IMPACT OF GLOBAL FINANCIAL CRISIS ON

REAL ESTATE

Project Report

submitted in partial fulfillment (Requirements) of

Master of Business Administration Programme

In

(Real Estate)

Under the Supervision

Dr.Anu Lather

By

Niharika Yadav Enrolment No.0241669008

)

University School of Management Studies

Guru Gobind Singh Indraprastha University

Kashmere Gate, Delhi-110006

June 2006

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Abstract:

The report is prepared in the head of the topic “impact of global financial crisis on

Real Estate”. It mainly concentrate on the general facts which are directly affecting

the Indian economy that is what all the financial crisis is about and what are the

poising factors affecting the Indian economy like the affect of the inflation,

banks, capital market, GDP, balance of payment, industrial growth, oil prices,

employment and the companies which are dependent on the down fall of the US Banks.

Executive Summary:

There was a time when India was discussed as the land of snake charmers,

black magic and epidemics but the revolutionary Indian growth story changed

everything. Indian economy at its height compelled the world to change its

viewpoint towards India. Out of the several factors which changed the face of

modern India, we are going to discuss the most roaring of them i.e. our share

market. The earlier reform procedures adopted by India gave India the two most

sought after world-class brands i.e. SENSEX and NIFTY. The magical figures

displayed by our market turned all the heads on India. And India became one of

the most favoured places for investment.

Now we are going to deal with the ups and downs in the share market since last

two years

i.e. since year 2006.our share market has went through many phases in there 2

years. We saw the investors getting overjoyed at 21K and we saw them crying

too when it crashed. We saw how the market rewarded the undervalued shares

and how the overvalued shares fell down to demonstrate the saying “everything

which rise more than expected, has to fall.”

So to analyze the saga of Indian share market, we had two indices to follow: BSE

sensex and NSE nifty. Though NSE nifty is a more advanced option and has left

BSE sensex far behind, still we call BSE sensex as the barometer of our economy.

That’s why we have followed the BSE sensex. It was not possible to track each and

everyday figure of the sensex since last twoyears. The performance of the sensex

is analyzed with the help of data and graphs collected from

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various sources and some of the most talked about movements of sensex starting with

the secondary market summary of each year, firstly year 2006 and then year 2007.

The global financial crisis, brewing for a while, really started to show its effects in the

middle of 2007 and into 2008. Around the world stock markets have fallen, large

financial institutions have collapsed or been bought out, and governments in even the

wealthiest nations have had to come up with rescue packages to bail out their financial

systems.

On the one hand many people are concerned that those responsible for the financial

problems are the ones being bailed out, while on the other hand, a global financial

meltdown will affect the livelihoods of almost everyone in an increasingly inter-

connected world. The problem could have been avoided,if ideologues supporting the

current economics models weren’t so vocal, influential and inconsiderate of others’

viewpoints and concerns.

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Certificate

This is to certify that the project entitled Impact Of Global Financial Crisis On

Real Estate is a bonafide work done by Niharika Yadav (Enrolment No.

0241669008) of MBA – Real Estate (June-2008-2010) in partial fulfillment of the

requirements for the degree of Masters of Business Administration of this

Institute.

Internal Evaluator External Evaluator Director

Name & Signature Name & Signature

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Acknowledgement

I express thanks and gratitude and indebtedness to Dr. Anu. Lather,

Dean M.B.A, Indraprastha University my project guide for her encouraging

support and guidance in carrying out the project. She constantly encouraged me

and showed the right path from day first till the completion of my project. My

grateful appreciation is also extended to Dr. Kuldeep Chandra, for his immense

moral support. I would also like to thank all those from whom I have collected the

primary data for this project for their valuable time and views

I would like to express gratitude to my father Prof. Ravinder

Singh Yadav, for his valuable advice and guidance without which this project

would not have seen the light of the day.

I thank Mr. Ankur, for encouragement and guiding me in

completing my project successfully. I would like to thank Mr. Anil Rawal for their

kind co-operation and guidance. I would like to thank my friends for being

supportive all the time, and I am very much obliged to them.

However, I accept the sole responsibility for any possible errors of omission and

would be extremely grateful to the readers of this project report if they bring such

mistakes to my notice.

Niharika Yadav

(0241669008)

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Contents

Introduction

Need and Rationale

Objectives of the Study

Research Methodology

Data Analysis and Interpretations

Findings

Recommendations

Annexure/Appendices/Questionnaires

Bibliography

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List of Figures and tables:

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Introduction:

A global recession is a period of global economic slowdown. The International

Monetary Fund (IMF) takes many factors into account when defining a global

recession, but it states that global economic growth of 3 percent or less is

"equivalent to a global recession.”

Informally, a recession in a country is a period of declining productivity. In a 1974

New York Times article, Julius Shiskin suggested several rules of thumb to

identify a recession, which included two successive quarterly declines in gross

domestic product (GDP), a measure of the nation's output. This two-quarter

metric is now a commonly held definition of a recession. In the United States, the

National Bureau of Economic Research (NBER) is regarded as the authority

which identifies a recession and which takes into account several measures in

addition to GDP growth before making an assessment. In many developed

nations other than USA, the two-quarter rule is also used for identifying a

recession.

Whereas a national recession is identified by two quarters of decline, defining a

global recession is more difficult, because developing nations are expected to

have a higher GDP growth than developed nations.According to IMF, the real

GDP growth of the emerging and developing countries is on an uptrend and that

of advanced economies is on a downtrend since late 1980s. The world growth is

projected to slow from 5% in 2007 to 3.75% in 2008 and to just over 2% in 2009.

Downward revisions in GDP growth vary across regions. Among the most

affected are commodity exporters, and countries with acute external financing

and liquidity problems. Countries in East Asia (including China) have suffered

smaller declines because their financial situations are more robust. They have

benefited from falling commodity prices and they have initiated a shift toward

macroeconomic policy easing.

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Possibility of a global recession in 2009

According to the IMF’s World Economic Outlook, October 8, 2008, the world

economy is “entering a major downturn” in the face of “the most dangerous

shock” to rich-country financial markets since the 1930s. IMF expects global

growth (measured using purchasing-power parity), to come down to 3% in

2009, on the verge of what it considers to be a global recession.

The World Bank said in December 2008 that the global economy will enter a

recession for the first time since 1982. International trade will decline from 2007

levels. The bank said it expects global GDP growth to decline to 0.9% in 2009

from 2.5% in 2008. Any global growth rate under 2.0% is tantamount to a

recession according to economist David H. Wang. Global trade is expected to

decline 2.1% in 2009, the first decline since 1982, on reduced global demand

and export credits.

Germany, Europe's largest economy, contracted by 0.5 percent in the third

quarter of 2008, putting it in recession for the first time in five years.

Japan's GDP contracted at an annual rate of 0.4 percent from July to September

2008, marking the second consecutive quarter of negative growth. Japan's

previous recession was in 2001, after the dot-com bubble burst in the United

States.

The Eurozone economy. made up of the 15 countries that use the euro

contracted by 0.2% in the third quarter of 2008 following a 0.2% fall in GDP in the

second quarter.In USA, GDP dropped 0.5% drop in the third quarter of 2008. A

number of economists surveyed by Wall Street Journal expect gross domestic

product to decline at an annualized rate of 3% in this year's fourth quarter and

1.5% in the following quarter.

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Despite the global economic forecast for 2009, the annual growth in greenhouse

gas emissions of 3% is only likely to slow modestly. It may even rise over the

long term because of the downturn's impact on global climate talks and the

funding of renewable energy projects.

Yet no one is entirely pessimistic. Experts and industry insiders believe that once

the storm blows over, demand is bound to rise for the same reasons it did last

time — a large, young workforce; gradual but consistent liberalization reforms;

and a high rate of consumer and private-sector savings. "The silver lining is that

once this phase ends, land and property prices will be corrected to rational

levels, speculators will be out, and the sector will have stronger fundamentals,"

says Shukla. If everyone's prayers go right, the goddess will eventually be

propitiated and her blessings will issue forth once more.

The deadly global financial slowdown will have a very deep impact on the realty

sector in India, which is already fighting a desperate battle.

Realty sector watchers are of the view that the slowdown will carry a double edge

impact to it. One, as big-ticket banks

, financial institutions and companies are pruning their staff, the market will lose

some of the possible buyers of new houses.

And, secondly, the affluent NRI community will have second thoughts about

property purchases here in India.

According to an official of Assocham, it is most unlikely that companies in India

will start hiring people in a big way in the next one year or so. It goes without

saying that it will impact the realty sector and it won’t find many buyers for high-

end apartments.

