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The Capitalist | The economic downturn and real estate blues

The Capitalist | The economic downturn and real estate blues
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First Published: Wed, Jun 24 2009. 11 58 PM IST

DLF Ltd appears to have witnessed the biggest drop in prices. Ahmed Raza Khan / Mint
DLF Ltd appears to have witnessed the biggest drop in prices. Ahmed Raza Khan / Mint
Updated: Thu, Jun 25 2009. 01 04 PM IST
Real estate prices have declined sharply. Banks, notwithstanding the directives from the government, have been proceeding very carefully in disbursing loans to this sector. True, credit to the real estate sector has eased, but the prices at which properties are being acquired are now being scrutinized much more carefully than before, and the margin money requirements more cautiously calibrated.
DLF Ltd appears to have witnessed the biggest drop in prices. Ahmed Raza Khan / Mint
Almost every big property has witnessed price drops by 30-50% (see table), and there are fears that there could be a further drop of 10-20%. Almost every real estate company has begun restructuring its loans, thanks to a bit of flexibility shown by the Reserve Bank of India in lending norms for this beleaguered sector. It is also the one in which many political bigwigs have significant interests.
DLF Ltd appears to have witnessed the biggest drop in prices. That could explain why this group is trying to focus on infrastructure development as its USP (unique selling proposition) to bring back some more value to its properties. This could explain the tremendous interest it has shown in the proposed 5km private metro in Gurgaon. The project was envisaged by DLF (now by the Haryana government) to promote its housing colonies, particularly Cyber City, which has a huge inflow of employees from Delhi and other areas.
At the time of going to press, the DLF-Infrastructure Leasing and Financial Services Ltd (IL&FS) consortium remains the only bidder for this project. The consortium includes two IL&FS group companies (ILFS Transportation Network Ltd and ITNL ENSO Rail Systems) and DLF. The bid now goes before the state’s cabinet for approval. The bid value is not known, but should be interesting for infrastructure watchers because all the other Metro rail projects with which IL&FS has been associated have been priced significantly higher than those at which the Delhi Metro was built. Considering that steel prices, financial costs, and the cost at which equipment can be purchased have dropped since then, there are good reasons for the costs dropping, not increasing.
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Peddling gold
Expensive buy: Demand for gold has been falling but prices have risen. Jayanta Dey / Reuters
Two asset bubbles appear to have begun forming, partly fuelled by the bailout money that almost all governments have pumped into their respective economies.
One is oil, and the other is gold. In both cases demand has been falling, but prices have been rising, or at least threatening to.
In the case of gold, there is a new development. For the first time in history, a private entrepreneur has set up a gold coin and biscuit vending machine at Frankfurt airport in Germany. The machine peddles gold coins and bars in 1g, 5g and 10g pieces. And the price at which this gold can be obtained is at a hefty 30% markup to international prices, which are automatically updated every few minutes. With this markup, the retail price of gold has already been pushed up to over $1,100 an ounce.
The entrepreneur, Thomas Geissler, of TG-Gold-Super-Market, based near Stuttgart, aims to introduce such machines at 500 locations including train stations and airports in Germany. The Frankfurt gold dispensing machine “Gold to go” is the first of its kind. A camera on the machine monitors the transactions.
What is interesting is that you can only purchase gold from these machines. You cannot sell gold. It does appear to be a demand boosting exercise.
But why not purchase cheaper gold directly from banks? Well, say some market observers, to purchase gold from banks, you need a bank account. Even to open an offshore bank account you need to fill in a form. With such a machine, at least some unaccounted cash can be converted into gold without inviting the taxman’s attention.
However, many believe that those who purchase gold from such machines will do so out of curiosity. Gold is also available on the streets through reliable jewellers or from gold souks (like in Dubai) with no questions asked. Unless the premiums at which gold is dispensed from such machines is reduced, they will enjoy excellent curiosity value. Not much more.
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Oily slide
Oil threatens to cross $75 a barrel, though it has found some resistance at $71. Saudi Arabia and many other West Asian countries want the price to be around $80 a barrel, and many members of the Organization of Petroleum Exporting Countries (Opec) are trying to do everything they can to shore up its price. But with demand flagging, many wonder if the price of oil is not due for another skid.
Take the facts: Opec itself expects world demand for oil in 2009 to decline 1.89% (by 1.62 million barrels per day) to an average of 83.8 million bpd. This is a further downward revision from Opec’s May forecast.
Meanwhile, Russia is expanding its oil production and is not unduly worried about oil prices because (very sensibly) its budget is calculated on an oil price of $41 a barrel. Anything above that figure means the deficit will be less and the reserves higher. The Economist points out how the recent rise in oil prices to around $70 per barrel “has calmed the nerves of Russian elite, pushed up the rouble and sparked a rally in the stock market”.
Then there is the problem of Saudi Arabia itself. It has just announced the start of production at the giant Khurais oilfield, which has the capacity to produce 1.2 million bpd of Arabian Light crude. But this additional capacity did not depress prices, possibly on account of the disclosure by British Petroleum Plc. that the world’s oil reserves shrank by three billion barrels in 2008.
However, with new finds in many countries, particularly in Saudi Arabia and Russia, and the absence of any significant growth in demand for oil, this could easily be another bubble in the making.
R.N. Bhaskar runs a company with significant interests in distance learning and examination certification and writes on corporate and business policy issues. Comments on this column are welcome at capitalist@livemint.com
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First Published: Wed, Jun 24 2009. 11 58 PM IST