Reality Firms Stepping in to Educational Sector

At a time when the biggies of real estate are divesting non core businesses, a clutch of mid-level developers are chalking up plans to invest in the ‘recession proof’ education sector. 

In the last one month, four real estate developers have announced plans of setting up business schools across the country with the combined investment exceeding Rs 500 crore. “It’s a natural progression for a real estate developer to foray into the sector which offers such a tremendous growth potential. There is a shortage of supply in the education sector which we feel we can successfully cater to,” says Pranav Ansal, Chairman, Ansal API. 

With diminished demand for housing and a cash constraint, it’s a natural progression for many developers with available land banks. The Chennai based R. R Industries, Ahmedabad based Omega Realty, Delhi based Ansal Plaza and Kolhapur based Sanjay Ghodawat group are betting heavily on the `business of education’ to diversify their businesses; a model that has worked successfully in some countries like US and Canada. 

The Delhi based Ansal API plans to invest Rs 200 crore in next three to five years for setting up private schools, engineering institute across various centre in the country. The group has already tied up with e-learning service provider Educomp and has leased out its three operational schools in Gurgaon to Educomp. The realty major also plans to build school in townships being developed by them. 

Similarly, the Ahmedabad based Omega Realty plans to get into business schools - to be named as United World School of Business - with a proposed investment of Rs 105 crores. The three proposed schools in Mumbai, Delhi and Ahmedabad will commence operations in academic session 2009-10. 

Another builder to jump into the education bandwagon, the Kolhapur based Sanjay Godhwat Group plans to offer courses in engineering, management and also in the pipeline is an international school. The development of the 150 acre Sanjay Godhwat Institute will happen in three phases with an investment of over Rs 250 crore. 

The trend is being seen amongst the builders in south too. Chennai based real estate firm R. R Industries has tied up with National Management School (NMS) which is being set-up by US academics to start 25 business schools across the country with an estimated cost of Rs 9 crore. 

Experts say the reason for the rush into education is the burgeoning demand supply gap and also a logical extension into an adjacent category for builders who have the necessary wherewithal. 

Karan Khemka, principal, of a global strategic advisory boutique explains, “High rate of returns on investment coupled with huge imbalance in demand supply is attracting real estate players towards the sector who will be at ease in setting up the required infrastructure who already have land banks with them”. But the diversification won’t be an easy one, as similar initiatives have flopped in China.

Real Estate Market Outlook. Have Builders been too Sluggish to React? Hyderabad - March 2009

1.0 Coming to Terms with Hard Reality 

Builders are like middle aged women. It takes a woman courageous effort, to come to terms with the harsh reality of aging. You can continue to live in a make believe world for months or even couple of years…but natural aging just can't be stopped.

Those who read the signals and adjust their lifestyle, carry on with minimal impact, on their lives. Those who refuse to read signals and adjust lifestyle, end up in medical care. 

90% of women are smart enough to admirably adjust and are prepared well in advance. (Salutes to women on Women's Day!!). However, more than 90% of the builders react sluggishly to realities of the market which could affect, if not personal but definitely their financial health. 

2.0 Reading Signals Early and Reacting Swiftly 

In a booming market, builders were quick to react by resetting prices upward, every week. The possibility of making larger profits drove them to be extra alert! When market trend shows negativity, it is rightly expected that the same builders would be quick to act, to cut losses. After all, cutting losses is MORE IMPORTANT than making quicker profit. (In boom, whether one reacts quickly or not, there is profit, always. Its only the quantity of profit that varies. But in a sliding market, money gets burned. And that could be deadly)

And this is exactly where builders have gone, dreadfully wrong. Even now, many are in a "make believe world". Comforting themselves, with grandiose vision of early boom! Unfortunately, they are unaware that they are shooting themselves in the leg. And soon, the self inflicted injuries may aggravate.

Cutting losses by aggressive pricing in anticipation of worsening market, should have been the mantra 9 to 12 months ago. But the opportunity was lost due to the blind belief that boom is perpetual and negative trend, a flash in the pan. Builders offered small cuts from August 08 onwards which had absolutely no impact. 

There were opportunities as late as September 08 to offer aggressive pricing and convert leads to Sales. But once the negative trend firmed into solid slide, NOTHING could work. Its only in December 08, after a whole year and a half of negativity, that few builders started to react with larger cuts. But the horses had bolted in September 08 itself. And builders who reacted late, know that the stable is empty. 

