The great Indian hope trick!

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Banks increase their exposure in the Indian realty sector; and the US sub-prime crisis can take a walk...

Realty seems to be the latest crush of the banks which are on a prowl for partners who can fetch them higher returns. The abundant opportunity in the real estate sector and the returns that can be minted off, are what have lured the likes of Deutsche Bank, Citigroup, Lehman Brothers et al, who are busy hitching private equity deals with leading realty sector players like Unitech, BPTP, Lodha Group and Ramprastha Group (see chart above). “The Realty sector is the most lucrative option with ever growing demand for infrastructural developments, especially in the NCR region,” justifies Arvind Walia, Group Director, Ramprastha Group. With the growth numbers being forecasted in the scale of 25-30% on a yearly basis, the realty sector’s reality seems to be illusorily encouraging! Ashish Agarwal, Real Estate Analyst, SSKI could not agree more, “Real estate industry is on a rise driven by the increase in demand of residential housing and official infrastructure.”

One should realise that with even million dollar investments, the foreign banks have managed to grab only a percentage of the total shareholding, vindicating the increased valuation of the domestic realty firms. For example, Deutsche Bank has bought 40% and 25% of Ramprastha and Lodha Group respectively, while Citigroup has supposedly picked up 40% in BPTP. This is not to forget other private equity majors like Merill Lynch, Deshaw, and even Bennett Coleman et al who have always been into the foray of investing into the sector. “Many banks have dedicated property funds, which are invested in such developers,” clarifies analyst Ashish.

And there lies the nail in the queen’s bed! While people like Walia of Ramprastha overzealously claim that banks “have zero risk involved and are going to earn unheard of returns,” warning voices are already being heard from people like Amit Majumdar, Banking Analyst, Angel Broking, who says, “Market volatility, land title disputes, approval clearance and many more are thorns in the paths for these investors.”

Amit Saxena, CEO, Planman Financial is more acerbic, “It is ridiculous for foreign investors to be blind to the clear dangers of domestic real estate firms simply folding up because of rising costs!” And rising costs all over the board, including raw material, labour, cost of capital, and almost all related to the dangerously rising inflation rate.

As on April 15, 2008, the US subprime losses have been forecasted by IMF to almost touch a gut wrenching $1 trillion! That’s equal to India’s GDP itself! If India’s real estate sector crashes any day – and the dangers are always present around the corner – these foreign banks, as one expert put it, “would simply be hanging on to the great Indian hope trick...” Then why don’t these banks take immediate precautions? Amit Saxena patiently explains to us, “If it were as simple as that to make these banks tread a safe path, the US subprime crisis would never have occurred, would it?” Well, would it?

Ratan Lal Bhagat

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Source : IIPM Editorial, 2008

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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