Caveat investor: DLF and listed realtors have destroyed Rs 3,30,000 cr wealth

Reuters

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 IT is common wisdom that you can’t lose money in real estate, given that land is always in short supply. But then, how does one explain the humongous wealth destruction by real estate companies that are listed on the stock markets? If real estate can only go up, how come real estate shares only go down?

Take the case of DLF, the biggest daddy of them all. According to Firstbiz calculations, from its all-time high price of Rs 1,205 a share in January 2008, DLF has plunged more than 90 percent to Rs 109 today (27 October). This means in six years, just one real estate company has destroyed shareholder wealth to the tune of Rs 1,86,000 crore, falling from a high of Rs 2.06 lakh crore to just Rs 19,502 crore now.

Firstbiz added up the wealth destroyed by six listed realty companies from their peak prices and today’s values, and the total loss to investors adds up to Rs 3,30,792 crore. Clearly, realty companies are not worth investing in at all.

Of course, measuring share prices from their peaks may sound unfair, but it is worth noting that the stock market as a whole has not only regained its peak, but is heading for new peaks now. So, the real estate sector – at the very least – should have regained at least its old values. Far from it, it is destroying further value.

What explains this anomaly?

The answer has to lie in the peculiarities of the real estate industry, including the following.

One, most of the wealth is created in cash, and thus the listed shares do not participate much in any of the wealth created during the boom years of the realty industry.

Two, the real estate industry simply does not follow the best accounting practices and may, in fact, be doing funny numbers. As this Firstbiz report in 2011 noted, the reported cost structures of any two real estate companies are so divergent as to be meaningless.

A Citigroup report on Oberoi Realty and DLF in June 2011 showed widely divergent cost structures, that it made no sense. According to the Citi analyst, steel and cement accounted for 40 percent of DLF's total construction cost. Adding labour, we arrive at 70 percent as the total civil construction cost as a proportion of the total cost (excluding land, one presumes).

But in the case of Oberoi Realty, a Mumbai-based realtor, the Citi report mentions steel and cement cost as just 16 percent of the total, and overall civil construction costs at 46 percent. Assuming that steel costs cannot vary so much across the country, why does a builder in Mumbai have far lower costs than DLF in Delhi? Is it only the higher land cost that explains it all?

One can only speculate that at least one of these numbers is not quite what it seems.

Three, it is also obvious that realtors make money at the expense of the consumer by changing delivery schedules, reducing carpet areas, and generally loading the purchase contract against the interests of the consumer. But this is now being challenged by the regulators, with the Competition Commission of India (CCI) coming down heavily against DLF for cheating home buyers in Gurgaon. In August, the Supreme Court asked DLF to pay up Rs 630 crore as penalty while it heard the company’s appeal. Sebi has also come down on DLF for allegedly not making full disclosures at the time of its IPO.

Four, realty prices have less to do with real demand and supply and more to do with political manipulation of prices, given that real estate is where crooked politicians, businessmen and bureaucrats stash their wealth. This was demonstrated clearly during the last elections, when realty prices mirrored political need for money during election-time.

The same point came through in a recent Times of India report, which noted that builders in Mumbai pay “anywhere between Rs 5-30 crore per multi-storeyed building…bribe demands in the island city are a whopping Rs 1,200 per sq ft, Rs 800 per sq ft in the Bandra-Andheri belt and up to Rs 600 per sq ft in the city's eastern suburbs. Compare this with basic building costs of Rs 2,500-3,000 per sq ft.”

Since all these payments are outside the balance-sheet, it is highly unlikely that the correct costs and revenues are captured by listed real estate companies.

So it is caveat investor: it is simply too risky to invest in listed realty companies. Stay away.

 by R Jagannathan: FP :27 Oct 2014

5 money mistakes that can hurt your wealth building process

Sunil Fernandes goodreturns 8 July14

"I want to build wealth," this is part and parcel of every individual's life. Everyone wants to save money for a luxurious life. Our seniors always thought that through hard work and exploitation of right opportunities we can live an affluent and prosperous life. But your motive to build wealth should not just be focused on saving money but it should be focused on a dream of a peaceful and wealthy retirement period.

The money you are earning currently is not sufficient for a better life post-retirement because of the rising inflation rate and medical costs. There's a strong chance that medical costs can sweep away your retirement savings.
While we all know the benefits of building wealth for the future, why is that most people still find themselves under a deficit after retirement. Many denote it as bad luck, while this isn't the truth. Undoubtedly, in the game of life luck does play a pivotal role. But many-a-times it is our spending habit and reckless decisions that land us in trouble.

