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The biggest real estate private equity fund invested in India, the Saffron Group, is now talking long-term about Indian real estate.
How many times has this happened in your life? You bought shares of a company in the hope of gaining 30% in a couple of months, and you waxed eloquently its virtues at a South Mumbai champagne party. You woke up groggy-eyed next morning, and winced as you found out that the stock you hold has crumbled 20%.
You are not worried, you tell yourself, because you have purchased these shares for the long term. Now, you are quoting Warren Buffet and how he made his billions holding on to good stocks. In the long term - never mind Keynes says we are all dead - you convince yourself, your share is sure to return 5 times.
If you are sheepishly reading this and saying: Touche, how true; you are not to be ashamed. You are now in blue-blooded company; for some of the astute investors in Indian real estate, Saffron Group, said that it will remain put for a minimum of five years in upcoming properties and will buy out assets with assured rental income.
"Our strategy is to be a leading player in the field. We don't have any short-term view. The industry is growing and it will yield better results for another 10-15 years," Kapoor said.
This means just one thing: upcoming projects are not expected to return in less than 5 years, and Saffron is waiting in the wings to pick up distress sales of properties.
The Group, a brain-child of Ajoy Veer Kapoor and his peers from the banking fraternity, is the promoter of Euronext-listed Yatra Capital, an India-focused real estate fund. Yatra Capital has already raised $260 million in the Indian real estate market. A $350-450 million unlisted real estate fund, launched in February 2008, had an anchor investment of $75 million from Standard Life UK. It is expected to close by the end of 2008.
If you just purchased real estate in India, hold on to your property for the next 10-15 years, for gone are the super returns of 2004-07. No more 30% each year. For that matter, considering an 8 percent inflation tick-in, your interest rate on the
home loan is certain to rise further.
Barclays Bank, a major global financial services provider, and Britain’s third-largest bank, has done a ludicrous rental deal for office space in Mumbai, where it has ended up agreeing to pay Rs 1.08 crore per month for a 15,000 sq ft office space.
In the same quarter, the financial institution saw its Q1 profits fall, suffering a 1.0 billion-pound (1.25 billion-euro, 1.95 billion-dollar) hit from the global credit crunch. Earlier, the UK bank had announced £1.7 billion ($3.3 billion) in new write-downs amid speculation that it was preparing for a rights issue, to strengthen its capital position.
Yet, the same bank has gone ahead and closed a ludicrous lease deal in Worli, Mumbai, where it is said to have paid Rs 725 per sq ft for 15,000 sq ft office space in an apartment block called Ceejay House (pictured left). This, at a time, when Citibank, in a bid to resurrect itself from the subprime crisis, is selling off global properties, including ones in Mumbai's poshest areas.
This deal is particularly intriguing, considering it is unimaginable that a bank like Barclays would pay such a high rate, which even seasonsed real estate professionals in Mumbai are calling a "freak deal".
The devil of course would appear in the details of the deal, not much of which has been reported. For one, Barclays already occupies 60,000 sq ft, in the same building, which it leased or purchased (we are not sure) in 2006. Interestingly, we do not know what rate Barclays has paid for the earlier deal, and whether the current deal includes the renewal of the older property. Property deals can include many things that do not get recorded in the lease document.
One of my imaginative scenarios are as follows:
- Pay Rs 725 per sq ft for 15,000 sq ft but get the 60,000 sq ft. space for free.
- Pay Rs 725 per sq ft for 5 years and get another 5 years free.
These are shenanigans of the real estate lobby to create an illusion that real estate is a great investment. As an aside, Ceejay House is adjacent to Poonam Chambers, occupied by NCP minister and aviation minister, Praful Patel, whose duplex and swimming pool spans over 35,000 square feet.
This story appeared in the Mumbai edition of The Times of India, dated March 24, 2008. Surprisingly it was not found online on the web site, at the time of writing this post.
It's a season of contradictions, and manipulations. While those with excess money are splurging on apartments, others despite their money, have nothing to own. The skewed Mumbai apartment markets has become a haven for either the super-rich or the denizens of the slums.
The real estate market, perched on a precarious ledge, is about to topple, but this does not mean there is respite for middle-class home buyers. And this means, that unlike 1995, the real estate industry is using all the ammunition in its arsenal, to make sure that the illusion of real estate industry growth persists for some more time.
Citibank, in a bid, to shore up money for its beleagured US operations, is selling all its expensive properties in Mumbai, and at the same time film actors and finance company executives are moving their excess cash in to apartments and property.
Vinod Khanna, yesteryears's film actor and Osho devotee, has paid Rs 1.2 lakh a square feet for an 2,400 sq ft apartment in Mumbai's Malabar Hill building, built in 1972, called Il Palazzo. The apartment, whose total cost is Rs 30 crore, was sold by the usual suspect Citibank. The sale was done at an auction held at its office in Bandra-Kurla Complex, and particpants included former Citi India chief, Jerry Rao, and others. As the reporter quipped, each tile of this apartment is more expensive than a Nano car. Il Palazzo has another famous resident, i.e. Rakesh Jhunjhunwala, who purchased an apartment for Rs 25 crore in 2006.