P K Jain, vice president of PNB Housing Finance Limited, feels that the ripple

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effect of the US financial crisis is going to hit the Indian market as well. “We were

expecting good times for it during this season between Diwali and New Year.

Now we are not so sure about that,” he says.

"Indian economy is insulated from the crisis… The global financial crisis will not

affect us much," [Indian Finance Minister Palaniappan]Chidambaram said, at

first. Chidambaram went on in this vein until both he and his boss [Prime

Minister] Manmohan [Singh] had to reluctantly admit that no developing economy

could possibly remain immune to the global crisis. Still, it was projected primarily

as a financial crisis or at best a precursor to a mild recession. But no financial

crisis is ever a mere crisis of the world of high finance alone. Just as the gloom

on the trading floors soon spread to the shopfloors in the factories, financial

turbulence is just a symptom of the turmoil in the real economy.

"The contagion is truly global in a globalised world. How can the high

priests of globalisation in India expect to insulate the country from

this all-pervasive crisis?"

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NEED AND RATIONAL OF THE STUDY:-

The Indian real estate market has been going through a bad phase since early

2008. It was hit by one and another factors through out the year like higher

interest rates, higher inflation rate followed by sub-prime crisis in United States of

America, job uncertainness etc. leading it to a chaotic market.

The volume in the Real Estate sector has dramatically fallen. There is hardly any

buying and selling activity in the sector at present. The market is in stand still

mode.

Is it the end of the growth story of Real Estate Sector in India? Was it a bubble

which has busted ? Or there is a ray of light on the other side of the tunnel?

Is the sector is going through RECESSION or it is merely CORRECTION which

was overdue?

How long will it remain? What is the broad future outlook of Indian Real Estate

Sector?

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Objectives Of study: -

To understand and analyze the Global Meltdown / Recession and its adverse

impact on Indian Real Estate Sector in the present scenario. Further to

understand and analyze the other factors in a broader view, which adversely

affected the Indian Real Sector and its future outlook.

Major Objectives:-

What is Global Meltdown / Global Recession ?

If it has adversely affected the Indian Real Estate Sector ?

If yes, then how deep the impact is ?

Is Global Meltdown / Global Recession is the sole factor for the slow down of

Indian Real Estate Sector at present ?

If not, then what are the other factors which have adversely impacted the Indian

Real Estate Sector ?

If the growth saga of Indian Real Sector is over or still there is scope for its

growth?

If Indian real estate industry is in recession mode or it's merely a correction ?

If Indian Real Estate Sector will ever come out of this recession or correction ?

How long it will take to come out of recession or correction ?

Minor Objectives:-

To study and analyse the impact of sub-prime crisis, slow down in global

economy, job uncertainness, liquidity crunch, govt. policies etc. on real estate

sector.

To study and analyse the behavior of general individual, Realtors, Developers,

Investors, HNI’S and people who are directly or indirectly are involved in Real

Estate Sector.

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Methodology Adopted: -

The methodology adopted for the present study was in two parts:

Primary Data:

(a) The methodology adopted for the present study was focus discussion,

interview and close observation through in-house study of Indian Real Estate

Sector post Indian globalization. Since the project is based on action research it

was necessary to build rapport to collect maximum information from the

consumers, investors as well as developers. Hence the researcher spent

considerable time with the people who keep investing in real estate, actual users,

HNI’s etc. and renowned developers. The main focus was to assess the various

factors behind the slow down of Indian Real Estate Sector at present and its

future outlook.

(b)

Type of Research:- Descriptive.

Sampling Technique:- Convenient Sampling Technique.

Sample Design:- Collection of primary data from self constructed

questioner form consisting of 10 items and further 5 of them were sub-divided

in to 30 items. Each question and its parts had five points namely Strongly

Disagree, Disagree, Neither agree nor disagree, Agree and Strongly agree which

carried 1,2,3,4 and 5 points respectively.

Sample Size:- 50.

Secondary Data: The secondary data was collected from the real estate and

research based websites, magazines, journals and periodicals etc. The objective

of the study was to understand the real estate sector at large and factors

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affecting it and further to analyse their reports / forecast with the past and present

market scenario.

“The new moon of the lunar month of Kartika marks Diwali, the Indian festival of

lights, when Hindus across the country worship the goddess of wealth, Lakshmi.

But divinities know full well the laws that govern finance, and Lakshmi may now

be a little tight-fisted about circulating her riches amid the ongoing global credit

crunch.”

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What Causes Recession ?What Causes Recession ?

An economy typically expands for 6-10 years and tends to go into a

recession for about six months to 2 years.

A recession normally takes place when consumers loose confidence in

the growth of the economy and spend less.

This leads to a decreased demand for goods and services, which in turn

leads to a decrease in production, lay-offs and a sharp rise in

unemployment.

Investors spend less as they fear stocks values will fall and thus stock

markets fall on negative sentiment.

•

What actually is the global financial crisis and how it has occurred?

In 1997, the global economic community suffered a severe downturn

spurred by the widespread collapse of the currencies in East Asia. In 1998, global conditions

were further strained by a financial crisis in Russia. In 2001, the United States moved into

recession following the “dot-com” stock collapse. In 2008, the United States fell again into

recession following a rapid decline in housing prices and a consequent rapid contraction in

credit. Is the regularity of these events just bad luck? Partially, yes. However, there is a logic

that connects them, and understanding the current crisis requires a look back at earlier events.

Beginning…..

Extremely rapid economic growth

Fed by low cost of capital

Supported by large investment group

Pushed by all round optimization

Spread by globalisation

Confidence in central banks and regulators

A correction had to come

The larger the bubble the steeper or longer the correction

THE EXPANSION………

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Everyone loves a bubble

US sub-prime housing credits

Indian real estate and construction boom

Ponzi & pyramid scheme everywhere

Europe, Asia, America

NO ONE WANTS TO BREAK A BUBBLE……

70% of US consumers felt Housing market will crash- WSJ ,April 10,2006

most rapid increase in money supply in India for so long –ever

The correction or recession………

The US sub prime crisis

Only one sympton of all round correction

Each had its own little bubble

World economic growth to slow down from 5 to

2%

IMF Growth Forecast 2009

UK -1.3%

Germany -0.8%

US -0.7%

Russia 3.5%(5.5%)

China 8.5%(9.3%)

India 6.3%(6.9%)

World 2.2%(3.0%)

The scenerio in India…..

International recessionary conditions

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International trade taking a big hit

US,China,Europe

No other big enough buyer

Asset market bust /correction

Financial

Real estate

Liquidity crunch

Banks holding liquidity

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Parts of India most affected………..

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 Indian Real Estate Sector – Will the phoenix rise again?

Indian real estate industry has witnessed a huge swing in its fortune in recent

time. Till December last year it was a darling of both domestic and foreign

investors. It received around $10 Billion in funding through FDI, Private Equity

and JVs. Everything was looking rosy and developers were busy acquiring lands

at exorbitant rates and launching new projects. Economy was growing at 9.5%

and corporate were looking for new real estate space to either expand or begin

new businesses. However, with the bust of real estate sector in the US, things

turned from good to worst. Investment Banks in the US crumbled and created a

mess called “Sub-prime crisis”.

Sub-prime crisis is the current financial crisis (considered as the worst ever since

World War II) characterized by acute credit crunch in the global capital markets.

At the core of this crisis lies “sub-prime housing loan market.”

How sub-prime crisis started?

The crisis began with the bursting of the United States housing bubble. A slowing

US economy, high interest rates, unrealistic real estate prices, high inflation and

rising oil tags together led to a fall in stock markets, growth stagnation, job

losses, lack of consumer spending, a virtual halt to new jobs, and foreclosures

and defaults. The sub-prime loans were given by FIIs at floating rates. With rising

interest rates in the US, EMIs for these individuals also started increasing (what

we see today in Indian market) and sub-prime homeowners began to default as

they could no longer afford to pay their EMIs. A deluge of such defaults

inundated these institutions and banks, wiping out their net worth. Their

mortgage-backed securities were almost worthless as real estate prices crashed.

The moment it was found out that these institutions had failed to manage the risk,

panic spread. Investors realized that they could hardly put any value on the

securities that these institutions were selling. This caused many a Wall Street

pillar to crumble. As defaults kept rising, these institutions could not service their

loans that they had taken from banks. So they turned to other financial firms to

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help them out, but after a while these firms too stopped extending credit realizing

that the collateral backing this credit would soon lose value in the falling real

estate market, resulting in this big “Sub-prime” mess.

