce fuel oil and polypropylene only when the entire plant is commissioned.

• Bloomberg: Gulf Shares Fall as Banks Tighten Credit; Kuwait Halts Trading

Persian Gulf stocks tumbled, sending Dubai’s index lower for a sixth day and spurring a trading halt in Kuwait, as banks tightened credit terms and oil plunged to a 21-month low.

Emaar Properties PJSC slid to the lowest in more than four years as the Middle East’s largest real-estate developer said it is reviewing its recruitment policies amid the property slowdown.

Dubai property buyers will lose 30 percent of what they have paid if they default, cancel, or breach their purchase contracts, Gulf News reported, citing the Land Department.

Emaar declined 5.6 percent to 3.18 dirhams, the lowest since October 2004. The shares have dropped 36 percent this week.

• Bloomberg: U.S. Stocks Surge, Led by Shares of Energy, Real-Estate Firms

Declines in midday trading today pushed the S&P 500 to 35 percent below its average for the past 200 days, only the second time that’s happened since the Great Depression. The last time was a day before the index rose 12 percent on Oct. 13, the biggest rally since 1939.

The S&P 500 swung between gains and losses at least 38 times, including a drop that sent the benchmark index to its lowest level since the Iraq War broke out 5 ½ years ago.

The gains in oil producers came after the valuation of the S&P 500 Energy Index retreated to less than 6.2 times earnings for the group, the cheapest since Bloomberg began tracking the data in 1995.

Huge turn-around in the US markets. Triple test of bottom? Just another volatile day on the way to S&P 600?

• Financial Express: Realty prices to fall 50%, says SBI chief

OP Bhatt, chairman of State Bank of India (SBI), the country’s largest bank, expects 50% correction in the housing sector prices in the country. “In India we may witness up to 50% correction in pricing in the mortgage markets. If that happens, it’s good news for the Indian banking system as NPAs would reduce and new business would fall-in,’’.

Joydeep Sengupta, director, McKinsey & Compan said the overall impact of the global volatility would enhance the capital requirement of the Indian banking system, which will need $70-80 billion in the next four years to sustain the India growth story. 

• Economic Times: Slowdown is here: Morgan Stanley

The investment bank’s sample of 105 companies reported a 29% fall in net earnings for the quarter ended September 2008, an all time low. This compares with a trailing five-year quarterly average growth of 28%.

. . . at the sector level, the best performances came from Utilities and Technology. The laggards versus the aggregate numbers were Consumer Discretionary, Energy, and Healthcare. Save for Technology and Financials, all sectors reported a slippage in operating margins YoY.

• Hindu Business Line: Slowdown effect: Container train operators start ‘parking’

Many operators now prefer to park their rolling stock assets in their own terminals or the Indian Railways’ yards — rather than running empty rakes (since cargo availability has gone down).

. . . while companies such as Concor, Gatewayrail (a subsidiary of Gateway Distriparks) and Adanis have their own terminals where they can park their rakes, others have to depend on the Railways infrastructure.

. . . two container train operators whom Business Line spoke to pointed out that compared to the cargo availability in September, in October it has decreased by about 20 per cent for their companies.

Times of India: Extra FSI: Govt plans to raise Rs 13,000cr in BKC

The state government plans to raise Rs 13,000 crore from the sale of surplus floor space index (FSI) in G-block of Bandra-Kurla Complex (BKC).

On Wednesday, the state put on sale 13 lakh sq m in the already developed G-block of the International Finance and Business Centre at BKC.

The MMRDA meeting chaired by chief minister Vilasrao Deshmukh on Wednesday resolved to sell the additional FSI at 1.5 times the existing ready reckoner rate of Rs 65,000 per sq m in the area.

Hope I get this right: Rs 13000 crore for 13 lakh sq m (i.e. Rs 1300000 lakh for ~ 140 lakh sq ft) = Rs 9285 per sq ft.

That’s a bit lower than the 15000 per sq ft paid out recently by Jet Airways, and much lower than the Rs 50000 per sq ft paid out in November 2007 by Wadhwa Builders.

Do let me know if I messed up the calcs. There’s all sorts of FSI numbers & land rates in the ToI article.