Citi has been on a selling spree of Mumbai apartments since 2007. It had also sold an apartment in the NCPA Building, Nariman Point, for Rs 97,900 a sq ft to a London-based NRI. Unrealted to Citibank, an apartment at Rs 90,000 a sq ft, in Usha Kiran, another 1970's building on Carmichael Road, which is in the same area as the new Mukesh Ambani tower, Antilla. The sale was supposedly made to an executive of Indiabulls, as mentioned by the owner Nirmal Zaveri, of Tribhivandas Bhimji Zaveri, for Rs 27 crore, but there have been no confirmations on the identity of the buyer. Zaveri himself plans to move to a neighboring and cheaper Villa Orb tower, where rates are at Rs 55,000 and Rs 65,000 per sq ft.
Aamir Khan, has agreed to pay Rs 33 crore, to pick up an entire housing society building in Santacruz, Mumbai. His objective: build an entire studio on the plot. The society was built around 32 years ago for SBI employees. There are 22 apartments in this complex, and each would get Rs 1.5 crore for their 730 sq ft home.
In another development, Barclays Bank, negotiated a lease deal of Rs 1 crore a month, for occupying 15,000 sq ft, in CeeJay House, Worli, the rent working out to Rs 745 per sq ft. Barclays already occupies 60,000 sq ft, in the same building, but there is no comment on whether this previously occupied space is owned or leased. Further, the current lease details have not been specified, hence any add-ons, freebies, or back-end rebates in cash, cannot be detected.
The magicians of the real estate business, providing back-end rebates, cheap funding with interest rate write-offs, and other tactics, are creating the ultimate illusion for the local-train traveler, that housing is the best business to put their money in to. Unfortunately, one just needs to check the sources of funds, to realize how the net cost of the apartment sold and rented is actually far less than what is made public through newspapers.
P.S: There appears to be a huge demand for buildings around 30 years old. This appears to be a common thread through the entire Mumbai belt, and considering that apartments are being picked up by politicians, finance company heads, and film actors, it appears that some Maharashtra government ruling is expected for redevelopment of buildings over 30 years old.
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Property Trouble? ARCHIVES | EQUITYMASTER HOMEPAGE 24TH APRIL 2008 In July 2006 I made a prediction: property prices in India will decline by 25% to 40% over the next 9 months. By July 2007, property prices had increased somewhere in the region of 20% to 30%. So much for my prediction. So much for sensible analysis. The property markets were in frenzy in 2006 and 2007. Large developers were listing their stocks via IPO’s and they were all lapped up. Well-paid analysts were talking about the embedded Net Asset Value in the stocks of these property developers and the land bank they all owned. The SEZ policy is the equivalent of the industrial license raj that ruled - and ruined -India’s economy till 1991. Land was acquired at maybe Rs. 10 per square foot. A few approvals later, the land was re-zoned and re-born as a pretty garden villa real estate project selling at Rs. 4,000 per square foot. The magic of the Indian rope trick. The magic of an opaque approval process. Land barons were born. They made it to the mega rich league of the market cap charts. Investing in India: real estate is overpriced? Sam Zell, the legendary real estate developer and investor from USA, gave a talk at a conference in Bombay in December 2006. Not more than 5 feet 6 inches in height, he stood above the frenzy of the crowd. Sam Zell had just sold his company, Equity Office, to the private equity firm, Blackstone, for some USD 35 billion in November 2006. Why are you selling Sam? - all the commentators seemed to be asking him - the US economy has a long way to run. I can picture Mr. Zell smiling in silence as he collected his cash. He sold out at a level that - in hindsight - was the peak of the US property market cycle. ADVERTISEMENT Your Family’s Future Depends On This. Read Now "There is no shortage of land in India", declared Sam Zell, "there is only a shortage of zoned land". Read that statement carefully. Read it again. And think of the SEZ policies and the land grab. Sure, India has a demand for some 20 million homes and some 5 million office units and some 200,000 hotel rooms. And schools and colleges to educate the one hundred million young children. And hospitals to take care of the 100 million elderly people in the country as they age in a changing society where the children don’t live with them anymore. And we need many more cricket stadiums to watch overpaid cricketers sell you some TV sets, washing machines, and mobile phones. A back of the envelope estimate indicates that India needs to build some 3 billion square feet of property in the next 5 years to partially meet some of this demand. How much is that? Well, visualise Nariman Point. And now imagine that we have to build a string of Nariman Points from Bombay to Bangalore. There is enough land to construct all of that. The shortage is in the zoned land. This is a man-made shortage. A shortage created by policy. Just as India had to suffer for 20 years with a regime that forced us to buy the Premier Padmini and the Ambassador - and we had to wait 3 years to get the cars delivered. At the end of the wait, we got a useless product for a lot of money. And Premier and Ambassador were profitable companies - whether their profits were declared in cash or cheque. Just like the sheltered real estate developers. Land is in abundant supply. There is some special mechanism to convert this useless land to useful, zoned land. My colleagues in our real estate arm tell me that there are 62 approvals required to get useless, un-zoned land converted into an end product that we can live on. Artificial barriers have created an artificial price of the end product. And this leads to a strange end market at today’s prices. The very rich can buy any property anywhere in the world - or any city in India. The rich can afford to buy one nice home in any one city. The middle class cannot really afford to buy in many cities. The poor have no hope of buying anything. ADVERTISEMENT