Saturday, December 29, 2007

Unreal Estate

SEBI proposes setting up of real estate investment trusts MUMBAI: India's markets regulator SEBI on Friday proposed setting up of real estate investment trusts (REITs), paving the way for wider participation by retail investors in the country's booming real estate sector. Under the draft guidelines issued by Securities and Exchange Board of India (SEBI) scheduled banks, public financial institutions, insurance companies and corporates will be eligible to set up a REIT, with initial networth of Rs 50 crore. REIT's are listed entities, similar to mutual funds, that use collective funds for owning and managing investments in real estate projects. The REITs will be managed by a separate real estate investment management company, SEBI said in the guidelines, which are awaiting public comments. They will be allowed to float schemes for a maximum 90 days, have to specify the amount to be raised and cannot offer guaranteed returns. They will also be required to distribute at least 90 percent of their annual income as dividends. REITs will be allowed to invest only up to 20 per cent of total asset value in incomplete and non-income generating assets, and can borrow only up to 20 per cent of the gross assets of the scheme. SEBI has also proposed safeguards by putting a limit of 15 per cent for investment in a single real estate project, and 25 per cent in real estate projects by a single group। All REITs will also need to secure a credit rating.
Source: Economic Times Finally, the much awaited REIT guidelines are out and the media isn't sitting lazy to mark this as an event to celebrate. It is being tauted as a great investment vehicle for individual investor bullish on real estate. Here are a few observations about what may happen with the advent of REITs. A big chunk of the population with investable surplus not enough to buy real properties would jump in to encash this opportunity. Not only individuals with less capital, but also individuals capable of buying property would jump in the REIT bandwagon as this would be much much more liquid than a piece of land or a commercial building. This will leave the REITs with huge cash pile to be deployed in just one sector, real estate. This might take the valuations to moon if they are not yet there since there aren't many venues of investment. There is one very big difference in India and other developed markets and that is population. Per capita property available in India is much lower than that of developed markets. With rise in income levels, demand for housing and commercial property has increased at a rate way above the rate of increase in supply and this scenario is not going to change soon. Consequently, many of the lower income group were left devoid of housing and pushed to slum like conditions. This socioeconomic divide has been very harsh and is increasing. If supply does not go up many folds, REITs would definitely accentuate this socioeconomic gap and you know what happens when there is a section of those with high income and a much bigger section of those who are deprived of basic requirements such as housing. Higher social conflict, crimes. It is to be seen whether the market prices of real estate dictate REIT's NAV or it happens to be the other ways round, that is the properties getting valued according to the NAV of a fund holding similar kind of properties. The probability of this phenomenon will gain strength with substantial rise in REIT fund, the more money they have the more power they possess to move the prices. The very fact that REITs will be traded in the exchanges indicates that REIT's NAV would inevitably be volatile . Also, no one could deny that speculative money would be coming in making REITs speculative and more and more volatile. Now, if it happens that properties are priced in accordance with the NAV, we would see wide fluctuation in property prices unheard of in India. I wonder if this was a right time to come out with this product as prices are quite high and are, at many locations, trending downward. However, this downward trend would soon be reversed with the buying pressure coming from cash-rich REITs. And finally, a disclaimer: All of the above is mere imagination of mine and not based on any fact. Most probably, none of above is going to turn true. Thanks for reading all this bullshit.

Tuesday, December 25, 2007

Desi Versus Videsi Credit

AMERICANS are falling behind on their credit card payments at an alarming rate, sending delinquencies and defaults surging by double-digit percentages in the last year and prompting warnings of worse to come. The country’s largest card issuers also found that the greatest rise was among accounts more than 90 days in arrears..... At the same time, defaults — when lenders essentially give up hope of ever being repaid and write off the debt — rose 18% to almost $961 million in October, according to filings made by the trusts with the Securities and Exchange Commission...... Around 325 million individuals accounts are held in trusts that were created by credit card issuers in order to sell the debt to investors — similar to how many banks packaged and sold subprime mortgage loans. Together, they represent about 45% of the $920 billion the Federal Reserve counts as credit card debt owed by Americans.
Source: Americans Tripping on Credit Card Payments, Economic Times American banks distributed credit cards to all the Toms, Dicks, and Harrys just as they did with mortgage loans and of course, all those Toms, Dicks, and Harrys weren't hesitating to make merry. The good thing about subprime mortgage is that at least there is something material to back those loans, the property. Foreclosures can fetch the banks some money though substantially less than the actual loan amount (given they can get buyer for the property in a falling market). On the other hand, there isn't much value left in products bought by means of plastic money, i.e., burnt gasoline, beer and ham burger that went down the gastric tract, iPhones, those made in India Jeans and cotton shirts bought at high premium, etc. I don't see banks running behind customers with a portable commode in their hand to recover credit card dues from excreta. With that said, the total money at risk is $920 bn out of which 45% has been securitized. That is around $414 bn has been taken out of banks books and no one knows (not me at least) in whose books they are lying. Now, the subprime crisis happened because people were not able to service mortgage when the interest rate climbed up to around 8%. The question is will those same consumers be able to service credit card loans at the interest rate of 36%. I don't know. May be Fed will come and baby feed them with some dollar bills. But if that doesn't happen, surely there will be defaults. Lets assume a conservative default rate of say 10% to 12%. With that in mind, the total bad credit card loan will be around $100 bn. You may add this figure to the present estimates of bad subprime loans of $500 to $700 bn and that's another 14% to 20% increase in irrecoverable loans in United States' book. Err... Not United States' book, rather world's book because yet no one is sure who owns how much of these dollars. May be your favorite Jaunpur National Bank of India owns some. Note: The above have been written about in another blogs I read, calculated risk. Now, the Indian story.
Bank gross NPA down to 2.5% of loans and advances in 2006-07 ... The asset quality of banks has improved further last year and is reflected in the decline in their gross and net non-performing assets (NPA). An ET survey of 77 commercial banks finds that their aggregate gross NPA has declined by 1.2% in 2006-07 over 2005-06. The gross NPA as percentage of loans and advances has declined from 3.35% in 2005-06 to 2.52% last year....
Source: Bank gross NPA down to 2.5% of loans and advances in 2006-07, Economic Times And that happened in the backdrop of hardening interest rate and increasing credit card spend. Surely, Indian banks are managing their risks much better than their American counterparts.

