Capitalmind
Capitalmind
Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial
Commentary

The Bribery Scam: Negative for Real Estate

The CBI yesterday busted a scam where executives in banks and fin-organizations took bribes (surprise!) to give real estate developers large loans. Among the arrested were a director of Central Bank, and senior executives of LIC Housing Finance, Punjab National Bank, Bank of India and an intermediary called Money Matters Financial Services (MMFS). MMFS was the go-between; they would organize loans by bribing these officials, and take a cut of around 5% from the RE company (one such was DB Realty).

Nearly all the people interviewed on TV seemed to think this wasn’t a big deal – it happens, it is reality. Implying perhaps that we shouldn’t be angry? Perhaps relatively true, in a situation where there is so much to be angry about – the 2G scam, Yediyurappa, Reddy Brothers, Adarsh in Mumbai, The CWG scam, Kalmadi’s arrogance, Lalit Modi and the IPL, and I must stop here. The amounts too – sub 1 crore worth bribes – are not even worth the CBI’s time, honestly, so this was done to either deflect public anger from the bigger scams, or to just arrest someone who didn’t hold the political system to ransom.

Either ways, the consequences are weird – the stocks of LICHF, Central Bank, PNB etc. fell like crazy – more than 5%, and some upto 20%, on the news. They have recovered somewhat, but I expect more news flow to damage the stocks – the news channels don’t give up this easy, and they do sway sentiment in a thin market. Now, what does this otherwise mean?

Think about it. Banks will now be even more careful of lending to real estate. After RBI’s recent RE loan tightening,  real estate developers are probably finding it tough to get money to complete their projects. Since they were (indirectly) bribing bank officials, they probably had shady stuff as collateral – otherwise why wouldn’t banks be trying to lend more to them anyhow? And now, with the scam out there, not only will bankers refuse the bribes, they might not even want to lend to legit projects for fear of a probe. Simply put, RE developers have a liquidity problem – no money, and further sources are drying up. Plus, the new norms have made the loans tough for borrowers.

Over the last few years, with real estate going up, (anecdotally) developers have levered up on their own projects. Instead of selling all the apartments early, and then watching as prices doubled as the project neared completion, many developers have taken to keeping inventory with themselves, holding out for a better price. This comes to bite them now – if they had sold their properties upfront, they could delay the project until cash was easier to get. Sure, that’s havoc on the poor investor or home buyer, but that’s not really the developer’s problem in a crisis. But with their own money stuck, they have to raise the money to finish the projects. My feeling is: they’ll sell properties at lower rates.

This can only mean a fall in real estate prices. This theory that will take time to play out, but in a crisis, time intervals become distressingly short. All RE stocks seems to be down today – from 3% in DLF to 6% in HDIL.

But there are ways out – RBI can’t handle another systemic crisis so they may relax these restrictions, or make loans available temporarily. Banks still do quasi-lending to developers, with offers such as – you take the loan, the builder pays the EMI. I’ll write about that later, but it is a functioning source of debt today, and much less expensive than the 13% they seem to have snagged in the bribery tainted loans. It’s not game over yet.

Disclosure: No RE positions. I recently got out of all banks as well. This is an opinion piece, and if there is data to refute or support this please let me know.

  • IFRS says:

    >First it was the Adarsh Housing Scam, then the 2G Scam and now this Housing Scam. Within a Span of 1 month, 3 Scams seems to have come light. Shocking !!!!

  • Ramki Ramakrishnan says:

    >Well thought through! I expect HDIL to reach Rs 90 in the coming weeks. Sell any recovery to 220 area.
    Ramki

  • liju philip says:

    >The real estate pricing is simply ridiculous in all the cities of India. Waiting for a crash so that i can buy some property 😉

  • Anonymous says:

    >Builder Lobby is still the most loved lobby for State Level Politicians as Land Ownership is a State Subject. They will surely help "a friend in need".
    Secondly Private Equity is waiting for lending at around 30%. They will step in to make a killing as long as they do not preceive threats from some "Mad Jairam Ramesh".
    Finally Pranab-da will be the man of last resort.
    So all in all this will be just a storm in the tea cup.

    MK