For the smarter builders, the market has indeed given an opportunity to prepare itself for the future. Those who have learned the lesson that procrastination will cause misery, may be quick to act during a slide, after the next boom! 

3.0 Truth Hurts 

Developers are not expected to focus on the larger economy or keep track of business and employment trends, world wide. The primary business is to build and sell. And in the melee, they are either unaware or if aware, ignore emerging trends. 

Their outlook is very narrow and is intensively latched to generating sales at rates, that are not clued to trends. Even when there is appreciable fall in month to month sales, they choose not to look at the root cause. 

During last year, we had the opportunity to advise four developers on pricing as well as downsizing. The exercise reached nowhere with developers shooting down proposals which was based on emerging trends and established facts. These developers could have been winners and built projects, instead of losing crores, if they had acted diligently.

Since the market situation changes fast, suggested rate will have to be reworked and tinkered every month. What is saleable in May, could be too high in November of the same year. 

4.0 Case Studies 

Project 10Km from Gachibowli - Suggested pricing was Rs.2800/sft in May 2008. (Off course the rate is no more acceptable, today) Struggled with high rates and even now carries on, with the overheads mounting. 

Project near Guchibowli - Suggested rate for Villas under Rs.150L, a hot rate at that time in January 2008. For large plot with large Villas. But was priced close to 200L. Also we advised to reduce plot sizes to have Rs.100L villas, which was not agreed. Developer remained adamant and the plots too remain adamantly unsold. Meanwhile, money continues to get burned, since land was purchased partly with Blade fund.

Project 2Km from Narsingi - Suggested pricing level was Rs.2200/sft in April 2008. Actual launch by developer Rs.3150/sft. Naturally Struggled to book at the price and has been forced to bring price down drasrically 

Project near Guchibowli- July 2008. This is one project where the developers correctly decided not to launch, after discussions thus avoiding hardship and saving money

5.0 Ungainly Sales & Marketing Set Ups 

In boom time, any Tom, Dick and Harry in marketing/sales could be a hero. What is surprising was the profligacy of some developers to appoint too many people. And in such scenario, inefficiency spread, like wild fire. 

No more than one good guy is required to handle sales of 300 to 400 apartments whether its boom or bust time provided there is management and ground level support. Its absolutely wrong to expect sales to happen, by adding many more staff. If the sales comes down, its due to market situation not because there is insufficient staff! Nor is it because the efficiency of the Manager has come down. Its no use barking up the wrong cabin, while the rate cat is in the Chairman's Chamber. 

6.0 Current Outlook 

With the economy showing no signs of recovery and elections scheduled to be completed by Mid May, we can not expect any change in the trend which remains negative. As we had commented earlier, till there is appreciable upswing in economy, job security and new job creation, it would be foolish to expect Real Estate Sector to recover early. Global indicators currently point to couple of years of hardship, unless certain positive triggers happen, in between. 

The buyers are absolutely uninterested in housing loan rate cuts and freebees. They are interested only in "reasobable" capital cost. The price of properties will eventually settle at position of cost plus reasonable profit. And this is that part of finely wrapped real estate anatomy, which most developers still feel shy to look at. Its time for them to gather courage, lift the veil and take a deep, hard, close look!

The lowest price reachable in each project will depend on the cost structure of the project and risk associated with it. Though 2 projects may be close by, we can not expect price X in both, due to structural, specification, land cost, land ownership, approval and funding differences. 

Foreclosures and Bank Sales? Is there a possibility to buy cheap Apartments in Hyderabad, India?

1.0 Where can I get information on foreclosure properties being put up by banks for sale? 

We have received many enquiries asking where information can be obtained on foreclosure properties being put up by banks for sale. All of these enquiries originate from NRIs or their relatives here. 

In the US, buyers have defaulted and continues to default on home loan repayments. Few consecutive defaults sets in foreclosure action and there are specific legal provisions in different states, how the matter is to be dealt with. Its not a very quick process but can spread over 9 months to year or more, after a default is confirmed. 

In India the boom started in 2005 and ended in early 2007. In 2007 itself, prices had jumped and buying had fallen to miniscule levels. 2008 was an year when almost nothing got sold. In effect not many people have really bought high priced apartments or villas. The sales in 2007 (after prices jumped) and 2008 have been sporadic and mostly, purchases were by buyers who had the resources and bought to stay. 

If we take Hyderabad, there has not been any investors around for buying flats for last 1.5 to 2 years. People who bought at cheap earlier prices, are never going to default. Even with correction, market rates are still much higher than their "bought rates." 

