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Commentary

MV Chronicle: Jan 22, 2011 – Real Estate, Liquidity Measures and More…

The Jan 22 edition of the MarketVision Chronicle is out! Read about Real Estate, Liquidity Measures, summary posts and more:

In the third edition of the Market Vision Chronicle, we bring you the tough real estate story, links and data on liquidity, and the bits and pieces we’ve been writing about at MarketVision. Read away!

Real Estate In Tatters

Real estate players have been facing tough times recently. Latest in the series of bad news, is that Banks are cutting down lending for commercial realty.

Builders seeking fresh loans have been asked to meet more stringent conditions, including demands to produce five-year lease agreements with tenants, and having to settle for considerably lower borrowings against future rent receivables, two bankers said.

While the RBI has been throwing warnings left, right and center about real estate exposures of banks, they still keep housing of certain types a “priority sector”. Banks must lend 40% of assets to the priority sector, so they will lend to anything that qualifies; and even Microfinance does. (Doesn’t it make sense then that there will be a bubble there? Where you encourage lending over other areas, you risk creating bubbles. )

Bank loans are one source of funding for developers, who get other kinds of cash-flow. They try to pre-sell projects, and in commercial realty that is simply not happening. Some have even resorted to asking YOU to buy, and they will pay the interest, because the realtors can’t get a loan directly. In fact they are happy to provide a 13% assured return – check www.omaxe.com to see one (listed) property developer openly ask for this kind of deal. In addition, they will even buy back the property in 8 years – the only questions are, will they survive till then or otherwise renege on this deal? The answers aren’t heartening.

Interest rates and Liquidity

The interest rate situation isn’t helping either. Rates have been shooting up, and the 5 year swap has broadened to 8.05%, highest in recent times.
MIBOR OIS Chart
(Source: CCIL’s Interest Rate Swaps)

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