Chennai real estate bubble has burst

This statement may be applicable to all of the metros in Chennai, but more specific to Chennai real estate-

More than first world prices quoted for worse than fourth world infrastructure!

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The following is my short take on the current Chennai real estate scenario.

At the outset, if you make web enquiries or talk to a broker you may get a feel that the prices have not gone down. But the reality is different.Look at the following stories that I know of

1. Many apartments launched on the OMR almost /. 7 years ago are still not fully sold and they are not fully complete in terms of construction either ( in terms of the amenities promised).The prices quoted are almost 50% down if you adjust for inflation.

2. In a building that I know in Adyar, a new 2 BHK apartment (1100 sqft) is quoted at 1.8 crores for almost a year now. The rental yield for this price is 1.5% at the max. There is a big garbage dumping place and a sewage stream within smelling distance of this apartment. 4 of the 6 flats in this building are waiting for sale for more than a year now. ( For this price you may actually find apartments in New York, Singapore, Malaysia, Dubai or even some European countries!)

3.One of my friends who bought an apartment in the city for 51 lakhs ( 5 years ago) wanted to sell his apartment for 90 lakhs. Finally he had to settle in for 65 lakhs and he was lucky enough. This apartment was flooded till the first floor during the Chennai floods. After the floods, the price could have gone down further.

4.A suburb which was flooded ( built in a lake bed) like hell is seeing exodus of tenants while the owners are left with their house along with huge mortgage payments for the next 10, 15 years.

5. Couple of my friends are frustrated as the possession dates of their apartments have been pushed indefinitely ( from 2014->2015-> 2016 now)

2015 has seen the beginning of the down fall.With state elections coming up in 2016, a lot of money locked by politicians need to be taken out.This might also pull down the prices further.

The reality will get more apparent to all  in 2016! 

Real estate debt levels #simply_scary

Real estate euphoria is slowly dying and the developers are facing some sort of difficulty- Most of us know this from the reports that we read.

Today, I happened to have a conversation with a person with a RE insider during my train journey and it was nothing less than scary!

• One of the RE company is having debt up to Rs 1000 crores while the paid up capital as per books is below 20 crores( the actual capital got in by the promoter is far far less --- :-( , that should be another story)
• The company has been using one bank debt to pay another cyclically and so on and they are managing this through their "contacts".
• One famous private sector bank which is the darling of the stock market is keen on re-financing one of their loans on the condition that they will be the preferred partner for retail loans if and when they sell the flats. The logic being that retail loans seldom go bad!
• Also got to know that the company had previously "pleased" a lot of people to get the loans.
• Even if the company manages to sell all their existing stock and WIP at current prices, they will be able to manage only 50% repayment of the debt. 

Not sure what if the RE bubble burst, a few banks may actually go bust. ( But for all retail investors,Fixed deposit seems the safest investment ;-) )

NPAs from real estate and infrastructure sector can play out more differently than what we can predict.

Fingers crossed on what will happen and how stock market would play out eventually.

At least, I feel very very scared!!

Real estate - insider story

My uncle works for one of the real estate companies in Chennai. The company has a strong political connection and so Public Sector Banks were the primary source of funding for this company. 

As sales slowly started drying up , the company borrowed a second round to pay interest for the loan initially taken. (You should not ask how these loans were taken:-) )

While this situation continued, interest rates rose and sales almost came close to zero.In normal circumstance you would have expected the builder to reduce prices. Now they have gone in for  another round of financing from a private financier with double the amount of property as collateral.

Just imagine the margin of this builder, if they are able to pay "Sooooo muchhh" interest and still sell their properties for a profit.

"Property prices keep going up " is the mantra that is held to sell property to the middle class. So, these companies don't want to bring down the prices at any cost.

Moral 1:- Builders will never want the price to come down.

One of my friends had bought a flat from this company 3 years ago for 75 Lakhs. He wanted to dispose this of for 92 Lakhs. But after trying out for 6 months, he has come down to an asking value of 80 Lakhs ( of course a big loss- considering the interest paid). Still no takers. 

The builder is still maintaining the prices of unsold flats in the apartment to market value. My friend is not able to sell his flat , the builder has many unsold flats. But my friend has not been able to hold to his selling price for long.

Moral 2:- Selling real estate may not be that easy for an individual as you may imagine.( Brokers, Builder, Bankers manage the game)

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Chennai real estate - the 'only investment' that can "never go down" ( that defies gravity!)

Statutory Warning ;- This post is written on a lighter note and readers are not expected to take anything written here seriously . ( Probably, this disclaimer should apply to all the posts :-))

If you are looking for an investment that never goes down, is secure and gives you a compounded annual growth rate of 30% or more , "Welcome to Chennai real estate".

