REAL ESTATE SEEKING PERSONAL LOAN-Is it suicidal ?
I spent the entire of the last week interacting with the Deep-pockets. (sorry for the analogy, but true). I had the opportunity to showcase our research findings about the Delhi Master plan MPD 2021 to the heads of a couple of large Realty funds, and some real estate investors who traditionally have been supporting the Real estate developers in north India with their earlier projects. In both the above cases, a Million $ was being spoken about as loose change.
At no point am I trying to play judgemental in my mind. Each to his own, and one gets paid in the same coin as one would have invested in the past. Hence, in the following lines if you see one segment trying to take advantage of the other, remember, they are only reverting a deed received earlier.
Though, there were some factors in common between both, the institutional investor as well as the individual investor.
a)Both were conscious of the fact that they have the strength of “Cash is King”, and rather proud of the fact. (In one instance, aggressively trying to assert superiority).
b)Both were extremely sure that the time is now for them to use the money as the ‘weapon’, rather than the tool for their pound of flesh.
c)Both have the virtue of time being on their side, and seem blessed with the patience of a vulture waiting for the prey (read developers requiring funds) to start bending their knees.
Like I said, no one wants to be judgemental, least me. Let me try and bring to fore my observations in an objective manner.
Around the mid of last year, there was this report in one of the leading business magazines which was co-authored by a friend & colleague. It forecasted the imminent over-supply in the commercial office space domain and projected a very bleak picture emerging. Over the media, it was a heated debate and the stake holders contested it hotly. My organization kept reminding the financial pricing pundits amongst some of the optimistic developers of the imminent situation emerging in the residential markets, but to no avail. Most of those who predicted an ebullient offtake in 2008, do feel the heat now.
Hang on! Hang On! I will come to the moot point and would definitely invite you to comment on it. Please bear with me till I weave some more background about my question.
Sometimes in the beginning of this year, the offtake of real estate products started seeing an actual downward slide. Towards the third quarter of this year, we almost hit the rough patch of about 60% drop in sales. I wouldn’t like to say that things are on predicted lines… remember, even our topline & bottom line becomes susceptible to the markets shrinking.
I started this point with a few questions in mind, which is:
Many developers are borrowing short time funds at interest costs in excess of 30% p.a. These funds are being utilized to complete some projects sold earlier. In one instance, I know of a developer paying a monthly interest of 3.5%. That makes it an annual interest payable @ 42%. Isn’t that much higher than the personal loans being sold in the market? Is that a sign of things to follow? Has an aberration become the norm in the real estate industry? Can this industry sustain a drop in demand coupled with a forced increase in the prices?
This morning news edition of ET got me thinking. The front page announced that Citibank has contested an award by the Consumer forum that 3% monthly charge is too much. They have gone to the Supreme Court and contested the allegation that Citi overcharges. They justify that charge since the loan ticket size is small, and the risk is too high.
If we equate the same logic of the interest rate being proportional to the risk, following are the questions that we better ask as sellers & buyers of real estate.
- ARE THESE BORROWINGS BY THE REAL ESTATE COMPANIES FRAUGHT WITH RISK?
- Are the small investors in these companies susceptible to losing their money? Would many of the announced projects of these very developers see the light of the day, or even, get completed within the announced time-lines?
- Who are these lenders in the market and what is the protection that they take, as collateral OR guarantee for their money and returns?
The point that I want to be debated in the public domain is twofold, namely?
- These extremely high rates of interest, short term or long term – Wouldn’t the end impact of this reflect on the product pricing?
- The challenge here is more from the developer end. Had his project or product been acceptable in the public domain, wouldn’t it have been subscribed earlier? Wouldn’t it have offset the challenge of the working capital & cash flow? Is that a reflection of the retail buyers’ lack of confidence in either then brand OR non acceptance of the product or pricing features?
- Given the current market conditions, isn’t the debt risky from the developers’ point of view? Would the market read the borrower company as a ‘not so well managed company’ which misread the signals and did not manage their finances well?
- Given that the above would be the understanding, the developer company might have to lose their say in their own company for strategic matters, and the lender might have a much bigger say. As for the retail investor / buyer, would it mean that experts of real estate development are not at the helm of affairs?
Please pardon my intrusive thoughts, but, I am a firm believer of one philosophy… which is part of the vision statement of the organization that I work for.
“EVERY ACTION OF OUR’s SHOULD START & END WITH THE CUSTOMER”
If the above is true for the developers too, how come the end buyers’ perspective is not accounted for into the projects at hand?
Some more points to ponder, and reply.