Tuesday, July 27, 2010

The Reality Of The Indian Real Estate Sector: Real Investing Opportunities vs. Imminent Crash?

We have all heard the catch phrase that 'If something sounds too good to be true, it probably is'. If not taken verbatim, there’s a lot of wisdom to the old saying but still people get drawn to all kinds of hyped offers and deals time and again. How many times in the history of mankind have we seen these too good to be true schemes turning out to be fake but every year more and more people get attracted to such "get rich quick" ponzi schemes and loose their hard earned money. What goes up has to come down but when the rise is exponential then chances are that the fall would be equally great if not more. An example is the recent collapse of the housing bubble in the United States which is slowly mutating itself into a global phenomenon. As the real estate bubble in the USA progressed from 2002 onward, it also gripped the Asian Property markets especially India. Just like Indian stock market bubble that popped in 2008, it’s quite evident that the Indian real estate is walking the same path.

  • The crash is more so imminent because Indian real estate segment does not have any real fundamentals attached to it. Rs. 1 crore ($220,000) which used to be a huge sum of money in India until only few years back, is now only good enough for buying a small apartment near New Delhi's earthquake prone NCR region.
  • India’s realty sector which was growing at a rate of around 30-35 % in the past few years was considered to be the barometer of the country's success but with the global economic juggernaut slowing earlier this year because of liquidity crunch and US sub prime crisis, a fall in India's much hyped and overpriced realty sector is imminent.
  • No matter how you look at it, India is still an incredibly poor country where majority of people work hard to get three square meals a day. The divide between the rich and the poor is growing by the day and lot of distortions still exist within the system mainly due to tax evasions and flowing of illegal money across the markets. Wherever black money is generated in huge quantities, real estate boom and speculation is rife. Real estate segment in India has long been seen as the safest and best place to park black money that justifies the unjustifiable realty prices across the country.
  • Today only 30% of India's population lives in urban areas, cities contribute more than 60% of the country's GDP and account for 90% of government revenues but a United Nations World Urbanization Prospects report has projected that almost 914 million Indians will live in cities by 2050, compared to 300 million now. Irrespective of the high priced land and real estate sector of the country, India's infrastructure continues to be poor. Real estate prices cannot sustain themselves in the backdrop of failing civic infrastructure and unplanned growth.
  • No one who invests in India or does business there can shield themselves from the effects of the real estate segment. Local stores in regular markets are selling as high as Rs. 2 Crores ($440,000) but are not even generating 10% of its price as gross earnings. Testimony to the falling realty segment is the fact that since 2007, prices of commercial as well as residential segments have dropped by 20-40%. Property sales across India have also registered a decline of almost 50% year-on-year. While the banks tighten their lending norms at one hand and developers fight the unsold and unfinished projects, the day of reckoning for the Real Estate sector could not be far away.

The signs of the bubble going bust sooner rather than later are ominous. Many projects in Tier I Indian cities have been stalled by builders due to their inability to raise finance. While potential buyers are delaying purchases in the hope that prices will go down further, the builders are still holding on to their hyped prices. The sentiment has been quoted by Chanda Kochhar, the chief executive of the ICICI Bank, India's largest private bank, who said in February 2009 that real estate prices still need to fall by at least 20% if the market was to pick up.

The major factors behind the rapid growth of the real estate are the relaxed policies taken up by the Indian Government on Foreign Direct Investment. The FDI policies of the Indian government has encouraged increasing number of foreign investors to invest in the Indian Real estate segment. India has replaced US and ranks second most preferred location for real estate investment but things are not as rosy on the ground as it appears to be. For the Non-resident Indians (NRI's) and foreign investors, there is an apparent lack of transparency in the Indian system. There is no independent reporting in the Indian media, which just plays on the market sentiment and helps create more cobwebs around the India realty hype story.

Commercial Real Estate: After nearly four years of aggressive growth, India's booming commercial real estate market is also in a free fall. Demand for commercial real estate in India was mainly been driven by the information technology sector and information technology-enabled services sector. The slowing of the global economic juggernaut due to severe liquidity crunch and US sub prime crisis has badly affected the Indian commercial Real estate segment. Many projects have been stalled by their inability to raise finance. Office rents have fallen, especially in Mumbai and New Delhi, where they have declined considerably since their peak.

