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Well, that didn’t take long for Bombay real estate developers to go from building “affordable housing” to overpriced properties.  Back in March 2009, at the height of the financial crisis every real estate developer was talking about changing their business model and going after value for money projects.  Now it seems many are scraping that residential business model and back to building massive properties, case in point – Indiabulls Real Estate (IBREAL). They recently kicked off their advertising campaign for Sky, Sky Suite and Sky Forest, all 3 properties are located in Lower Parel.  According to a sales rep I spoke to at IBREAL, Sky is sold out and their managed residences at Sky Suite are 20% sold. Sky just came onto the market about 6 weeks back, so that is either an incredible sales effort or excellent marketing to say “you can’t buy, go away.”

The latest building to go on sale is Sky Forest. The marketing info talks about 10,000 to 22,000 sq/ft for either a duplex or triplex.  I called and asked about pricing, it starts at Rs. 20,000 a sq/ft plus Rs. 50 per floor rise and Rs. 1000 sq/ft for a Worli view. So the math for a 30th floor 10,000 sq/ft pad is:

Base price = Rs. 20,000
Floor rise @ Rs. 50 x 30 = Rs. 1,500
Worli view = Rs. 1,000
Total 22,500 x 10,000 = Rs. 22.5 CR (approx USD 4.7 million)

The kicker is that the 10,000 sq/ft is really super built-up area, whereas the livable carpet area is more like 4,430 sq/ft. Why such a hugh difference? That’s because of the crazy Bombay real estate math that includes things like the lobby and other common areas of a building and quoted as “super built-up”, exceptionally stupid I must say.

So the price is really more like Rs. 45,000 sq/ft or around USD 1,000 which is quite spendy.

It’s been over year since the financial markets started to collapse and since then we are seeing many deals that might make you scratch your head.  The one that comes to mind is Sequoia Capital investing into low incoming housing in Bombay.

Sequoia Capital is one of the oldest and most well connected venture capital firms in the world, they have invested in companies like Atari, Cisco, Google, LinkedIn and PayPal to name a few. It was started by Don Valentine who had the balls to invest in Cisco Systems back in December 1987, which was just weeks AFTER the October 1987 stock market crash.

Back to the low income housing project. Sequoia Capital is investing in Tata Housing which has a project outside of Bombay in Boisar. The flats will most likely sell for between USD 8,000 to 10,000. So why would Sequoia get involved? I’m betting there are a couple reasons:

1. Sequoia Capital is first and foremost a technology VC firm and unfortunately the number of technology deals that are in play in India is a fraction of what they see on a global scale.  Which means instead of funding entrepreneurs they have to be entrepreneurial themselves.

2. There is a HUGH potential to streamline the construction industry in India.  I’m guessing Sequoia will try and see if they can inject some technology into the process and see how it scales with Tata Housing.  If it works, then they can target the entire industry and get a piece of the action.   I’ve seen people bring foreign building products to India which are priced 25-50% more then a local product and that just won’t work. You need to innovate within India so you can understand the cost constrains and get the locals comfortable with the product.

If this works out, I would expect them to go after the agricultural space and drop some knowledge there as well.

Over the past 3 1/2 years while living in India I felt that corruption was one of the bigger threats that could face a nation. In the US, an average citizen does not come across many opportunities to bribe.  In India, corruption is dealt with on a daily basis whether it’s straight forward in business or not so straight forward.  Need a new internet connection? I had to wait over 4 months to get mine, but I’m sure if I bribed the local technician I would have gotten it within a week. Service with a smile as they take your money to grease the wheels.

However, after hearing all the non-sense about the bailouts and latest program from the Treasury the Public Private Investment Program (PPIP). I think it’s arrogance over corruption that takes the cake. Wall Street believes it’s about them. They still believe they can fix the problem which was in part fueled by them. Obama from day one has talked about transparency, yet I’m willing to bet that the PPIP will be hazy in it’s dealings.  The applications for managers are due on April 10, I really hope that on April 12, they provide a list of all the investment managers that applied. I hope this does not turn out to be yet another thinly disguised compensation vehicle for Wall Street. Aren’t the PPIP investments still going to fall in value until the residential and commercial real estate markets stabilize?

This idea of getting Wall Street fixed then Main Street can recover is pure arrogance.  Let’s assume everything is fixed with Wall Street and all the banks are re-capitalized and ready to do business.  Who are they going to loan all this money to: people, companies, state/local governments?  Leverage is what got us to this point and jump starting the banking system to make loans to people that are still financially wounded sounds like another bubble in the making.

There is no silver bullet to this, there are way to many moving parts.  Governments and central banks have to show they are trying to do something but their attempts seem more like swimming upstream.  Some big actions like nationalizing Citibank might help and show the US is serious and bring back confidence.  Once confidence is in place then people might go back to their banks and apply for a loan and get a toaster instead of the other way around.