Most of the working class in this city has seen the property rates go up at least 10 times in the last ten years. So, everyone who buys a property in Chennai feel that they have done the best investment on earth.If you try to discourage a person who is going to buy his second or third property and tell him not to "lock" 70% of  his take home salary on "EMI", you are looked down as a fool.

Equity's lackadaisical performance and the extended bull run of real estate(over the last five years) has gotten into the deep psyche of these 'investors". 

India is thickly populated, City population keeps going up, Rates have never gone down in Chennai are all regular arguments you hear. No amount of data or concepts can take away the belief (rather fact:-) that "Chennai real estate never goes down". You will feel   people more confident than Warren buffet on their investments.

I am left with only one doubt - why do corporations work with thousands of employees and struggle to make 20% profit margins.Why do banks who lend to the Chennai real estate buyers @10%  (home loan) , When they can  buy and own flats to make 30% CAGR?? 

But what are you waiting for?? In the time that you have been  reading  this article , if you had booked a piece of property in Chennai, you would have been richer by 10% :-)).

IT express highway! - water woes.

OMR, as it is called was promoted as the "destination" for IT companies in Chennai in early 2000's. No doubt, this promise has turned true to some extent in attracting IT companies on the corridor.

 Ramesh, was one of the those who decided to live and work on the corridor. He bought an house , five years ago. For the last five years, one of the major problems for him has been the increasing maintenance bill. The bill has been swelling primarily  due to the growing "water supply" bill from the tankers. Most of the stretch lacks potable water ( underground water is too salty to be used for any purpose!) and so, fetching water through tanks ( owned by local politicians)is the only option for most of the flats. 

A couple of years ago, when the zone was reclassified into "City limits", residents  rejoiced considering the fact that now the municipality will take care of fixing the water woes. In reality, the panchayat water connection which was available earlier, completely stopped and the reliance on water tankers went up from 70% to 100%. Ramesh almost shells out Rs 10,000 for water almost every month now.( The amount usually goes higher up in summer). 

When the residents association of the flat represented their woes to local counsellor  ( elected representative of the ward), he demanded Rs 1 lakh a month to ensure corporation water supply ( for the 300 flat complex
). When another resident managed to get an appointment with the chairman of the "Water Board", the interview turned futile as the "Chairman" asked him , "Who asked you to buy an house knowing that there is NO water". The resident could do nothing except to shoot back a question "Who asked you to provide the approval , when water was not available". 

Net result:- Residents keep paying the exorbitant water bills apart from paying their EMIs. Traffic problems and incomplete flats are other issues on the road that require another post to elaborate. 

Whenever, government promotes a place as the next destination and the real estate prices shoot up- the middle class/ working class are definitely not the real beneficiaries!

Lesson :-Ensure  basic infrastructure  availability before you buy a flat ( easier said than done :-) )

House - Rent Vs Buy - Calculator ( Biased or Fraudulent!)

I found this " Home- Rent vs Buy" calculator on a famous property website.

 I gave the following input to check the site's recommendation.

Results from the website:-

At the first glance of the result , you will feel that only a foolish person would live on rent and the output says that you tend to gain in crores when you buy a house at the "inflated" prices.

The reality is that

1. The calculator is silent about what would you do with the "down payment" money if you are not buying a house.

2. The calculator is also silent on what will you do with the differential EMI money ( EMI- Rent, if  you stay on rent)

The fundamental assumption behind the calculation is not transparent and the intention of the site is clearly to sell you the over inflated property.

After reading the post, if you are not able to get the correct calculation for  " Rent Vs Buy" decision, a primary school maths book can provide you greater assistance.!

Happy Renting!!

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It's black, it's white

"2 bhk flat " available for sale , this was the board I saw this morning, on a new building in a prominent location in my city. Thought of enquiring the builder about it and gave him a call.

Me: I saw your building and  the ad. on it........need details please.

Other person :  Yes sir , only one 2 bhk available ,that too on the third floor ( top most floor).

Me: Area .?

Other person: 1400 sqft , sir.

Me: Price .?

Other person: we offer an all inclusive price of 14,000 per / sqft and only 80 Lakhs would be accepted in "white".Rest of 1.1 crores need to be paid in cash ( unaccounted).

Me: Thank you so much. ( call ends).


Just two questions came to my mind  after the enquiry.

1. Would any person earning legitimate money and paying taxes honestly be able to afford this deal..?
2. Why is our  IT department missing out such low hanging fruits and 'milking' the salaried class to the maximum?

There are no  answers to these "black and white " questions:-)

Real estate prices- why blame "others?"

In the last week, I have seen many newspaper and blog articles like "XXX to be blamed for India's housing bubble" and "Why Real estate stocks should not be allowed to be listed in India".

I would say that these articles have highlighted only one side of the story. We have to agree that the contribution of the so called 'middle class' population to the bubble is also significant.