Why did India market fall?

Once investments by the FIIs in the US turned bad, more money had to be

invested back, to maintain that fixed proportion i.e. to match assets and liabilities

on their books. In order to invest more money in the US, money had to come in

from somewhere. To make up their losses in the sub-prime market in the US,

they went out to sell their investments in emerging markets like India where their

investments have been doing well.

So they started selling their investments in India and other markets around the

world to maintain enough liquidity in the US economy and for their own operation.

Since the amount of selling in the market was much higher than the amount of

buying, the Sensex began to tumble. Additionally, crude prices were in the range

of $120-150 which caused inflation to rise in double digit forcing banks to raise

their interest rates. Thus, higher rates seriously affected real estate, automobile

and banking firms’ operations and their stock crashed. Moreover, there were

some rumors that even Indians banks had some exposure to these risky MBS

and hence, banking stocks were among the worst hits. The flight of capital from

the Indian markets also led to a fall in the value of the rupee against the US

dollar. The stock market will continue to tumble as long as there is huge selling

pressure from these FIIs.

Since most of FIIs who invest in India are based in the US, the stock market in

India generally closely follows the sentiments in the US economy compared to

that of Japan or European economy.

Stock market and real estate

Let’s explore how stock market affects real estate industry. Most of the real

estate developers are publicly listed companies and trade on these stock

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exchanges. This is because real estate development is capital intensive and

developers need cash to develop properties which is then sold or rented to

customers. Firms need to buy land, which is extremely expensive these days,

raw materials such as cement and steel, and hire manpower for the construction

activities. All of these require huge amount of money. Developers generally raise

capital either by borrowing from banks or issuing stocks. RBI has made

extremely difficult for the firms to raise debt in domestic market and through

external commercial borrowing (ECB) in order to check the incessant rise in

property prices. Hence, the best way for them is to issue stocks. The investors in

the stock market provide these developers cash for their projects by taking some

stake in the company or projects. Hence, the market to a large extent decides the

fortune of these companies.

A large number of financial institutions (Banks, Mutual Funds and Hedge Funds)

buy or sell these companies’ securities on the exchange. For the last few years

these FIs were extremely optimistic about Indian economy and real estate sector.

They made huge investments in these companies and got great returns. Hence,

their stocks went up through the roof due to heavy demand. If these FIs start

selling their investments heavily for one reason or other, it will negatively affect

companies’ stock price. The stock is an attractive currency for the firms in the bull

market. Firms may sell (issue) these stocks in the market to raise capital to fund

their expansion plan without the headache of interest payments that accompany

debt. So any downward movement in the stock market might decrease the stock

price of these firms and hence reduce their ability to raise sufficient capital; thus,

affecting their future plans.

Unfortunately, the global financial crisis has taken a heavy toll on the Indian stock

market. In less than a year Sensex has gone down from 21,000 to 9,500 levels.

Most of the real estate stocks are down by over 70% w.r.t to their 52-weeks high.

This is because of higher interest rates, global slowdown and heavy selling by

financial institutions, seriously cutting down these companies expansion plans.

They are stuck with their existing projects while investors have pulled out.

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Lehman had around $1.3Billion of investments in Indian real estate market.

Several developers such as Unitech had planned to raise money through Special

Purpose Vehicle (SPV) to fund their projects. Now, after the bust of Lehman,

firms may seek PEs help to raise capital.

Some macroeconomic factors such as inflation and economic growth

also affect companies and their stock prices. As we know inflation in

India was around 11.5% (October 2008) which was quite high

compared to last year’s figure of 3-4%. Banks had to increase interest

rates to counter high inflation. For real estate companies higher

interest rates environment is not suitable because customers avoid

taking home loans (due to higher EMI) which decreases the demand for

properties. A bad prospect of growth in the earnings of the firms gets

reflected in their stock prices.

Company Current Price* 52-weeks high % drop

DLF 304.65 1225 75

UNITECH 86.8 546.8 84

PURAVANKARA 123.95 535 77

SOBHA 132 1060 88

* As of October 16th 2008             Table 1

Mega deals - are their days over?

Indian real estate sector was a hot cake for foreign investors a year ago.

Everyone wanted a pie of it. Did you ever hear about mega real estate deals that

happened in Mumbai in 2008? If not here they are: London-based banking major

Barclays Bank created history in May when it took space at Cee Jay House, a

landmark office complex in Worli, for Rs. 725 a square foot (sq ft) per month.

Yesteryear movie star Vinod Khanna and his wife set a reality record in Mumbai

by buying an apartment in Malabar Hills for Rs. 30 crore after paying a

mindboggling Rs. 1,20,000 per square foot. But those days are over now. The

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sub-prime crisis and negative economy outlook have taken their heavy toll on the

sector.

Outlook just after sub-prime crisis

From the Table 1 we can see the outlook for these companies was not so good.

Over 70% of their market value was wiped out in less than a year; thus, putting

brakes on their expansion plans. They were looking for alternative sources of

capital or delaying their projects. The global financial crisis and recession in the

US severely affected a large number of industries such as IT/ITES and Financial

Services. Both these industries were creating huge demand for A-grade

commercial properties in Metros and Tier-1 cities. Now, that demand has

reduced by over 50% which might decrease further if the US goes into deep and

prolonged recession. So the next one year would not bring good news for the

firms in the realty sector.

However, the consumers having cash have great opportunities in this bear

market and high interest rate environment. With the decrease in demand for both

commercial and residential properties, prices/rentals have come down. We have

already seen a correction in the range of 5-10% across the properties and

believe prices may go down further by another 3-5% in the next 2 to 3 months.

Also, the prices in the secondary market have fallen more compared to that in the

primary market. We believe inflation might cool off by June 2009 which might

push the demand for residential properties. Though the long term outlook looks

good, the short-term outlook is bad for the industry. So if you plan to buy a

house, either buy now (only cash) or wait for couple of months but definitely

before inflation falls below double digit and banks gradually start rolling off hike in

rates.

What does 2009 holds for the sector?

Good news for both industry and buyers! Inflation has come down from its

October high of 13% to 8%. RBI since then has announced a series of rates cut-

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Repo rate has been reduced by over 200bp, while Reverse repo rate saw a

100bp decrease. CRR too was reduced by 150bp to inject liquidity in the market.

Today, which is December 15th 2008, as I write this article, public sector banks

hold a press conference to announce major rates cut and other measures to

boost real estate sector. The highlights of today’s meeting were:

• Rate for home loans up to Rs 5 lakhs will not be more than 8.5%

• Five-year fixed rate terms on up to Rs 5 lakhs home loans

• Banks to take 10% margin on home loan of up to Rs 5 lakhs

• No process, prepayment fees for home loans

• Home loan rate under package can fall if rates fall more, which is likely to

happen

• Home loan of Rs 5-20 lakhs for maximum 20 years at 9.25%

• India banks’ margin for Rs 5-20 lakhs loan will be 15%

• India state-run banks will offer free life insurance cover for  home loans

These new home loan rates will be effective Monday, December 15, 2008 and

expire on June 30, 2009. This has come as good news to some developers while

rest felt disappointed. DLF and Unitech have good presence in sub-20 Lakhs

housing segment, which is also called “Affordable Housing”. Those operating in

“affordable housing” hailed these rates cuts. Sanjay Chandra, MD of Unitech,

said “It is a big benefit — the rates coming down, no processing fees as well as

the fixed nature of it because a lot of people didn’t like the uncertainty with the

way interest rates were moving. So I think the fixed rate and also the only option

possibility of downward revision is a good thing for the sector and for us in

general.” This might force and encourage other developers to focus on affordable

housing. But the existing home loan borrowers felt dejected because these rates

are applicable to new loans only.

However, these measures may not revive the flagging sector conditions because

a majority of residential projects cost above Rs. 40 Lakhs i.e. where loans are

above Rs. 25-30 lakhs. Industry insiders say that unsold property to the tune of

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Rs 20,000–25,000 Crores remains stuck in the country. Unless these properties

are sold first, developers may not launch new projects or finish the under

construction ones. To give a boost to this, developers are demanding an interest

rates in the range of 7-8% i.e. back to the days of 2005.

With falling crude prices and global recession, Inflation should come

down to the level of 5-6% by June 2009 end. So expect RBI to cut rates

further by 100-150bp which we will bring the interest rates in single

digit. This will give the much needed boost to the industry. Buyers,

who are right now playing wait and watch game, will go for cheaper

home loans. Expect another cut in prices in the month of January or

February by developers who desperately want to flush out their

inventories. More so costs of construction have come down by 10-15%

due to decrease in prices of cement and steel. This cost should be

passed on the customers as well. I will surely bet my money on real

estate companies, especially bigger ones like DLF, Brigade and

Unitech.