I can honestly say I don’t know sh#$% about New York real estate nor really care but an article in the New York Magazine got me some what hooked on it.  The article goes behind the scenes of one of the biggest real estate deals in Manhattan - Tishman Speyer, along with BlackRock Realty, agreed to buy Stuyvesant Town and Peter Cooper Village, a sprawling 80-acre complex on the East Side of Manhattan, for a record $5.4 billion from MetLife. Best quote from the monster article:

“Stuy Town is the quintessential rent-stabilized apartment filled with well-educated old Jews, and you shouldn’t fuck with them,” says one affordable-housing advocate.”

NY Mag article

Doesn’t Look Favorable = DLF. India’s largest real estate developer DLF announced their 3rd quarter earnings this past week and it was not pretty.  I think we all understand the economic environment is grim and the real estate market is REALLY grim but hearing Rajiv Singh, DLF Vice Chairman, speak on CNBC-18 you get the sense it ain’t so bad…whatever.

There is no denying it, most real estate developers around the world and in India are living on borrowed time and borrowed money. Rajiv also stated in the same interview that he doesn’t expect homes prices to get cut beyond 20% yet they have a hugh amount of excess inventory.  Rajiv mentioned people are not buying because bank rates are too high, I think what’s high is either home prices or Rajiv or probably both.

Real estate projects can simply be classified as:

1. New – in today’s environment only a complete moron would loan a dime to a new project
2. Partial – Hugh dillema, throw good money after bad?
3. Completed – sell or lease at rock bottom prices, this screws up the initial project cash flow calculations. Existing tenants will ask for a rate negotiation (read – lower prices)

For DLF the numbers don’t add up and they are massively over leveraged which is not a good thing.  Will DLF or any Indian real estate company file for bankruptcy?  No chance, Indian corporate law is so convoluted that filing for bankrupty doesn’t seem to be an option, instead the company will just be a zombie of it’s former self.

Previous posts on DLF:
May 2, 2006 - India’s next crorepati (billionaire): KP Singh
June 8, 2007 - Yes, DLF. Really?
Oct 10, 2008 - Boom to Bust

Okay, Satyam not only stumbles but it falls flat on its face. Tuesday after the Indian equity markets closed Satyam Computer Services, the 4th largest IT company, decides to acquire two companies as part of a diversification strategy. When I heard about the diversification, I thought maybe it was buying a data center company or some online advertising company. Nope, the Raju family decides to REALLY diversify and get into real estate and infrastructure. If cash is king then Satyam is ruling, they have over USD 1.2 billion in cash so they decide to blow USD 1.3 billion on Maytas Properties and USD 300 million on Maytas Infra. If you are wondering Maytas is Satyam spelled backwards. The problem is that both Maytas entities are Raju family owned companies and they were basically moving the cash from one company to another where they had a larger ownership stake. The most appalling part was on the conference call they mentioned they had a “Big 4″ accounting firm help with the deal but would not reveal the name. Does anyone really still give a damn what a “Big 4″ accounting firm has to say? And when asked about other real estate or infrastructure companies they looked at they again decided not to reveal any names.

Then Wednesday morning, they must have been enlightened because after ALL that due diligence and working with a “Big 4″ accounting firm they decided to call the whole deal off. Then they get on TV and try to justify how just 12 hours ago it seemed like the best thing since sliced bread but now they are all about “shareholder value”. Bottom line, they don’t seem so transparent as a publicly listed company should be.

The irony is that in 2008 they received the Golden Peacock Award for corporate governance. I wonder if they have to return the award like Milli Vanilli gave back their Grammy after their lip sync scam?

The ultimate irony, Satyam means truth in sanskrit, something that is truly missing with the Raju family at the moment.

Wow, what a day on the Indian equity markets…Sensex down 1070 points and the Nifty down 360 points. Currently the Sensex is EXACTLY where it was when I landed 3 years ago at 8,700. And the fun is only beginning the Dow Industrial Futures are down 550 points – limit down. I can honestly say I have NEVER seen this happen before. But that is not the reason I’m speechless, I read this NY Times article this morning and having a very tough time trying to sympathize with this family:

…Last month, Mrs. DeCicco, 32, was laid off from her $35,000-a-year job managing a hotel business center in Orlando, and the family moved north where Mr. DeCicco, 28, a security guard supervisor for SecurAmerica, could earn $13 an hour instead of $10.

…these include a four-piece marble and mahogany bedroom set for which they paid $8,000 after they refinanced their house two years ago.

WTF, are you kidding me? Mrs. DeCicco spent nearly 25% of her yearly salary on a marble and mahogany bedroom set. Dude, I can’t even begin to comprehend how you could justify this purchase, based on this logic everyone should be living in McMansions, driving leased cars and living beyond their means…oh wait…

Intel’s Andy Grove penned a great book back in 1996 about Intel, business and being paranoid about the competition. People have been asking me what’s happening worldwide, what’s up with India, etc…I see two stories being told depending on the audience.

The positive spin is “in the long term everything will be okay and you might actually want to invest now” and the other is “dude, watch the expenses, be liquid and don’t trust anyone.”   When it comes to my money, I’m absolutely paranoid and the competition is anyone out there trying to reduce my capital. In the last 6 weeks I have seen legitimate deals vanish, what was a viable business plan back in September is now apparently crap. The VC studs at Sequoia Capital had a meeting this week with a slide deck titled “RIP: The Good Time” and in short – get your house in order, things might get real crazy real fast. (Here is summary from Om Malik of the meeting).  

