India: Update on Real Estate

The BSE Realty Index has lost 83% of it value from the high of Jan 2008 to today.  Basically, it is back to the levels of January 2006.

A number of players bought land in 2007...projects intended for these tracts of land will not be profitable...so they are unlikely to be started or finished.  Banks that lent for these purchases and for the development of land will suffer rising NPA's.  The collateral, land and or shares of the developer, has eroded in value.

Although there have been declines in profitability, no significant losses or defaults have yet been reported.  This cannot persist.

Today I read this article from BS:  There is no need for Irrational Pessimism

Deepak Parekh has never been known to mince his words. He’s upset that so much panic has been created unnecessarily in the money market and feels the media, through irresponsible articles and because of too much publicity on television, is partly to blame.

What is happening in the real estate space?
Every developer I meet tells me he’s slowed down construction and got rid of labour. Builders say international companies that have signed leases with them are backing out, these are being rescinded. So real estate prices have to come down and rates for commercial space will come down much faster. They are already down but will come down further because there are readymade buildings with no occupants. Land prices have collapsed, land is no longer an asset — people don’t want land as a security. Today, there is surplus land, low demand and so those who invested in IPOs and through private equity have lost money. Now that the value of land is probably half of what it was, it’s become affordable so we need to fund developers so that they can start constructing affordable housing. There is good demand for that.

Also the spread that banks are keeping for themselves has increased because they are scared.

Mr Parekh seems to want to lash out...He is a banker so he must be "scared".  The only culprits he has found for the import of the global financial crisis to India is:  "The media".  Look at the chart above...Mr Parekh is in complete denial if he thinks the media created this price action.

With leadership like this, it will take a long time to recover from the coming slowdown.  Better to face reality and move forward than to fantasize and point fingers.

I would say there is 'A lot of room for Rational Pessimism'.