The mutual fund industry: Waiting for Godot?

Jayant Pai | jayant@ppfas.com

 

 

 

 

 

A journalist called me up last week asking for my views for a story that she was working on. It dwelt upon the fact that investors were deserting mutual funds in droves as they were disillusioned by a lacklustre market. So much so that the Prime Minister himself was sorry to see the state of the industry and was keen to lend a helping hand. She then asked me what could mutual funds and the Regulator do to ‘attract’ investors once again.

If she was hoping for some revolutionary ideas from my side she must have been disappointed…as I told her that nothing more or new was required. I was neither being defensive nor escapist when I said this… Continue reading

“Un-fixed rate loans”: The new kid on the block

By Jayant Pai | jayant@ppfas.com

Recently, I read a few media articles railing against the launch of “Semi-Fixed Rate Loans” by a couple of banks. Here the borrower is charged fixed rates for a certain period – say two or three years – and then has to pay Equated Monthly Instalments (EMI) based on a floating rate (usually linked to the bank’s Base Rate). Continue reading

Margin Trading in Real Estate…..

By Parag Parikh | pparikh@ppfas.com

We have created and nurtured a society where insanity works. Take the recent advertisements by builders selling flats with just 10% upfront down payment. The balance is to be paid on possession. It sounds so good and consumer centric but is it really so?

What an invention. Enter Margin trading in real estate. What is Margin trading? In short it is buying beyond your means. It is very popular in stock markets. At present real estate prices have doubled in the last year and the builders are only building flats. Investors are buying and waiting for the greater fool theory to work. They expect that someone will still buy it at a higher rate from them. However that is not happening. With so many residential premises coming in the market you need someone to buy it so the investors exit and make money. The consumer that is the real user of such flats is existent but he does not have the capacity and money to buy it. There is big latent demand for housing because people need houses but it does not mean that they will be able to afford the current prices. It is beyond most peoples’ means. How do you raise money to complete such projects and pay off high interest debts when there are no genuine buyers at such high prices?

This is how it works. The flat prices are at record highs. They have doubled in just a year fueled by investor demand. The flats are offered at just a down payment of 10%. The balance has to be paid on possession. However the fine print does specify certain conditions. One of the conditions is that one cannot get out of the deal and there is a heavy penalty if one chooses to do so. This is only for serious buyers thus goes the argument. The brokers who are able to get buyers are offered a brokerage of 2% and above packaged with gifts of Mercedes cars and other luxuries. That’s real hard selling. Real estate prices are currently highly inflated and even a correction of just 10% wipes away the buyer’s capital.

So the upfront 10% is just an incentive for one to get into the debt trap. When the time of the possession comes who knows the prevailing real estate prices. If they are lower than today imagine the plight of the buyer. Not only has his asset lost value but how will he be able to get a bank to finance him? The bank finance will come at the rate prevailing at that time. The loss in the value of the asset will wipe out his capital and he will have to opt for the debt trap. Imagine the interest one would pay when one does not have a bargaining power. And of course the high maintenance charges of these new luxurious buildings will be an added stress on the already burdened home buyer.

The lure of the new and such quick fix schemes need to be avoided at any cost. You can’t be margin trading in real estate especially when there is no exchange to let you know the fair market price of the real estate. It is run and regulated by the builders lobby itself. Surely these are signs of a big real estate bubble and crony capitalism allows such ponzi schemes to flourish.

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This first appeared as an article in Business Standard dt. October 20, 2010.

Real Estate IPO’s ready to hit the Markets….

There are newspaper reports that a lot of real estate companies are readying themselves to tap the IPO market in view of the changed sentiment in the markets. When investors turn greedy we have companies/ investment bankers ready to capitalise on that greed. Now lets for a moment stay away from the market irrationality and think like a rational human being. Lets understand the nature of the real estate business rather than be carried away by the noise in the markets. Investing is all about buying a good sustainable business which is easy to understand and which is run by a credible management. Then comes the different characteristics of the business like, strong brand, distribution network, pricing power, moats around the business etc. Lets deal with the first aspect of the real estate business: Is it is easy to understand? This is where I disagree. It is an illusion if you believe that it is a business you understand. They possess land banks which are valued and reflected in the balance sheet. Does anybody know the real value of the land banks? I doubt. In our country it is a known fact that cash money changes in real estate deals, wether you are buying land or an appartment. In such a scenario can we truly assess the value of the land banks? Then what is the authencity of the balance sheet of the real estate company? Is it giving a true and a fair picture? As a value investor the balance sheet is the only document an investor can rely on. If that is misleading how does one know the real value of a real estate company? How are Investment Bankers able to value such companies? Corporate governance issue? In spite of this we have fund managers (qualified)of mutual funds making big investments in such real estate companies. This is reported in various newspapers thus adding credibility to the issues. This should not be the guiding post for genuine value investors as they got to understand that these mutual fund managers are investing other peoples money. What incentives are given to them is anybody’s guess.  So do not be carried away by the hype of these real estate companies IPO’s. The markets are hot and this is the best time to dump their stocks at ridiculous valuations on you. Never chase a fancy in the market as you always end up paying a fancy price. Investors need to understand that investing in real estate as an asset class is very different from investing in to a real estate company. It is this misconception that makes investors flock to real estate companies IPO’s.