Company Current Price* November 01 Price

DLF 280.85 207.2

UNITECH 37.9 48.05

PURAVANKARA 46.45 47.65

SOBHA 107.35 111.85

* As of December 15th 2008

You may see above that most of these stocks have recovered from their October

lows and are moving north now. Thus, market too looks optimistic about these

companies and the sector as a whole. I am confident that economy will improve

next year and get back to 8-8.5% growth rate.

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With the sudden collapse of world leading financial houses,the Indian real estate

players who were already facing the problem of lack of funds due to economic

slowdown and correction in prices would find it difficult to raise further funds.

Among the US financial houses –lehman brothers was very bullish on Indian

reality sector and had an investment in excess of US$ 700mn( maximum

amongst peers)

Layman PE investment in India :

Projects Amount/year

Hyderabad IT park project of Peninsula land 12.5 2008

Unitech ‘s mumbai pune expressway 175 2008

Hotel project of future capital 200 2007

DLF Assets pvt. Ltd. 200 2007

Anant raj industries 66 2006

Unitech’s mumbai projects 16 2008

Lehman’s real estate investments at projects levels ( including the

big ones like DLF,Unitech& future capital) have been disbursed & it

will not affect the ongoing projects.

RBI’S directive not to remit investments made by US financial

houses in India without permission is also a step in positive

direction & would restrict fight of capital

However stocks of companies in which sunked financial institutions

have a direct exposure ( as FII investments especially Lehman)

would see selling pressures.

Stocks to get affected: Anant Raj Industries, Orbit Corporation, Ganesh

Housing, DSK Kulkarni Dev,

Ajmera Reality, Ansal Housing, Ansal Properties, Purvankara Projects

28

Infrastructure

Adverse impact on the infrastructure companies as it disturbs the financial

atmosphere for the companies which are in the growth stage.

Lately,after having raised money through IPO’s many Indian infrastructure

companies have gone in for QIP issues with the financial measures across

the world .

Thus, the current situation might not affect the companies at the project

implementation level , however we might see heavy selling pressure in the

stocks of these companies by the sinking US financial which have an

exposure to

these companies.

Going forward, if there is no change in the scenario, fund raising by

infrastructure companies could become a problem.

Stocks to get affected: Reliance Infrastructure, Prajay Engg, Triveni Engg,

Pratibha

Inds, Unity Infra, BSEL Infra, Nagarjuna Construction, Sujana Tower,

Madhucon

Projects, Jyoti Structures, Action Construction.

29

Background Issues

Since the early 1980s, the global economy has seen a rapid expansion in the availability of

savings due in great part to the rapid economic growth of East Asian economies. Because

the U.S. economy has historically been viewed as a financial “safe haven” – a safe place for

foreign citizens to bank their savings – foreign citizens have often moved their savings to the

United States The financial crises and dislocations of the 1990s enhanced the perception of

the United States as a safe haven. Important to the current crisis, the movement of savings

from abroad into this country significantly increased the financial base of the U.S. economy in

the 1990s and the early part of this decade.

During the 1990s, the United States was in a globally dominant economic position. This led

The federal government and the central bank – the Fed – to act as a global guarantor of

economic stability. This was seen in U.S. backing of Mexican debt in 1995 and with the Fed’s

significant injection of money into markets following global crises. Unfortunately, these tools

were blunt. While they aided the foreign community (and the U.S. economy through greater

global stability), these actions tended to again increase the financial funds available in the

United States. Also during the 1990s, and continuing into this decade, the United States ran

very large trade deficits. While the cause of these deficits is subject to various causal

interpretations, the consequence is clear.

Any continuing trade deficit must be balanced over time by a net inflow of financial capital from

abroad. These inflows again increased the availability of financial assets in the United States

Compounding the complexity of absorbing these financial assets was the significant move

Toward deregulation throughout the U.S. economy starting with the Carter Administration.

During the 1980s and 1990s, deregulation moved into the banking industry and allowed for

rapid changes in how banks did business. Two particularly noteworthy changes were the partial

revocation of the Glass-Steagall Act in 1980 and 1999, and the significant decreases in

restrictions on the formation of interstate branch banking operations. These changes increased

the range of activities banks were allowed to engage in and reduced the personal connections

between bankers and borrowers. While it would be foolish to conclude that these innovations

were universally wrong, the rapidity of their introduction did not allow for a sufficient period of

time to develop tools to manage new risks.

30

In retrospect, it is clear that downside risks were underestimated (first in dot-com stocks,

secondin housing, then in financial derivatives). The introduction of these innovative products,

combined with the increased monetary base to fund them, allowed for the consequences of

poor risk control to be significant.

Finally, the Financial Accounting Standards Board changed asset-pricing standards effective

November 2007. This change introduced “mark-to-market” asset valuation requirements on

Capital assets. As discussed below, the change in accounting standards served to worsen the

credit crisis during 2008.

Keypoints:

1. Foreign savings flowing into the United States made

borrowing inexpensive.

2. Loose domestic policies made borrowing inexpensive.

3. Banking consolidation allowed banks to increase lending.

4. Banking deregulation weakened oversight of banks.

5. Changes in accounting rules were implemented $>

during the early part of the crisis.

Housing Price Run-Up:

Throughout this decade, many people expressed concern about the rapid pace of

growth in housing prices. This was a legitimate concern. Between 1994 and 2006,

the average price of a single family home increased by almost 200 percent. The fuel

for this growth was:

(1) Inexpensive mortgage rates,

(2) Reduced adherence to banking rules in the mortgage industry, and

(3) Changes in consumer expectations. Consider these items in turn. For most

people, purchasing a house is a joint purchase – both a house and a mortgage are

31

purchased. Basic economic theory shows that when the price of one good in the

pair falls, the demand for the other good increases. Hence, the fall in mortgage rates

funded by the factors discussed above serves as the first impetus to rising housing

prices.

Further, deregulation of banks changed banking practices. Initially, this was seen in

the widespread movement to branch banking and bank consolidation. This has

important ramifications for banking practices. Fifty years ago, the neighborhood

banker was the primary source for credit. Further, that banker personally knew

many of his customers. This offered a casual information channel by which a banker

could assess risk. The introduction of larger branch banking institutions eroded this

information channel.

Unfortunately, as the casual information channel was being eroded, the incentive

structure within the financial sector further changed.Historically, the issuer of a

mortgage was likely to maintain anequity stake in that mortgage – it would remain

“on the books.” Financial sector deregulation changed that constraint. Banks and

other financial institutions introduced numerous financial derivatives (for instance,

Collateralized Debt Obligations – CDOs) that allowed mortgages (and other types

of debt) to be packaged and re-sold (and as time went by, re-sold again). This

reduced the need for lenders to practice quality oversight – if a loan went bad, it

would no longer belong to them. With the growth in foreign savings in the United

States and too much domestic money, lenders found many ready. buyers of this

repackaged debt. Mortgage turnover increased as lending

practices became increasingly weak.

More important for housing prices as mortgage debt

became more easily available, new buyers of housing

entered the market – the “subprime” borrower.

The influx of these new borrowers who would

traditionally not have had access to loans, further

spurred housing demand.

32

Finally, consumer expectations changed as housing prices rose; consumers came to

expect housing prices to continue to appreciate at a high rate. This encouraged the

entrance of new real estate speculators into the market. These new buyers again

drove up housing demand and continued to propel the upsurge in housing prices.

This final speculative demand – when piled onto the other forces driving an

upsurge in housing prices – formed a housing price bubble.

If asset price bubbles never burst, they would not be of concern. Unfortunately, they

always do. The proximate cause of this downturn has not been determined, though

it is likely tied to the notable decline in the international confidence in the U.S.

economy starting in 2006. The fall in confidence dried up some of the foreign

savings and pushed some foreign buyers out of the housing market, which put

upward pressure on mortgage interest rates and likely started the downturn in the

housing market. However, regardless of cause, the effects are clear – since the

peak of housing prices in July of 2006, nationwide housing prices have declined

by 21 percent.

Key points:

1. 1. Cheap mortgages drove up home prices.

2. 2. Banking deregulation allowed new

potential

3. borrowers to enter the housing

market.

3.Households began using real estate as a

speculative asset.