Unless there were people to buy flats at extraordinary rates, the sellers wouldn’t have been able to create the so called 'housing bubble'.

The salaried class who 'invested ' their hard earned money and those who committed more than 50% of their net salary to EMIs are also responsible for this.

The greed of middle class to be a part of owning 'fast' appreciating assets is also a significant contribution factor to this so called 'bubble'.

Regarding the 'listing of real estate stocks', many retail investors have lost their money. But even in this case, the decision to invest was an individual decision. Once it goes for a toss, it is very easy to blame everyone around except ourselves.

If an investment goes for a toss ( or loss !) and you start blaming 'others' for it, most probably you took an uninformed investment decision out of greed.

Note :- This article is not to justify the wrong doing of  'others' . But to highlight the rule of ' Investor/ buyer be aware of all the facts when making any financial decisions'

Real estate bashing

It has been quite a while since I posted. What would be a better way to start out than providing a link that bashes  current real estate prices. ??


"Anmol Choubey, 35, a general manager in a media company, has lived in Malad, north Mumbai, on rent for five years. Despite pressure from his parents and wife to “settle down”, he has no plans to buy a house in the foreseeable future. To him, it adds up. “I want a certain standard of living, certain amenities, certain kinds of people as my neighbours, certain kinds of children to play with for my son. I get that here for a rent of R
s. 20,000. The 10% hike in rent written into my contract gets covered by an average 15-20% hike in my salary every year. To buy the same place, I’d be spending Rs.80k as EMI on a housing loan, apart from exhausting my savings on down payments. If I try to lower my EMI, I will end up moving to a place I don’t really want to live in,” he explains. He first rented the place in Malad when he worked in that area. Today, he works in south Mumbai. “Tomorrow, I may move closer to work, or out of town, or out of the country. I don’t see why I should be tied down by a large financial commitment,” he says."

 Another one..."The sense of ownership of 850 sq. ft has come at a price: “I do not remember the last time I went to a pub. I do not own a credit card. I dine out sometimes, but I do not go to a fancy restaurant. I live a simple, hermetic life,” he says. With a 

 57 lakh loan, he even questions the cost of his food. To what end? “I don’t foresee myself living here 10 years from now—infrastructure, water, traffic—this is not the dream. Imagine having children in this state! I can’t even think about it"

Read the full  article at Livemint

How to sense a bubble /scam ?

A bubble/ scam is often known only when its bursts out. But we can possibly look for some indicators to see whether we are in a bubble.

Trying to list such indicators here

1) When everyone believes something is a very good investment ( including the layman/uneducated/elite and all) and can never falter.

2) When most of your neighbours invest in something and cannot justify how the ( more than average) return can be made.

3) Newspaper /media focus shifts too much on the investment opportunity and you start feeling that you will miss the 'Bus' , if you do not get onto it now.

4) There is a strong justification for the thing to be a good investment and 90% of people agree to the justification . There's nothing unique about what you know about the investment.

We have seen stock market bubbles, teak plantation scams, Benefit fund  ( NBFC) bubble and burst, IT bubble (recollecting all those that are significant and that I can remember ), oil spikes et all.

Two things that are falling into the category ( you  need not agree with me ) as of now are real estate in India and to some extent gold...

But still if you want to invest in real estate , go for Dubai and not for Mumbai ...why ????? read  this in ET :-)

We are not selling you the flat , if you.....!

Tale 1-

My friend has been scouting around for a flat in Chennai.  Some of the statements that he got to hear from a few builders..

" We are not selling you the flat, if you are going to take a home loan from SBI"

My friend was keen on getting a loan only from SBI or HDFC as he believes they have  a stricter verification process in terms of the property titles.

One another told " We have'nt registered the UDS yet and that bank doesn't sanction the loan , if this is not done. So, you have to compulsorily opt for loan from XXX bank".

Lesson to be learnt ~ Do not deposit your money in banks that you feel are risky and have a less stringent loan verification process :-)

Tale 2-

The tale of another friend has been different yet. He has been asked by builder to pay 4.5 lakhs extra before the possession for " interest charges" for delayed release of payments from the bank. He was wondering what to do. Later after negotiation he settled for a "cash" payment of 1.5 lakhs to the builder after which registration was done.

Lesson to be learnt ~ There is nothing called transparency in real estate transactions, even while dealing with reputed builders. Be on the caution till you get away completely from them.

When will the real estate prices fall?

Real estate prices have skyrocketed and have almost have moved near astronomical heights in India. The last 7-8 years has seen the prices manifold. While a section has been waiting for this to fall, no significant correction has happened. 2008-2009 saw a period of lull during global recession, but no impact was actually felt in India. Let's try and look at the facts that have enabled soaring of prices.

Chennai real estate to "sink"??