Someone asked me what is the silver lining to all this. I would take this time to vet out money managers, if they can survive this period they can rock in any market. If big companies can be paranoid about the future, I’m not sure why you shouldn’t be. It’s not me being a permabear, it’s just me protecting my capital at all costs.

Here are some great quotes from today’s newspaper:

The property rates in Mumbai will not see a correction above 10-15%, given the land rates are very high in Mumbai…

Gopal Sharma of Gundecha Builders 

Gopal has to be positive or his cashflow won’t be positive

Indians buy a home for long term use, unlike people in western countries

Pravin Doshi, Pres of Maharashtra Chamber of Housing

Seriously, Pravin have you even visited the West or just talking smack?  I know several of my cousins in India that have bought property for a quick flip. And several of my cousins in the US, that only have one house – the one they live in.

Be absolutely paranoid about your portfolio and don’t let anyone sway you.  People talk about risk metrics, the best risk metric is if you can sleep peacefully at night.

Over the past several years the great Indian real estate story has been front and center. From a Bombay point of view it’s been fun to hear about how prices will never come down and the time to buy is now.  Even in the last 3 months, people have been saying the real estate market will not crater like in the US.  I’m sorta leaning towards bulls@#$ when I hear that.  

I’m expecting every country that had a real estate bubble will have at least one bank and one developer go bust. Every time I rattle off a list of developers people have a reason why they will never implode:

Indiabulls – politically connected, it’s just a front for converting black to white money
DLF – lots of land, good rental income, political money
Unitech – backers with deep pockets
HDIL – politically connected, focused on slum rehab projects

On the bank front, the last 48 hours have generated more headlines and rumors about a bank going under. The one name that consistently seems to come up is ICICI, hence they have been appearing on TV the last 2 weeks telling everyone everything is okay. I’m sure the only reason it comes up because it was the most aggressive of the Indian banks. I have pulled all my money out of ICICI because if they fail, I’m not sure the Indian gov’t can create magic like Paulson and Company.

If you are watching your portfolio plummet and wondering what is happening, this post might help you understand with better clarity why it seems your money is being flushed down the toilet.  The 3 combined podcasts run about 100 minutes, I’ve summarized the key points and some choice quotes. However, I highly recommend you downloading them yourself to listen to. (If you have a Zune or don’t use iTunes, please close your browser and jump off a cliff)

60 Minutes (iTunes link, 42 minutes)
- What went wrong with the risk models

“You can’t model human behavior with math”

- What is a credit default swap (CDS) 

“It is an insurance contract, but they’ve been very careful not to call it that because if it were insurance, it would be regulated. So they use a magic substitute word called a ‘swap,’ which by virtue of federal law is deregulated,” 

- The CDS market is around USD 50-60 trillion dollars

Radioeconomics.com (iTunes link, 34 minutes) – The guest is Barry Ritholtz (from The Big Picture blog which is one of the best blogs covering the financial crisis)

- The Commodity Futures Trading Act of 2000 exempted any derivatives instrument (such as CDS) from being regulated
- The CDS market went from USD 2 trillion to USD 50-60 trillion in just several years
- Ratings agencies (Moody’s, S&P and Fitch) were rating most mortgage backed commerical paper as “triple A” investment grade
- Housing sales peaked in 2005 and housing prices peaked in 2006
- Why in 2004, were 5 investments banks exempted from the Net Capitalization rule?
- The ban on short sales in financial stocks is stupid

This American Life (iTunes link, 1 hour)

Part 1 – Commericial Paper Market
- The commerical paper market (one of the largest markets) locked up after “breaking the buck” occured with the Reserve Fund

Part 2 – CDS’s
- Satyajit Das talks about the market originally being used for insurance and soon turned into gambling. (He has a great book, that I reviewed a while back)
- Great analogy of using CDS’s for fire home protection
- CDS’s are traded via over-the-counter (OTC) between two private parties in an unregulated market
- USD 5 trillion in Bonds and USD 60 trillion in CDS  - a 12x leverage

Part 3 – CDS’s traded in an unregulated market

After listening to all 3 podcasts it’s clear, there is no quick fix to the problem.  The Fed stepped in on Tuesday and announced a Commercial Paper Funding Facility and the DJIA still got slammed over 500 points down. 

The two largest financial markets: commercial paper and CDS are unregulated and I’m sure the market participants like it that way. With regulation and transparency, you have to fight for business and lower your prices, look at the US brokerage model.  Once the US brokerage model was littered with companies offering rock bottom services, the industry looked towards new markets – CDS.

The size of the world stock market is estimated at about USD 60.9 trillion  at the end of 2007.  The size of the CDS market is between USD 50-60 trillion. Shouldn’t both be regulated the same way based on their size and importance?

The ONLY thing that is going to continue to rise is the US National Debt…USD 10 trillion and counting…