Credit Crisis

The credit crisis is a direct outgrowth of

the fall in housing prices that began in 2006. While many channels exist by

which the housing prices enter thefinancial sector, the core connection is

straightforward. Every bank or other financial entity in the United States is

required to have capital assets backing its loans. As a rough approximation for

33

every $10 in loans issued by a commercial bank, a bank must have $1 in capital

assets. With the introduction of financial derivatives, financial entities widely used

mortgage-backed securities as a share of the capital backing their operations. As

housing prices decline, the value of mortgage-backed securities decline. Because

banks’ capital assets are declining in value, they must issue fewer loans. The

tightening of credit conditions necessitated by this logic starts a downward

spiral.

First, tighter credit narrows the market for housing. The fall in demand begins

pushing housing prices further down. Recent buyers of houses begin to find

they owe more on a house than the house is worth (negative equity); this

encourages them to walk away from mortgage obligations and foreclosures

increase. As foreclosures increase, the value of properties next to foreclosed

houses declines. This pushes more homeowners into a situation of negative

equity.

Second, the continued decline in housing prices further reduces the value of

mortgage-backed financial derivatives. As they decline, credit conditions further

tighten. This becomes an increasing problem as variable rate mortgages begin

to reset. Those who were planning to refinance prior to the interest rate reset

find they are unable to do so; regrettably, some also find that they are unable to

afford the now higher payments. Another round of foreclosures ensues.

This cycle continues until the capital assets are fully re-priced (we are not

there yet), stopping the continued contraction in lending. This

34

contractionary cycle is made more severe by requirements to “mark-to-market.”

With

mortgage-backed derivatives falling in value, the market for these assets has

effectively disappeared, as such, the market value of these assets is close to zero

(though they can realistically be expected to rebound in value within five years).

However, if valued at zero now, the extent of the credit constriction must be more

severe.

Because the housing market and mortgage-backed derivatives were the early

locus of the problem, the discussion above broadly focused on those areas.

Unfortunately, the crisis spirals outward from those sectors. As credit

conditions tighten, consumer loans, loans for business operating expenses, and

loans for corporate expansion become increasingly difficult to obtain. This

drives down the sales of many items and forces many otherwise well-

functioning firms into failure. The effects of this broader downturn are currently

being seen in markedly higher rates of unemployment. If the collapse in credit

becomes significant enough, it could spiral the economy into a serious

economic downturn. For historical comparison, the last time credit conditions

became this poor was during the Great Depression (though the contraction

then was greater AND there were other contributing issues to the Great

Depression that are not currently present). Another way of looking at it, the

current credit issues are about three times greater in extent than the Savings

and Loan Crisis of the 1980s (though it will not be surprising if the extent of the

crisis grows).

Keypoints:

1. Falling asset values forced fewer loans to be issued.

2.Fewer loans reduced the demand for housing; this reinforced the initial

decline in home prices.

3.Reduced lending constrained production throughout the economy.

35

Fixes and Lessons

Fixing the credit crisis will not be easy. On October 3, 2008, the Emergency

Economic Stabilization Pact (EESP) became law.6 This law, along with the

earlier interventions, is directed at stopping the downward slide in loan

availability by shoring up the capital assets backing lending. Effectively, this bill

gives the Treasury Department the charge to buy capital assets that are currently

becoming worthless in exchange for government debt (though debt exchange

is not the sole option). Because U.S. government debt is effectively without risk,

a continued fall in capital asset values by financial institutions is avoided.

Unfortunately, this requires transferring these risky assets to the government,

which points to two key concerns with the legislation. First, will it work? Second,

how much will it cost? Neither question can be answered now. We will know if the

intervention worked two years from now – if it does, the economy will have

recovered. Answering the second question will take more time. The purchases

under EESP will total roughly $700 billion.7 But, the government gets

something in exchange – the risky assets. If these assets continue to fall in value,

the cost of the bailout will be close to the cost of the purchases (worse – this is

most likely to occur if the bailout did not work). However, if the assets begin to

perform again as the markets stabilize, the government should be able to recover

a significant portion of the $700 billion.

A final concern about the bailout links to the notion of “moral hazard.” Moral

hazard arises when offering protection from a negative outcome increases the

likelihood of future bad outcomes. To see this concern, consider the following

scenario. Suppose the bailout works and works well. Further, suppose that the

remaining financial firms come through the downturn with minimal harm. What

lesson will these firms have learned? First, that the government will shield them

from the cost of poor management of risk. Second, that the protection will

leave them without damage in the long run. If this is the case, what would a

business do that saw a great – though risky – chance for profits 10 years from

now? Would it be more likely to pursue this end? If so, the current bailout merely

sets the stage for future crises.

36

What lessons can be learned from this crisis? First, no single factor caused it.

Lenders, borrowers, and regulators are all at fault – lenders through poor risk

management, borrowers through excessive borrowing and overvaluation of

real estate, and regulators through lax enforcement of the financial sector.

Second, given that this is the second speculative bubble to have formed and

burst in the United States in the past 15 years, better financial risk management is

required. However, better risk management is not easy. The globally

interconnected economy is more complex than the economy of 50 years ago.

Until our management mechanisms improve sufficiently to better quantify the

new and little understood risks of this economy, households, businesses, and

government must tread more carefully. Perhaps twice burned will be sufficient to

teach this lesson.

Key point:

The value of assets held by banks must be restored so that they can resume

lending.

37

History v/s Present

Black Thursday 1929:

38

Stock Market Crash

Passive Federal Reserve System

Ignorance of Keynesian Pump Priming

Panic in the Banking Sector

Unemployment Rate of 25%

Complete Dominance of the US Economy in the World

World Financial Market Illiquid

Black Monday 2008

39

Real Estate Bubble

Proactive Federal Reserve System

US Government Pump Priming

No Panic in the Banking Sector

No Crash in the Stock Market

Unemployment Rate Manageable

Countervailing Power of Emerging Markets

Liquidity of Sovereign Funds

Massive intervention of European governments

Growth Rates of Major Economies

40

World Growth (GDP Growth Rates)

Threats to World Growth

Financial meltdown in the U.S.

High rates of inflation

Tight credit despite lower interest rate

High albeit moderating food and fuel prices

Slowdown in the EU and Japan

The U.S. twin (fiscal and trade) deficits continue to cause concern

U.S. Economy:

Still no end to financial turmoil……

Huge losses in the financial sector

41

US 0.8 1.6 2.5 3.6 2.9 2.8 2.0 1.6 0.1Euro Area 1.9 0.9 0.8 2.1 1.6 2.8 2.6 1.3 0.2

Germany 1.2 … -0.2 1.2 0.8 3.0 2.5 1.8 0.2France 1.9 1.0 1.1 2.5 1.9 2.2 2.2 0.8 0.2Italy 1.8 0.5 … 1.5 0.6 1.8 1.5 -0.1 -0.2Spain 3.6 2.7 3.1 3.3 3.6 3.9 3.7 1.4 -0.2Netherlands 1.9 0.1 0.3 2.2 2.0 3.4 3.5 2.3 1.0

Japan 0.2 0.3 1.4 2.7 1.9 2.4 2.1 0.7 0.5United Kingdom 2.5 2.1 2.8 2.8 2.1 2.8 3.0 1.0 -0.1Canada 1.8 2.9 1.9 3.1 2.9 3.1 2.7 0.7 1.2Australia 2.1 4.2 3.0 3.9 2.8 2.7 4.2 2.5 2.2

2004 2005 2008F 2009F2006 20072002 20032001

Still uncertain results of U.S. government bailouts of failing banks

Real GDP growth to fall from 2.0% in 2007 to 1.6% or lower in 2008

Today’s Real Estate Market – Career-Ending Crisis or Golden Opportunity

for Agents?

It’s no secret that real estate agents across the country are struggling for their

professional survival. Due in part to the subprime mortgage meltdown of August

2007,many agents find themselves with unsellable listings or suddenly-uncredit-

worthy buyers (who would have qualified easily just a year ago).

The doom and gloom brigade has wasted no time predicting the downfall of the

residential real estate industry, some even gleefully so. Even within the industry

itself,the more cynical agents are warning of a mass forced exodus of all but the

most aggressive and knowledgeable real estate licensees.

It all sounds pretty grim for the average real estate agent, doesn’t it? Not

according to one industry insider. Jennifer Allan, real estate broker, author and

consultant, claims that the current “crisis” may in fact be an incredible opportunity

for the real estate sales community.

42

The real estate agents have bemoaned the fact that we are not respected as

professionals; that the general public doesn’t value our services much above

those provided by used car salespeople.”