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For Serious Investors: It's Time for Africa

In this era of global uncertainty, investors are wary of investing in alien markets. A lack of fundamental analysis of the potential good upcoming markets also acts as a deterrent for investors. Some markets follow the global patterns and some just swing with an entirely different wavelength. One such market that historically has never followed the global market and its patterns is the African continent. The African people and more importantly the African markets have their own dynamic life and irrespective of current trading volumes, liquidity or fundamentals, African markets have mostly walked without much global baggage. Considering the fact that most African regions are bracing themselves to kick-start their economic progress, a long-term growth potential is the best possible way to look at the African markets.

Gone are the days when Africa was considered to be a poor continent rich only in natural resources but where poor people fought for survival amid disease and poverty. Africa, the birthplace of human civilization, is slowly but surely getting its rightful place in the history of mankind. African countries are not simply spectators to the economic rise of China and India but are a party to it. Africa is not only attracting investors from China and India, but African ETFs have also shown substantial gains in the recent times. There is no doubt that some African nations offer a tremendous growth opportunity for the investors, especially for those looking at emerging economies outside the BRIC nations. Of course there are people who are skeptical of the kind of growth African nations can achieve, but as South Africa showed with the successful completion of the FIFA World Cup Football 2010, the continent is ready to attain its lost glory.

The largest economy in Africa is the Republic of South Africa with a 77% total market cap of the MSCI EFM Africa index components. Egypt, Nigeria and Morocco make up 5%-10% each, and smaller investments include Kenya, Mauritius and Tunisia. Together, the African Nations make up 10% of the world’s emerging markets market cap. According to a recent International Monetary Fund report, at least eight African countries were headed toward emerging market status when benchmarked against the founding members of the Association of Southeast Asian Nations, which were among the early emerging markets. The criteria of growth, private sector-led growth, and investable markets were met in Botswana, Ghana, Kenya, Mozambique, Nigeria, Tanzania, Uganda and Zambia. The International Monetary Fund (IMF) has further projected that sub-Saharan Africa’s economy will expand 4.7% this year, double 2009’s rate. Commodity exporting countries are likely to lead the growth.

Investing in Africa

Investing in Africa is high risk for many reasons, including currency fluctuations, poorly developed markets and political risk. Yes, there are still some unstable countries, but the number of African democracies has jumped from just four in 1990 to 17 today. At the same time, many countries have begun liberalizing their economies and developing their capital markets. Not just Ghana and Egypt, but African markets overall have easily outperformed the world averages last year and over the past three years. Moreover, the number of stock exchanges has jumped from ten to 18 in the past decade. The International business community and most multi-national corporations operating businesses in Africa have been reaping significant dividends from their investments and in many cases the rates of return have been higher than from those in other regions. Another very good reason to look to Africa is that investment, rather than charity, is more likely to lift Africa out of its troubles and poverty in the long-term.

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Dubai Real Estate: Lavish House Of Cards Built On Sand

Dubai may boast about the world's highest building, Burj Khalifa, a rocket-shaped edifice soaring 2,717 feet with views reaching almost 60 miles, but with almost zero occupancy rates in the building and those around Dubai are good enough reasons to see the realities on the ground.

One doesn’t need to be an economic genius to understand the fact that real growth is sustained only through strong fundamentals, a virtue that doesn’t quite exist in the Dubai real estate segment. Dubai’s economy diversified away from oil towards real estate and tourism. But the economic recession and international financial crisis caught up with Dubai and other regions of the world. Finally, the inflated real estate bubble that propelled the frenetic expansion of Dubai in the last six years on the back of borrowed cash and speculative investment, has burst. What's worse is that the Dubai real estate crisis is slowly but surely spreading to other emerging markets especially in Middle East And Asia making the world economic recovery a distant dream.

