Housing Finance Scam - Realty Stocks in Blood Bath

The Indian Real Estate Stocks which have always been a pack of cards falling at the slightest jerks have taken a severe beating on the Stock Exchanges today. RBI which has been an indirect hand in glove to the real estate industry backed by Government sponsoring Black Money / Unaccounted - Non taxed Money to be used in deals makes this the least preferred choice for investment.

Investors deserted REal Estate Stocks in yesterday's trade and continued their selling spree in early trade today. Almost all the stocks are down between 5% to 10% and here is how the Indian Real Estate Stock Index looks like.

LIC + PSU Banks Financing Realtors Scam

The CBI has arrested officials of several financial institutions ranging from CEO to deputy general managers for allegedly accepting bribes from a debt syndicate company, "Money Matters", for facilitating loans to companies across many industries including Indian property developers.

Details of those arrested: Personnel from LIC Housing Finance (CEO), LIC (Secretary, Investments), BOI (GM), Central Bank (Independent Director), PNB (DGM) and 3 people from Money Matters (CMD + 2 others) were arrested.

Pro-forma analysis of commercial real estate books indicates that were half these books to be written off (an extreme outcome, in our view), the impact on NAV would be an average of 16% for our PSU bank universe but 72% for LICHF. On the other hand, were earnings/book values to remain unaffected but multiples reverted to their 5-year averages, our scenario analysis indicates anything up to a 20% impact on the share prices of our PSU bank universe from current levels.

We believe these investigations will have negative implications on the companies involved and will remain an overhang, both from financial impact as well as sentiment perspective.

Has the RBI Woken up yet to take to task all the il-legal money launderers ? Land / Real Estate is the Worst Asset Class for Investment. Read on How Government Sponsors Black Money in Land Dealings.

Historical Returns in Indian Property

JP Morgan was able to capture four transactions in four major markets that gives pointers to a long term price growth trend.

Mumbai (Napeansea Road) over a period of 90 years returned 15% ;
Prime Delhi (Kasturba Gandhi Marg, Barakhamba Road) over 40 years has returned 17%
Gurgaon over a period of last 20 years returned 20%
Chennai (T Nagar) over a period of 80 years returned a CAGR growth of 20% ;
[All Returns in CAGR]

Ansal's residential projects in Prime Delhi have witnessed a price CAGR increase of 15-17% over the last 35-40 years. Based on recent transaction, prime South Mumbai [Carmichael Road] bungalows have registered 15% CAGR over the last 60-70 years.

RBI Checkmates Luxury Residential Projects

The RBI has introduced three measures, which we believe will primarily
impact premium and luxury residential projects.

The RBI has increased the risk weight for residential housing loans of INR7.5m and above, irrespective of the loan-to-value (LTV) ratio, to 125%. However, risk weights for other loans remain unchanged.

So Luxury in India means over 75 Lakhs.

The LTV ratio for home loans has been capped at 80%. Lenders typically have an average LTV ratio of 70%. Hence, we see no significant impact on end-user demand from the 80% LTV imposition. The LTV however, should curb price rises and speculation over the near term in the luxury segment.

The RBI has raised the standard asset provisioning for all 'teaser rate' loans to 2%, from 0.4%. We believe this would end the 'Teaser rate' campaign wherein lenders offered a lower initial 'interest rate' (50bps below the current rate) and calculated affordability (or ability to service loan) of a buyer on the lower interest rate