However, Allan continues, “We have a golden opportunity to show the home-

buying and-selling public what we’re made of. And no, not with expensive ad

campaigns, but rather by doing what we were licensed to do - that is - Sell

Houses. If we, as an industry,commit to putting our prospecting efforts on the

backburner and focus on performing for our seller clients, it’s possible we could

turn this mess around. And in the process,perhaps change the perception of the

professional real estate agent forever.”

Which of course, raises the question, how does a “professional real estate agent”

sell houses in a lousy market?

“In today’s market, an MLS listing and a For Sale sign in a yard isn’t enough to

sell a home. It’s not even enough to create color home brochures, hold open

houses and demand price reductions at six-week intervals. We need to work a lot

harder than that, and to have the guts to tell our sellers what’s what.”

These are the three main items that can mean the difference between

a listing that sits and a listing that sells:

1. Price is King. Properties must be priced more aggressively than their

competition to even be shown, much result in an offer. It’s not enough to simply

be “fairly

priced.”

2. Condition is Queen. A home that evokes a negative or even a neutral first

impression has little chance of selling. It’s the agent’s job to make this clear to

the seller and do whatever he or she can to help the seller get the home in

showingready condition.

3. Accessibility rounds out the top three. If a listing is hard to show, regardless of

the reason, it will be passed over. The seller needs to understand that once he’s

on the market, his life is no longer his own. He must be willing to accept

showings on short-notice and to vacate the home during showings. The key to

43

the front door must work easily in the lock and there can’t be barking dogs locked

up in the laundry room.

Anatomy of the economic depression in IndiaAnatomy of the economic depression in India

Real Estate SectorReal Estate Sector

•The key challenges faced by the industry now are inflation and the psychological

impact of the US crisis, leading the companies to hit the panic button.

•Bonuses, perks, lavish parties, and many other benefits are missing as

companies look to cut cost.

•India's IT export growth is also slowering down

•One of the casualties this time are real estate, where building projects are

half-done all over the country and in this tight liquidity situation developers find it

difficult to raise finances.

Layoffs and UnemploymentLayoffs and Unemployment

•Hundreds of workers have lost jobs in diamond jewellery, textiles and leather

industry.

44

•Companies in IT industry have stopped hiring and projected lower manpower

need.

•Firms attached to the capital market are laying off people and large companies

are putting their future expansion plans on hold.

An investment bank uses its propertiory book (own money) tom lend others

and invest, it started with the sub prime crisis banks like Lehman, buy

mortgage loans from the other bank, and then package them to sell bands

against the loan pool often they add cash to make the loan pool more

attractive so that the bonds can be sold at higher price. Suppose mortgage

was earning 6% these bonds are sold at 4%. The difference is the spread

which the invest bank earns by selling these structured banks it raises money

and frees capital. But when home buyers started defaulting these bonds lost

their value. It all began like this and then virus spreads across the markets al

over the world where India is one of the nation affected due to the giant

companies of the India invested in huge amount hence the problem persist.

(Source: anatomy of global financial crisis ET 17th Sept2008)

The International Economic Environment

The International Economic Environment Current Crisis

What causes CA deficits and surpluses? The origins of the US trade

45

imbalance Sustainable or Source of Concern? Impact on the $ Impact on firm

profits Bernanke: Why is the United States, with the world’s largest economy,

borrowing heavily on international capital markets — rather than lending, as

would seem more natural?

Recent Growth Trends in Indian Economy

India’s Economy has grown by more than 9% for three years running, and

has seen a decade of 7%+ growth. This has reduced poverty by 10%, but with

60% of India’s 1.1 billion populations living off agriculture and with droughts

and floods increasing, poverty alleviation is still a major challenge.

The structural transformation that has been adopted by the

national government in recent times has reduced growth constraints and

contributed greatly to the overall growth and prosperity of the country.

However there are still major issues around federal vs state bureaucracy,

corruption and tariffs that require addressing. India’s public debt is 58% of

GDP according to the CIA World Fact book, and this represents another

challenge.

During this period of stable growth, the performance of the

Indian service sector has been particularly significant. The growth rate of the

service sector was 11.18% in 2007 and now contributes 53% of GDP. The

industrial sector grew 10.63% in the same period and is now 29% of GDP.

Agriculture is 17% of the Indian economy.

Growth in the manufacturing sector has also complemented

the country’s excellent growth momentum. The growth rate of the

manufacturing sector rose steadily from 8.98% in 2005, to 12% in 2006. The

storage and communication sector also registered a significant growth rate of

16.64% in the same year.

46

Additional factors that have contributed to this robust

environment are sustained in investment and high savings rates. As far as the

percentage of gross capital formation in GDP is concerned, there has been a

significant rise from 22.8% in the fiscal year 2001, to 35.9% in the fiscal year

2006. Further, the gross rate of savings as a proportion to GDP registered

solid growth from 23.5% to 34.8% for the same period.

The poising factors affect the Indian economy

47

Impact on Indian economy

Inflation

Employment

GDP

Industrial growth

Stocks

Consumers

Banks

Consistent increase in the inflation rate:

The market remain under pressure after inflation recorded fastest rise in more

than 16 years in early August 2008, increasing the likelihood of the Reserve

Bank of India (RBI) raising interest rates again. With no major key events

scheduled in the forthcoming week, the market will closely watch global stock

market cues. But it may turn volatile on account of expiry of August 2008

derivatives contracts on Thursday, 28 August 2008

The wholesale price index rose 12.63% in 12 months to 9 August 2008, above

the previous week’s annual rise of 12.44%, government data released on

Thursday, 21 August 2008, showed. Inflation for the week ended 14 June

2008 was revised upwards to 11.80% from 11.42%.

Rising inflation rate has dashed hopes of any relaxation in the monetary

policy. Market expects Reserve Bank of India (RBI) to raise the rates further in

its next monetary policy review two months from now.

On 29 July 2008, the Reserve Bank of India (RBI), at its quarterly policy

review, raised repo rate by 50 basis points to a seven-year high of 9% to curb

inflation and dampen inflationary expectations. RBI also raised the cash

reserve ratio (CRR), the proportion of funds that banks must keep on deposit

with it, by 25 basis points to 9%.

Market will closely watch developments on the Indo-US nuclear deal. A two-

day meeting of the 45 countries of the Nuclear Suppliers Group (NSG) began

in Vienna on Thursday, 21 August 2008. A green signal by the NSG is

required for the deal to proceed to the US Congress for final ratification. As

per reports, nuclear supplier nations at a meeting on Thursday, 21 August

48

Companies B.O.P

2008, proposed conditions for lifting a global ban on fuel and technology

exports to India, a step required to implement a US-India nuclear cooperation

deal.

A further rise in crude oil prices may act as a dampener for the stock markets.

Light, sweet crude for September 2008 delivery surged $5.62 to $121.18 a

barrel on Thursday, 21 August 2008 on the New York Mercantile Exchange

(NYMEX) on weaker dollar and worries about tightening output from OPEC

countries.

Foreign institutional investors (FIIs) sold shares worth Rs 831.40 crore in

August 2008 (till 20 August 2008). FIIs sold shares worth Rs 28,133.40 crore

in the calendar year 2008. Mutual funds sold shares worth Rs 886 crore in

August 2008 (till 20 August 2008).

(source: economy watch Friday august 8, 2008)

Industrial production:

Falling crude oil prices and improvement in south west

monsoon will provide some relief to investors. Rising inflation remains a major

worry for the markets in the medium term.

The government will release June 2008 industrial production data at 12:00 IST

on 12 August 2008. Reserve Bank of India’s recipe to contain inflation by

increasing the lending rates is expected to hurt industry, manufacturing sector

and the overall growth momentum. Industrial production grew at the slowest

pace in more than six years in May 2008, at 3.8%, as against 10.6% in the

same month of 2007, with manufacturing showing signs of acute deceleration.

Inflation remains a major concern for the central bank. Inflation based on the

wholesale price index rose 12.01% in 12 months to 26 July 2008, slightly

above the previous week’s annual rise of 11.98%, government data released

on 7 August 2008 showed.

49

Reserve Bank of India (RBI) on 29 July 2008, raised repo rate by 50 basis

points to a seven-year high of 9% to curb inflation and dampen inflationary

expectations. RBI also raised the cash reserve ratio (CRR), the proportion of

funds that banks must keep on deposit with it, by 25 basis points to 9%. The

central bank left its reverse repo and bank rates unchanged. Responding to

the RBI’s monetary tightening, top lenders HDFC and ICICI Bank and a

number of state run bank have raised interest rates.

