Ripple effect

In my earlier article (Way Out!)I have expressed that it will take some time for the realty sector to come out of the blues and with each passing day things will become tougher for everyone in the market be it developers or prospective buyers. Real estate companies and upcoming projects will be subject to stringent regulatory checks and controls. On the other end financial institutes has raised the bar for margin money to 20% from 15% earlier, which means the prospective buyers need to shell out additional 5% margin on their purchase.

Discovery of loan scam will have ripple effect and will trigger many events perpetually.

Prima-facie it is learnt that post discovery the real estate prices will decline which in turn will trigger margin calls for the developers who has placed that land banks as collateral. Developers, who have borrowed money by placing land/ project as collateral, will have to replenish margins that have fallen due to correction in overall property prices.

Real estate developers will be forced to borrow money at high cost or place more property as collateral to fill-up the lost margin. Developers will rope in money by inviting investment as a part of fixed maturity plan (FD’s) and might offer interest rates which will be obviously higher to other financial institutes. But possibility of raising funds through this route is also tougher as Real estate developers fixed maturity plan are finding few takers post meltdown and recent scam headlines have further dampened the already difficult fund raising efforts by them.

Apprehension, difficult to answer in a very immediate term, one has to wait and watch to see the market reacting, Developers will definitely explore Fixed maturity plans deposit route for funds raising by offering good interest rates. Investors who love to pursue risk can definitely explore the option as risk reward ratio will be lucrative but simultaneously should not forget to read the ratings given by rating agencies before investing.

Way Out!

How the loan scam discovery will shape up the realty market in the future, will it be a win-win proposition in the market and how the common man should read in between the lines; these are some of the apprehension which can’t be answered in a very immediate term instead one has to wait and watch to see the market reacting.

The loan scam was busted with the allegation that few private institutes have benefited some real-estate players by compromising stringent procedure of funding and providing funding to real-estate players in return of monetary benefits. The day since this loan scam was busted the stocks of funding companies whose names was involved in the scam and the real estate player are bleeding. Stocks even breached there year low’s since the discovery came to the light.

Well there is mixed reaction from the market regarding property prices projections for days to come. With every passing day new names and new ways of misappropriation are getting exposed including writing off of bad debts and malpractices. I anticipate some new imposition from government in a very immediate term, to curb malpractices in future transactions. This will lead to tougher financing guidelines resulting liquidity crunch to real estate developers which in turn will slowdown there upcoming projects.

It is also learnt that Real estate developers are having an outstanding obligations tuning to 25,000 Crore rupees to honor, for which they can’t look back at market. Tough time for real estate companies doesn’t ends here, the Public offers which were in the pipeline to hit the market are taken a back as there is a subdued interest on investor in real estate stocks post scam, Investors are in a pause mode and it seems that real estate sector has suddenly lost its shine.

In this entire development the developers are bleeding and to honor there existing obligation they may take a decision of reducing the price for there completed and upcoming projects as well

On the same time projects with clean image will beg a premium for there upcoming and completed projects, scarcity of the new projects and premium from these developers will push the prices.

In nutshell how the market will react to this development is not very certain and if you are thinking for a dream house of yours I will suggest you to watch the situation and then take an informed decision.

Image source: princetonrealestatehomes.com

Welter - Shelter

Working on the deadline for my house hunt which was really very short (11^th oct-2010 to 13^th oct-2010 ), I overstretched myself in terms of efforts to honor the deadline and finally I was able to zero in one residential complex. I communicated with the developer, paid them the token by 12^th Night itself and the deal was struck though the other formalities pertaining to loan, house selection/ allocation and other legal procedure was pending. As it was already getting late for the day, so we thought of exploring them by tomorrow.

The very next day i.e. 13^th I reached the site to work on the pending issue, but was surprised to learn that they were reluctant to offer me the price which they had committed hardly 5 days back. I was taken aback as I have already paid them the token amount and they were not willing to honor their own commitment, I communicated with their head office even but all in vain.

I was worried about the token as they may even confiscate the entire token money or might deduct some statutory charges as I was filing for the return of the deposit. But thank God the HO people were genuine enough to refund my entire money without any ifs and but.

If it would have been other case I would have fight for the honor of words but unfortunately I couldn’t; specially in this case. As the real estate developers are really big & influential people and one should not really mess around with those people. I don’t know whether I missed my deadline or honored it but the fact is that I own a house for a day virtually but didn’t own it really.

Image source: totalmortgage.com