Jayanth Varma @ Financial Express: Bubble in our backyard

Indians have been buying expensive houses almost completely financed by banks. The cumulative loan to value ratio including “furniture loans” and other forms of financing has been close to (and has sometimes exceeded) 100%. Unlike in the past, many of these transactions have been largely free of black money and therefore there is no hidden cushion in the loan to value ratio. Moreover, our young upwardly mobile professionals have been taking on large mortgage payments (EMIs) assuming that these would be affordable on the basis of projected salaries one or two years down the line.

I’m not sure about the ‘largely free’ part, but the ratio’s certainly gone down.

Real estate prices are sticky and they fall only gradually. Hidden discounts are more common than public price cuts. Evidence from the stock prices of real estate companies indicates that the value of their land bank has fallen by over 50%.

Sticky? Very much so. You can’t deny a lower stock price, but you can be in denial about the market-clearing price of your home for a long time.

We have anecdotal evidence that the retail unsecured lending portfolio of some large finance companies (including some foreign owned ones) received exit valuations of as little as 30% of face value early this year, and are probably worth even less currently.

Yowza. And we all know how the market has voted on the Great Indian Real Estate Boom; here’s a summary of the BSE Realty Index:

It’s near its 52-week and all time low. It’s down over 80% from the peak.

As I said, liquid & transparent markets discount things sooner. The real estate market in India is neither liquid not transparent. It’ll take quite a while for prices to correct to saner levels.

FT: Dubai property on red alert

Dubai is the most exposed of the local economies because its local real estate market is supported by foreign investment and because, as an emirate, it has little in the way of natural resources. A home-grown credit squeeze caused by excess lending and insufficient deposit taking has added to the disquiet.

Credit default spreads on Dubai debt, especially real estate linked borrowing, have ballooned as institutions bet that the pace of growth in the property market will not be maintained.

“The stock markets are a barometer of the real estate market - it’s telling you investors are very concerned right now.”

Well, first look at the golden goose that was driving the market - crude oil prices. They are now down 40% from the peak:

Let’s say oil settles down ~ $80 over the next few months. I think that’ll prick the ME/GCC/Dubai real estate & infrastructure bubble, given the huge amount of supply coming online - who’s going to occupy all that RE? Where do the cash flows come from? US/UK financial services companies? I don’t think so.

Let’s see if the skyscraper indicator works this time: Skyscraper indicator, LIBOR signals, Deficits & rupee

That means - Yet Another ‘New Low’ In Realty:

BSE Realty Index now down 78% from the peak. DLF down 10%+ today. Of course, most developers are still refusing to accept reality and cut prices. Drastically. Now!

• BCA Research: The Bailout: Necessary, But Still Not Sufficient

• Business Standard: Domestic commodity prices down upto 16%

RBD Palmolein prices have come down by 8.14 per cent, while rubber fell by 20 per cent or Rs 28 to Rs 108 a kg.

In the metals segment, nickel lost the most with a fall of 16.11 per cent, while tin followed with 5.78 per cent and lead 4.63 per cent decline.

Natural rubber’s (NR’s) fall is attributed to the decline in crude oil prices, which makes synthetic rubber cheaper and pull down the NR prices.

Edible oils were down as the fall in crude oil prices resulted in a slowdown in demand for bio-fuels. And, palm oil being an important alternative for bio-fuel took the hit. That apart, an increase in acreage of oilseeds and expectations of better rabi crop also contributed to edible oils’ fall.

• Economic Times: Home prices may drop upto 12%

The bitter realisation that the Indian developer has limited options before him to attract buyers. The builders unanimously agreed to allow customers to have a greater say in price negotiations — in other words, they decided to cut home prices.

The developers agreed to give a 10-12% reduction for all consumers, albeit couched in schemes such as ‘bearing’ 2-3% of the interest cost, flexible rates for parking and floor rise pricing.

Indicative prices per sq ft:

Andheri (W) Rs 12,500
Bandra (W) Rs 20,000
Ghatkopar (W) Rs 8,000
Goregaon (E) Rs 9,000
Mulund (W) Rs 6,500
Worli Rs 35,000 

They have ‘agreed’ to a reduction. What a joke. They are probably crapping in their pants, hoping that Mumbai realty doesn’t go into a free-fall.