The aggregate results of 2,988 companies showed 5.1% rise in net profit to Rs

63,752 crore on 37% rise in sales to Rs 7,64,023 crore in Q1 June 2008 over

Q1 June 2007. The net profit growth is now in single digits the lowest in the

past 20 quarters. In the June 2008 quarter, a number of companies were hit

by mark-to-market (MTM) losses on their foreign exchange (forex) exposure.

Crude oil prices have declined sharply from record high $147.27 a barrel hit on

11 July 2008. Oil held near $118 a barrel on Friday 8 August 2008. India

imports 70% of its crude requirement. The rising crude oil prices affects the

fiscal deficit position of the country and its sovereign rating.

Market men will keenly watch the development of India’s nuclear deal with US.

The Board of Governor of the International Atomic Energy Agency (IAEA) on 1

August 2008 unanimously adopted the India-specific safeguards agreement, a

key step in operationalization of the Indo-US nuclear deal.

Foreign institutional investors (FII)’s bought shares worth Rs 1,527.90 in the

first few days of August 2008 (till 7 August 2008). FIIs sold shares worth Rs

25,774.20 in the calendar year 2008, till 7 August 2008. Mutual funds sold

shares worth Rs286.10 in the month of August 2008 (till 7 August 2008).

50

Balance of Payments

Balance of Payments Anything that we buy or sell to the rest of the world must

be paid for. The current account (CA) tracks the flow of goods and services

between the US and the rest of the world and Net Exports of Goods and

Services, Net Income (from investments and wages) and Net transfers The

capital & financial account tracks the payments for those goods & services

(KFA) and records the purchase and sale of financial and non-financial assets.

It includes Official international transactions which central banks collect as

reserves.

Investors reaction

Most investments conversations in India obsessed about precisely picking the

bottom while this may be worthwhile past time for a few professional investors

for most others it exposes the exact opposite which is to say they remain

under invested when things began to work again. India never did shine as

brightly as people thought in 2006 nor is as dull as the people are thinking now

the truth is in the middle and there is money to be had for the long term

investors in recognizing that.

Impact on the nuclear deal.

US administration and the congressed bogged down over the financial crisis in

the country.The focus has shifted to bail out the country from the economy

turmoil and administration is trying hard to iron out the parameters and

specifics of the nearly 1 trillion dollar package that is being put through

stabilize frighten markets one of the legislative strategies being discussed

recently is that of attaching the financial package to continue in resolution that

is needed to fund the government the end of the month. Some are hoping that

the civilian nuclear deal will also be attached to this resolution so that the

congress can pass one omnibus major prior to its adjournment for the season.

51

Indian BPO Companies

India’s outsourcing story has become the un Intended victim of the collapse of

some of the most venerable wall street firms such as Lehman brothers & Meryl

lynch since the subprime crisis began to unrevealed idea can no longer claim

that the BPO or KPO operation will escape unscathed from troubles of the Us

financial sector already hundred of jobs have been lost following the

downsizing of the operation and closing down of back offices in India the tall of

the collapse of Lehman is reportedly about the 2200 jobs several other global

financial services companies to have been force to cut the strength of back

office operations in India. Laying of people across various functions as their

incomes were hurt by crash of stock market software majors such as TCS

Infosys, Wipro & satyam that earn a significant portion of their revenues from

the banking. Financial services and insurance sector would njedd to be

prepared for loss of business needless to say the loss of several well paying

jobs would dampened demand in some product segment as well as the real

estate which is already suffering door to the sluggish sales. Indian companies

which have partnered this institution for business collaboration or funds would

have to be prepared for a change in the partners an even the stake sale by

distressed institution.

However that is not to say the collapse of the financial sector would make the

outlook for India and its market more gloomy their have been a few positive

developments over the past couple of weeks for instance the industrial

production for july 2008 looks healthier rising 7.1% over the same month last

year. In particular the robust growth of the capital goods sector [albeit over a

low basin July 2007]and consumer durable [perhaps in anticipation of the

festival season of demand] are definitely encouraging the decline in the global

commodity prices particularly crude oil now inching close q$90 a barrel should

spell good news for inflation control beside the first quarter GDP growth at

7.9% although slows in 3 years. Reflects that the fundamental of the economy

still varies from that should inspire confidence in the performance of our stock

market.

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Banks wants to be safe:

Even Indian banks have started tightening the news the noose on the credit

most banks have started going slow on proposals and are looking not only at

the best possible returns but also at the safety factors because of the sub

prime collapse financial cost of these for these banks have also gone up

drastically in past few month most Indian banks not tapped the international

debt market. Financing cost for the more corporate have gone up to 5 times in

the past one year. Financing coming under pressure fees on loans have

atleast doubled in the past one year. Most Indians and foreign banks feel that

the prices could last till next year and they now want to play safe.

Stock market:

One often wonders why the Indian stock markets reacts more than the US

markets and an American financial institution goes burst. Close look at the

extreme volatility off course markets will lead to one to conclude that the

Indian markets provides neither adequate liquidity nor value share efficiently.

The result is that the very purpose for which exchanges are constituted and

shares are listed is defeated low floating stock and low public share holding

result in extreme volatility forcing retail investors to shy away from the market.

Gross domestic product:

Earlier projection of 8% no they are predicting it as 7.4% . the multilateral

lending agencies has revised country’s growth projection dur to current global

financial turmoil and weekend investment outlook the bank revised its growth

projection for the developing Asian economies as a whole to 7.5% this year &

7.2% next year from earlier projections of 7.6% & 7.8% respectively. These

economies posted the fastest growth of 9% in nearly two decade in 2007

(source: Asian development bank)

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Rupee v/s dollar:

The issue concerning the rupee exchange rate to the case of either near zero

volatility or sudden excessive volatility it is unfortunate that we have never

witnessed orderly moves on the exchange rate base on pure economic macro

or micro fundamentals this makes the task of managing the exchange rate risk

very difficult for the market participants who run a multicurrency balance sheet

having either import or export or foreign currency lending or borrowing ideally,

rupee(against dollar) should depreciate by inflation adjusted interest rate

differential added to that is the trade gap (on the current account) and net

flows through the capital; account (debt & equity) while the inflation adjusted

interest differential and the negative trade gap would guide rupee depreciation

the flows in the capital account will cushion the rupee depreciation hence

flows in the capital account

( through FII/FDI/PE/VC/ECB/FCCB/DR etc) are very critical to guide rupee

exchange rate.)

the three core issues to be addressed to guide orderly exchange moves are to

move in to current account surplus by boosting exports and other receivable to

build long term capital account flows to minimize the risk from volatile short

term flows and to hedge risk on crude oil prices at appropriate levels to

address the said issues rupee exchange rates should remain attractive

through exporters should not give exchange rate benefits to short term foreign

investors and to reduce volatility in the oil import bill, gradual rupee

depreciation by 2-4% per annum will be in order and to undue the recent

damage rupee reversal (the mid point of 39 & 47) 43.00 should help the Indian

economy.

I would look forward that the rupee to settle in the range of 43-43.80 by march

2009 with the support of the RBI. Till the said core issues are addressed yes

as rupee appreciates to much to 39. Now it has depreciated too much at to 47.

mainly ion volatility in trade gap and capital account flows it is time for market

participants to move away from windfall gains and to focus on students risk

management practices to arrest the downside.

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On the issue Mr. Manmohan Singh suggested –

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“A coordinated fiscal stimulus by countries that are in a position to do

so would help to mitigate the severity and duration of the recession”

“It would also send a strong signal to investors around the world.

Resort to fiscal stimulus may be viewed as risky in some situations,

but if we are indeed on the brink of the worst downturn since the

Great Depression, the risk may be worth taking,” he added.

Corrective Steps to Check RecessionCorrective Steps to Check Recession

•RBI needs to neutralise the outflow of FII money by unwinding the market

stabilisation securities that it had used to sterilise the inflows when they

happened.

•This will mean drawing down the dollar reserves which is important at this hour.

•In the IT sector, there should be correction in salary offerings rather than job

cutting

•Public should spend wisely and save more

•Taxes including excise duty and custom duty should be reduced to lighten the

adverse effect of economic crunch on various industries

•In real estate the builders should drop prices, so as to bring buyers back into the

market.

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•Also, the government should try and improve liquidity,while CRR and SLR must

be cut further

•Indian Companies have to adopt a multi-pronged strategy, which includes

diversification of the export markets, improving internal efficiencies to maintain

cost competitiveness in a tight export market situation

Opportunities in India due to US recessionOpportunities in India due to US recession

•US recession may be a boon for Indian offshore software companies

•The impact of recession is higher to small and medium sized (SMEs) enterprises

whose bottom lines get squeezed due to lack of spending by consumers

•SMEs in the US are under severe pressure to increase profitability and business

margins to survive. This will force them to outsource and even have M&A

arrangements with Indian firms.