Monday, December 17, 2007

Is the uptrend over?


In India, people are really very enthusiastic now and very busy, counting returns they would get in future and that too not in terms of percentage but how many folds their money would grow. That's pretty understandable specially in such times of boom (read bubble). Actually, I feel this is extension of that bubble, the last run before things collapse. I know there is great possibility that I am wrong and it would be one of those rare instances when you are proved wrong and yet it feels great to be proved so. But there are a few things that would make you worried.

The riskiest economies, all with current-account deficits and relatively high consumer-price inflation, are India, Turkey and Hungary. Those with current-account deficits are vulnerable to a sudden outflow of capital if global investors become more risk averse. Economies where inflation and credit growth are already high and budget deficits large, such as India, have less room to ease monetary or fiscal policy if the economy weakens.

Source: The Economist

US Housing Bubble: The worst thing in US housing bubble is yet to happen. Here is what fed says.
First, the bulk of the first interest rate resets for adjustable-rate subprime mortgages are yet to come. On average, from now until the end of 2008, nearly 450,000 subprime mortgages per quarter are scheduled to undergo their first reset, eventually causing a typical monthly payment to rise about $350, or 25 percent. Second, the weakness in house prices and the resulting limit on the build-up of home equity will hinder the ability of subprime borrowers to refinance out of their mortgages into less expensive loans; as a result, more borrowers will be left with a mortgage balance that exceeds the value of the house.

So by 2008, mortgage thing should come out in full color.

The Expert Phenomenon: But the "great minds" must be correct in predicting whether there is a problem in the economy or not, at least partially. So, it must be better to listen to the "experts" rather than trust your own logic. Or we are wrong? Here are some Greenspan quotes from the '90/'91 recession: (recession started in July, 1990)
“In the very near term there’s little evidence that I can see to suggest the economy is tilting over [into recession].” - Greenspan, July 1990
“...those who argue that we are already in a recession I think are reasonably certain to be wrong.” - Greenspan, August 1990
“... the economy has not yet slipped into recession.” - Greenspan, October 1990
Japanese Money: Yen-carry-trade is another story. As dollar depreciates against most currencies and yen is one of those currencies, those who borrowed in japan will definitely like to pull their money out of markets and pay back their yen loans.

How Much is Too Much, How Long is Too Long: Now one would say how far can Indian markets fall, may be 15000 in extreme conditions and that would be a great time to enter. So, even if the markets fall we have a reason to enjoy since it gives you an opportunity to make even more profit by entering at low levels. Well, think again. In 1989, Nikkei was trading at 38,000. In 1996, it dove to 22,000 and people called it long-term buying opportunities. It continued its downward journey to 7600 in 2003. Today, its trading at 15,000. Same happened with Korea and other Asian economies too and it won't be a surprise if India joins the list in the near future.

Human Behavior: People are making beeline to buy companies trading at huge premium (read high PE) counting in how many days their million will turn billion. The two basic problems with such people are greed and sluggishness. They are sluggish to enter the market and often enter when the stock has already appreciated quite a bit and if the party continues, they gain, but when things turn the other way round, they are even more sluggish to get out of the market. They wait for the market to return which never happens. So, be prepared to collect your booty and run before the building collapses.

History shows that, mankind have predicted 9 out of last 3 recessions. The problem with a crash is that it presents a catch 22 situation to you. No one knows when its gonna crash and if its not a crash, then no one wants to miss the ride too. Sitting with cash and seeing the markets skyrocketing is painful as is investing and seeing them reduced to half or even less. A correction may be a buying opportunity as well as start of a recession that's gonna last 3 years or so. This is really critical to those individuals (read naive) investors who have missed out the previous rally and want to get in now or entered the markets in 2007.

Clouds are there in the sky, but whether it rains or not is just a possibility and whether to carry an umbrella or not is your decision. It is a known fact that it is always better to react to the situation then predict future. But here I'm clueless as to what must be the strategy in case market turns bearish. I am unable to figure out what to do in such a situation. 

Finally, here is a pictorial representation of amateur investors' psyche (including me). The credit goes to Saint for creating this piece of billion-dollar art.