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signed leases with them are backing out, these are being rescinded.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'.
Lee's Dhaba
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