•India is going to be a great beneficiary of this trend which will minimize the

impact of the US recession on Indian industry

•By March 2008, India had received SME outsourcing deals worth $7 billion from

the US as against $6.2 billion in the previous year

Good News…….

Agriculture growth up

Two years of good monsoons

Rural growth to pick up

Govt. wages and salaries increase

Demograpic dividend continues

Basics unaffected…food,FMCG,Education,Health

Prices under control

How to deal with this crisis?

Communication

Simply

Timely

Accurately

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Repeatedly & consistently

Credibly

Communicating & Action

Acknowledge the problem

It wont go away easily and will require effort

Assure but state continued concern

Although we are not out of wood yet

Confidence v/s uncertainty

Confidence in ability but uncertainty for outcomes

Action for self protection

You must do X

You should do Y

You can do Z

THE FUTURE ………

2008-2009

India and world well into the downward phase

Probable worsening

2009-2010

Some improvement in India on account of rural demand multipliers

Recessionary condition internationally

2009-2010 and beyond

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India in the 6.5% growth range

World should start to emerge again from lowpoints

Government current-stance………..

Will be unable to do much

Some reforms

Some announcements

Some increase in infrastructure allocations

Will try for international funding

Fiscal deficit will be about 10-12%

Don’t depend on it for much

What the government should do?

Fight pessimism

Many reforms have political consensus

Financial inclusion

Domestic transport

Laws affecting internal trade

Ramp up IT spending within the government

Get the banks working again

Manufacturing sector credit

Trade wit hneighbours ( balance argument)

Political consensus

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Conclusion

Arise, Awake and be Alert. “Financial emergency” has stepped in our country.

Sharp fall in revenue deficit as well as fiscal deficit stopped Government from

announcing further concessions. Do not expect much from RBI also. Those of

us who hoped for further sops from Budget are feeling dis-appointed. But this

is the time to stand on our own. Consolidate your position and be fully

prepared to face an even worse year 2009.Expect good times in 2010 only.

Merciless Professionalization, Outsourcing “Marketing & HR functions”,

Consolidation of Business and giving top most priority to ‘Cash’ and Cash

Flow’ can only help in such situation of crisis.

We lead leadership – in the era of economic uncertainty” that “credit” is the oil

of the economic engine, and credit ultimately is a creation of confidence. Until

all players are confident about the “intentions” and “strength of others”,

There can only be stag nation. The economic peace of past generation is

over. We are in a war for survival,be set by fear uncertainty and doubt.

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Conditions now demand for a seriously different kind of leadership. Leaders

must be prepared to make strategic, structural, financial and operational

changes in a hurry and with information that is at best incomplete.

themselves best to their environment. However Mr. Ram Charan, the noted

management guru opines that “

It is not the strongest species that survive, nor the most intelligent, but the

one most responsive to changes.”

The hope from Interim Budget has vanished. Door of Central Govt. is closed

for next few months till next government assumes office and is a stable

government. Developers are now looking to State governments for help.

Though the activity in sector is gearing up slightly – The wait and watch

attitude of buyers continues. It seems the sector is heading towards more

price correction during march. Availability of cash and its rotation has

assumed importance in real estate sector which is forcing Developers to be

more end user sensitive and revise their business model soon.

Ability to confront reality is always important, but now it is absolutely critical.

We must use our “ground-intelligence” and have the “GUTS” to act. We must

be prepared to reverse earlier decisions that no longer make sense – look to

DLF move in Bangalore. Be decisive about the future too. Yes, forecasts and

predictions seem all but meaningless at the moment.However, at some point

there will be a recovery, and we need to prepare for it by making the most

intelligence guess as we can. Aggressive measures and decisive actions

build optimism and confidence which is essentially needed at this moment of

crisis.

Looking ahead, anticipating what is coming intelligently and moving quickly

and decisively to adjust to the new realty is the only mantra in this time of

sharp slowdown. Tendency among many of us to say to ourselves, “This will

end soon, and we will be back to normal” is not going to work. You have to

act and act faster than others not only to grow but even to survive. Paying

special attention to the people who are interacting with customers, monitoring

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cash flow daily and keeping a finger on the pulse of external environment may

definitely help all of us during this period of unprecedented crisis.

Extra ordinary times require extra ordinary leadership. It is true for every

sector including that of real estate sector. Government is doing their own

piece of work but it is the time when Developers should take lead. Clearing

old inventories even at lower price is a good option since market for Premium

Housing is not expected to spur in near future. It may prove more costly to

hold on the inventories than disposing them atreduced price.

Global trends point out reversal of the process of Globalization. U.S.A has

started the process of protectionism by refusing grant of H – IB Visa. Such

steps may start the process of de-migration specially from Gulf and European

Countries. This may further impact our economy.However, earlier signals of

revival of economy and real estate sector is still to be seen. Meanwhile Real

Estate Sector has to put extra effort to make them transparent and

trustworthy so that customers haveconfidence in it.

Any episode like satyam may kill the confidence of customers and can make

revival very difficult, hence this is a period of patience and extra caution.

Fantastic win of 8 Oscars by Slum dog Millionaire is to be celebrated because

it is a story about HOPE,Optimism and Dreaming the impossible. Rahman

Says “All my life I had a choice of hate and love. I choose love and I am

here.” Yes, it is time to love. Love your customers and you will win. Explore

his needs, his affordability and build according to that and you will not only

remain in business but will grow even in deepest downturn.

Govt. of India has given final round of stimulus to industry by cutting down

excise duty & service tax by 2% at the cost of increased fiscal deficit. This is

like short term gain for a long term pain. Increased fiscal deficit has made

S&P to reverse India’s outlook from stable to negative which may make

foreign investment more costlier and more scarce.

DLF initiative to cut prices of its Bangalore & Chennai projects by 32% to 17%

respectively appears to be a right step in right direction to boost demand and

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increase cash flow. Increased competition between Developers will force

them to cut their prices on the line followed by Market leader DLF. However, a

collective action by all Developers would have been better in prevailing

circumstances.

IT and ITES were the prime drivers of Real Estate Industry in the past. These

services flourished on the basis of outsourcing from USA and European

countries, which are now suffering from slowdown hence there is obvious

reduction. Now, Barrack Obama’s official protectionism policy to not provide

tax sops to those industries who outsource activities, is a direct blow to future

growth of such companies. Though cheaper labour cost during past has

promoted such activities but State intervention will slowdown outsourcing

hurting Indian real estate also by reducing the demand. The requirement for

office space, retail space, hospitality space and premium housing will get

reduced. Developers may not find good growth in these segments and

therefore should focus more on domestic demand like affordable housing and

infrastructure linked real estate development.

Banking sector were prompt in rescheduling the debts of developers but were

slow in loan disbursal to individual buyers.Buyers are also in wait and watch

mode and both – banks & buyers are waiting for the developers to cut down

prices. However, nobody is sure that demand will pick up, if developers

reduce their prices. Nobody is sure about quantum of reduction of prices.

How much reduction will be sufficient is a guess. Reduction by individual

developer will definitely force other developers to bring down prices but it will

not end demand for further reduction. Only collective decision, based on

location, may work.

Right now there are only bad news. Sensex at lowest point in three years

while rupee touched historically lowest valuation. The stimulus package

announced by Government of India was more dependent on infrastructure

spending which has a long leg effect and may not show results soon. The

solution lies only in reviving domestic demand but, in such a scenario people

prefer to save rather than spend. FII operating in Asia Pacific region are

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giving more weightage to China in comparison to India and are risk averse.

The silver lining, however, is that in India fundamentals are very strong.

Growing population, demographic dividend of having younger and educated

population, continuously rising urbanization will make Indian economy recover

faster than others. However, the strategy adopted by Sobha Developers and

is DLF is worth appreciating in such testing times and expected to bring more

cash flow.

Banks did not respond adequately. Unwillingness of Banks and

their risk-averse attitude towards aggressive lending is the greatest bottleneck

in spurring demand, which is at rock bottom presently. For aggregate demand

to boost, the interest rate environment has to change. For that to happen,

Banks have to be shaken out of their present mindset. With overseas debt

market dried up, FII pulling out, primary market almost dead and

Governments on holidays, it is the aggressiveBank lending that can make the

difference.

BIBLIOGRAPHY

http://www.asia-pacific-action.org/node/210

www. Google.com

www. 4shared .com

Articles in times of India

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