Fairval

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Real Estate – More trouble ahead

Posted by fairval on September 26, 2008

Can it get any worse for real estate companies? Share prices are already down 60-80%. Looking at whats going in the real markets, the bottom may not have been reached. There may be more trouble ahead.

Some pointers –

1. In Apr-Jun’08, bank lending to real estate markets is apparently down (by around 20%) in absolute terms. That’s a shocking slowdown. Can’t see how residential rates are holding if this is going on.

2. Commercials could be crashing, tho this is not coming out in media yet. Evidence –

a. In Mumbai, one has heard of office space rates coming down by 50% in one specific property. This is an important new property. It cant be an isolated instance

b. We know malls are in trouble. Want to know how much? Check this – a leading retail chain has negotiated 2 contracts recently, where they don’t pay any rent for 4 years ! . Why would be builder agree? Becos without a strong anchor tenant, he has no hope of selling the rest of the space.

3. SPVs are a ticking time bomb. Most builders have multiple SPVs in which they have raised money. These have so called ‘FDI’equity investments, which is nothing but high cost debt. The builders have promised IRR of 20-24% to foreign investors, with exits often starting 3 years from investment date. No way most of these SPVs will generate enough internal returns to meet these returns. Prices are crashing, and buyers are cancelling space. When these SPVs start maturing, that’s when some real serious trouble will start.
So far the builders claim they are able to hold prices. Lets see for how long.

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