India Real Estate: End Of The Road

DLF, Unitech and the entire real estate, bank and construction sector stocks have completed one leg up of the trader's rally. Time to get out now.   The stock market in Bombay is increasingly turning into a traders market, with no room to manouevre for investors. The central bank's 6.3 per cent GDP growth forecast for FY10 looks optimistic in the face of sustained headwinds. The GOI and the RBI post changes at North Block are letting slip through money at such a rapid pace that it will end up in the most unproductive sectors of the economy-Real Estate, Automobile financing and SME finance.   The result could become apparent within the next 3 quarters as collateral values collapse and Real Estate loans to the Builders or to the Buyers of Commercial and Residential Real Estate become visible as NPAs in the books of the Banks. This will massively de-stabilise the financial system and will need either nationalisation of private commercial banks or huge recapitalisation of banks. Huge real estate led NPAs will destroy capital for most banks, and ensure that GDP growth goes substantially lower than what is being forecast for FY10..   Investors need to recall how just four months ago India's central bank led by Dr. Reddy could not shut up about how a bubble in the country's real estate sector was leading to over-heating in the economy. This month the Reserve Bank of India announced norms making it easier for banks to restructure property sector loans – giving the same real estate companies, once so reviled, a sudden leg up.   This about-turn is a sign of panic. India's property market is heading for freefall. Prices are too high, supply too great and affordability too low. Driven up by rampant speculation, property prices in India today in real terms have exceeded those of the previous bubble in 1996, from which it took the market three years to unwind and another seven to recover.   A building boom has led to supply exceeding demand in most cities, particularly Bombay, where there is three times as much commercial space coming on stream this year as needed. As unsold inventories pile up builders will either have to declare bankruptcies or cut Real Estate prices. However, having bought parcels of Agricultural land at atrocious prices there is only that bit of price cuts that builders can take. After-all cost of construction for properties located in the metros now averages Rs 2000 per sq feet, making a 2000 sq feet flat worth Rs 40 lakhs without pricing in the cost of land or profits.   Get out now, before everything is lost. Real Estate declines nearly a decade, and the decade may have just started in 2008.

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