This article is for those who are vying for a seaside property in chennai. There is a report (Times of India) which talks about submersion of many areas in chennai in a couple of decades due to sea level change.

On a lighter note, choose the place you buy carefully or else your "real" asset may sink in sync with your end of 20 year EMI.

The article is here. One more here

Tightening of real estate lending by RBI

A real welcome move by RBI.


http://valueresearchonline.com/story/h2_storyview.asp?str=15468

The over valuation continues

I have been a great critic of the Indian real estate scenario for a couple of years now. I stick to my view point even now.Buyers are still flocking to buy houses and say that Indian real estate prices have sustained even the worst of global recession.

Real Estate Burst Again!!

The Dubai financial crisis has popped up. We all need to learn a lesson or two from the same. Irrespective of once income levels , one should always be cautious on debt and never over borrow.

Over the last decade, more and more people are committing to huge EMIs and consider their flats as an asset class that is going to fetch huge returns. Indian laws that do not regulate real estate and the black money that is available have so far been able to keep up this myth to a great extent.

But I think we are at a point where such growth without any fundamentals get burst.Most of the real estate stocks are trading at almost 1/3 rd of their IPO value also reflect a gloomy trend ahead. Although the demand of housing is genuinely high, the sky high prices keep away the mass buyers.

The real estate players should learn a lesson or two from their global counter parts or else they might be in a bad state very shortly!!

Reality Talk

As I took a quick evening walk around DLF phase V this evening, I could see a lot of flats under construction. I also saw a lot of new flats that are ready to get occupied but still vacant and quite a few unoccupied shopping complexes. I had started noticing such huge construction activities which I felt was definitely an oversupply ( @ the prices quoted) a couple of months ago in many parts of Bangalore too. Almost everything around the world including commodity prices, stock markets, real estate have fallen sharply. But still I feel the Real estate sector in India is still being kept afloat. The no: of transactions of buying/ selling has come down in reality sector but the reduction in prices is not very visible yet. ( Although some 20% correction is seen / reported in some places)

I am not sure about the reasons as to how the prices have'nt fallen sharply. Is that because of Indians sentiment towards owning a home? or because of the political and black money nexus with real estate or because of a lack of transparent pricing visible to the public.

Even in premium areas the return from house in terms of rentals is just 4%. I am not sure who likes to own all these houses. These things still remain a mystery for me.

The stock prices of most of the real estate companies have corrected by almost 90%, but an equivalent correction has not happened in the real prices. The real estate companies may manage to survive by the killing profits that they have made over the last 3-4 years , but how long can they continue to hold these prices is the question.

But one thing is for sure, that the prices may remain flat for 4-5 years from now unless a dramatic boom revives the Indian economy. But till the time we have the salaried class who are ready to shell out 50% or more of their salary as EMI for 15-20 years, the developers would try to take an advantage.

I think the match between developers and buyers is in a tie breaker situation now. (My thought that prices would fall in India like a pack of cards hasn't come true yet.) I am keen to see who wins the match from hereon!!

Real estate crash in India??

http://www.iimahd.ernet.in/~jrvarma/blog/index.cgi/Y2008/FE-Bubble-in-backyard.html
Rea

Will the real estate prices get reasonable???

Real estate stocks are battered the most in this free fall of sensex. With hardening interest rates and slump in demand due to high prices, sales are expected to go down in this sector.

This may also lead to small corrections or a big fall in the real estate prices depending on the situation that unfolds. if oil prices keep going high or inflation continues to be in double digits, RBI may hike the interest rates further tightening the liquidity.

Moreover if there is an increase in EMI default because of the hardening interest rates, we may also see some panic selling in the market. If the real estate prices stands out this crisis for a couple of years... we may say the real estate prices are REAL or else they are certainly NOT. Lets see how things unfold.

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Penny wise , Pound foolish

One of my friend is a very alert guy when it comes to handling finances. He always goes for a bargain buy ( even for vegetables), plans his tax on time and so on. But when it comes to a buying a home, he was not that prudent . This is the mistake that most of middle class makes. he booked a flat almost to years ago with a reputed builder in Bangalore and still waiting for a day to get the possession. He keeps paying his EMI and has lost already lot of money in terms of the rent he is paying and pre-EMI interest for which he cannot claim tax benefit.

Although, the builder has been postponing the dates nobody has ever dared to sue the builder. This is a typical scene where one prudently saves everywhere and looses out in a big way in buying a liability ( yes!! your first residence is going to be a liability..If you don't agree , I am fine).

In this context found two great posts on some fellow bloggers post wrt buying homes. They are a must read , if you are planning to buy an house.

http://blog.investraction.com/2008/04/reader-comment-sea-of-red-for-real.html
http://greenbuck.blogspot.com/2007/09/how-to-buy-apartment-in-banaglore-i.html

I sincerely acknowledge the great articles by these bloggers.

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