People who bought in 2007-2008 are resourceful, had their numbers ready and that is why they bought. Except few cases, do not expect anyone to default. Such few cases will have NO market impact since these will never be known widely. For the market to react and participate there has to be a critical mass of defaults, which is not at all possible 

.0 Individual Loan Default 

Buying of a property by an Indian is usually a "family affair". Even nuclear families fall back on parents / in laws / uncles for support, while booking a property. There is unwritten commitment from several people, behind each purchase. 

If someone is stressed, family will standby. You will find pre-payments happening now, to reduce EMI. In fact banks have been reporting increased prepayments and rescheduling of loan by increasing repayment period and reducing EMI. No bank has reported foreclosures of individual accounts due to default, even though economy has been under severe stress for more than 7 months now. (There are only unsubstantiated loose talk fed by news from US) 

In India, each housing loan is Guaranteed by someone known to the borrower. Once a borrower defaults and default is persistent, the bank will immediately sound out the Guarantor. The Guarantor is legally bound to pay EMI and settle any outstanding, if borrower defaults. Making Guarantor pay is considered a taboo, in India. Something that is to be absolutely avoided. And this fact also ensures that immediate family steps in to ease the burden. ( As far as we know such Guarantor provision does not exist in US Home Mortgage Agreements) 

And even if someone is unfortunate not to have family support and lands up in big mess, usually banks will give interest free breaks, reschedule loan etc. If nothing works, (it may take couple of years to reach a stage of "nothing works"), the legal process starts which again is very laborious. Banks have to issue legal notices, get court orders etc before it can attach property. Even after attaching, selling-off is not easy. Again, court will be involved. With the way Indian legal system works, banks can not shake off the properties quickly at all. 

So basically except sporadic incidents, never expect enough properties to come into market, at all, from individual home owners. Obviously, people in India chucking their homes and running away, is just a dream that many in US may have. Its not going to happen here at all. 

3.0 Default by Builders 

Now..this is a possibility which can not be ruled out. The reason is the fact that unlike individuals who get cocooned by family circle, companies have no love lost between them. If a business fails, its not practical for families to support since the default amounts are HUGE running into several crores. But does this help the eagerly awaiting so called "foreclosure buyer?"! Lets examine.

Logically, there is possibility that builders who are unable to sell and hence are unable to meet debt service obligations, will default.. In fact, most of the builders in Hyderabad have already defaulted. BUT, banks have a peculiar issue. They need to dress up their accounts and need to show as less NPA as possible by end March. 

In fact, this March was hectic month for Banks here, with loan rescheduling exercise underway with all builders. Builders are given moratorium from payment for several months, loan repayment period is altered and several other exercises are carried out. 

Banks will keep quiet for another year and start running again, in the first quarter of 2010 before Financial Year end. If by that time, builders are unable to recoup, they may be forced to start legal process which again will take months. 

Most interesting thing about builder default: If builder has already completed construction, he would anyway have sold the inventory slowly, at reduced rates and got out of the mess. (So finished ready to occupy apartments, will not come from banks due to builder default) 

If builder had cash flow, he would have anyway completed work, sold and got out, during the rescheduled loan period. No builder will give finsihed flats to Bank! But if builder is unable complete work during this period, then banks get stuck with worthless, incomplete structures, jutting into the sky. 

Now, this is what is going to come into market for our dear people who are looking for Foreclosure Flats!! 

And we can remain assured, that the NRIs who look for foreclosure properties in India will be the last ones to touch such ghost structures with No "BAP" to complete work. 

Incidentally, Asset Reconstrcution Companies are taking shape on India now. They are supposed to buy these NPAs from Banks and later package such bad assets and sell to risk hungry funds. Obviously again, individual buyers will not be involved. 

4.0 Does individual buyers buy Foreclosure Properties in the US?

If we are to believe a trust worthy source like Investopedia, it's a firm NO. Its says that the legal position of such properties are sticky and generally only investor groups or funds which take big risks, touch them. More info at: http://www.investopedia.com/ask/answers/08/foreclosure-investing.asp 

5.0 Conclusion 

Its more than obvious that talk of buying foreclosure properties in India is appearing due to complete lack of understanding of ground realities. Also it sounds a bit cruel, to think of feeding on another's misfortune. 

Source: http://www.exclventures.com/News-Real-Estate-foreclosures-India-Apr09.asp