  • Till the money ran dry, Dubai's $582 billion construction boom was financed by lenders flush with oil money and safe haven seeking black money.
  • Half of all the UAE's construction projects, totaling $582bn (£400bn), have either been put on hold or cancelled, leaving a trail of half-built towers on the outskirts of the city stretching into the desert. Dubai has fallen about $80 billion in the red, primarily from Dubai World, a state-run property conglomerate that accounts for about $59 billion of the debt.
  • According to recent projections, Dubai real estate prices could fall as much as 60 % this year from their peaks in July last year, while Abu Dhabi may slide as much as 20%. Testimony to that is the fact that a four-room villa, which was evaluated at $4 million several months ago, is now available for $1 million but there are no buyers. Dubai’s example shows how quickly countries can slide off the path to recovery and land into trouble. According to analysts, it would take years for the Dubai real estate market to come back to levels as high as they were in 2008.
  • With banks stopping any more lending and the stock market plunging almost 70%, home prices in the sheikhdom have dropped about 50 % from their peak two years ago and Credit Suisse estimates a further decline of as much as 20 %.
  • Dubai also never wanted 'foreigners' on a permanent basis. The country showed very little respect for the rights of foreigners in their country, including the labor market, and reversal of resident visa policies (particularly the over 60's, a massive potential market of retiree's) and foreigners never felt confident enough of their payments in escrow accounts with too many variable and unknowns around. Another important human factor against Dubai is the Islamic mindset as many westerners found out when they were made redundant before the strict legal system of the country. A case in point is Dubai's strict legal code where defaulting on debt or bouncing a cheque is punishable with jail. Any expatriate in financial difficulty knows the safest bet is to take the next outbound flight.

Whenever any economic story goes sour and looses its glare, the least talked about feature is the human element. With Dubai's real estate sector going bust, perhaps those who suffer most are the construction workers from the Indian subcontinent. The workers who had worked on perilous building sites with all their blood and soul earning as little as £70 a month played a very important part in the inflated Dubai growth story. The human effort and skill is the only positive to have emerged from the whole fiasco.
These workers who made it possible for the rich Arab Sheiks sitting in their air conditioned mansions to declare that the Sun never sets on Dubai are now facing a bleak future. The Indian embassy in Dubai has already received requests from almost 20,000 Indian citizens to be sent back. Keeping in mind that most of these workers took loans to pay agent fees to come to Dubai and lead a better economic and social life will are now flying back with nothing but large debts.

Dubai And Its Notorious Escapades

There is no denying the fact that Dubai, one of seven states that make up the United Arab Emirates (UAE), is in deep crisis. The crisis has not just appeared overnight but has been slowly building up as Dubai's Arab tycoons have tried their best to make the city breeding grounds for everything fake and unjust. Tracing Dubai's notorious past could very well bring out the answers of its not so rosy present and its bleak future.

Arab business tycoons and sheikhs who have always had a say in the country’s business as well as foreign policies have always ruled Dubai and formulated its foreign polices to an extent. Those policies however were not welcoming to those labors and small time workers who were toiling hard to make the city of Dubai worth living. With Dubai’s real working population as foreigners mainly from South Asia, Dubai and its rulers never gave them a reason to feel at home or citizenships or something permanent. All they had was a temporary and insecure life. With the rise of the Indian economy, not many Indians are entering the Dubai trap and are more secure with jobs in their homeland. Even tourism has nose-dived for Dubai even with all the attractive beaches and theme based parks it planned.

Even though Dubai appears to be a safe haven from the outside, the fact of the matter is that its just a tax safe heaven for all the black money in the world since the Arab sheikhs don’t seem to care about the origin of the money as long as it is coming in their city. With no real regulatory body for the pool of money coming in, Dubai soon became a safe bet for gold smugglers who used to trade illegally with Iran, Pakistan and other South Asian nations. The Dubai boom of turning sand dunes into a glittering metropolis and the gold capital of the world is grinding to a halt while Arab tycoons wrapped in traditional headscarves sip fruit juice cocktails and watch Russian models twirl. Today Dubai is only for the super rich Arab sheikhs or Russian or Afghan drug lords with enormous loads of black money. All major investments that had flowed in are now moving out of Dubai. The city is left standing alone like a Ghost town with no foundation or substance but a history of notorious dealings and crime.

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