If you make smart decisions, luck will automatically follow you. If you make poor decisions, you might get trapped in huge deficits or losses.

Listed below are the 5 spending habits that could block your wealth building process.

Buying a Lavish House

This is a costliest financial mistake people tend to commit. While buying a house is a wise decision purchasing an abode that is beyond your capacity is a hapless decision. Previously, you buy a house, live in it for a few decades. But the present generation doesn't believe in continuing the same job or staying in the same house for years. The more frequently they change their city for job, the quicker they sell their residence. This often means lesser returns and more costs to be borne when buying and selling.

Additionally, banks are often willing to give more loan than you can afford at the higher rate of interest. Owning a house means, paying higher interest and creating lesser ownership. Make sure you are buying a home for a peaceful living, and not end up paying a large monthly EMI.

By buying a lavish house, you are investing in an illiquid asset and if it is for self-occupation then you will not sell it to meet any of your other goals. Also lavish house means, luxurious neighborhood. Our neighborhood plays a vital role in determining our lifestyle expenses.

Avoid this financial mistake for a wealthy future. Buy only that what you can afford to.

Letting Your Money Leak 

It is a fact that buying anything bigger costs more, but it's that miscellaneous or little expenses that can deteriorate your financial condition. You need to scrutinize your income and expenses to find the leakage in your budget and save a little extra every month. Many-a-times you buy something, which you don't really need.

For instance, annual fashion magazine subscription that you rarely read, monthly SMS pack recharge though you use Whatsapp (majority people use considering the low price of Smartphone), premium movie channel etc. Each one of these may cost more than Rs.100 individually every month. Don't you think by cutting these unnecessary expenses you can save a little more for a safe and financially sound future? Think over it!

Having a Craze for Luxury Vehicles

This is the biggest of all! Buying a luxury car and changing the cars frequently. Most people don't mind spending half of their income in paying the monthly installments of the car of their dream. Owning a vehicle may not be an expensive deal for a few of you, but the miscellaneous expenses associated with it can kill you.

First you buy a car, but there isn't a pause to your expenses here. Apart from the monthly installments, you are left with filling diesel or petrol every month, frequent maintenance and unexpected repair cost, car insurance etc.

When you are buying car, you are putting your money in a depreciating asset. So, don't make such a mistake. Buy a car, which you can afford and use it for 7+ years. An expensive car requires extra care and bigger maintenance and repair cost. Think before you buy!

Saving Too Late 

Ask someone at 25, are they saving for their retirement? And see their expression. When we are young we think "I'm too young to even think about retirement, forget about savings." But that doesn't mean life will wait or you'll never retire. It is never too early to plan your retirement. There is something called as compound interest, if you save early, you will earn handsome returns that could be beneficial for your future.

There is never a good time to start saving. Stop making excuses and just start! Time is your strength; don't make it your weakness.

Spending Extravagantly On Education 

While educating someone or educating oneself is a good deed, but wasting your money on a posh college or premium private tuitions is certainly not a wise decision. Though it is necessary to have a degree to get good job, it is definitely not necessary to go to a premium private school to get a superb education. While some college may be better than others, selecting a college because of their name or stylish campus is like buying an Rs.3000 premium branded shirt over Rs.1300 shirt. Even the Rs.1300 shirt will serve your purpose and need, so why waste money on a premium branded shirt of the same quality. Similarly, completing your education from a good decent educational institution is sufficient.

Whatever you decide, make sure you think about your present financial condition and then move ahead.

Hopefully you won't commit these mistakes in the near future. Make better financial decisions; however don't get demoralized if you are going through any of the above situations. Learn from your mistakes and carve a healthy financial life from scratch.

‘More than 60% of India’s rich feud over inheritance’

Source :Press Trust of India:Dubai:: Wed Nov 16 2011, 00:32 hrs


Forty per cent of the globe’s wealthy population has direct experience of their family fortune leading to disputes, but the percentage is even higher in India, where 61 per cent of the rich have seen relationships deteriorate into feuds over money, according to a new report.


In contrast, 53 per cent of respondents in Singapore, 51 per cent in Hong Kong and 51 per cent in Monaco have experienced family tension as a result of wealth, as against just 11 per cent in Qatar.


The Barclays Wealth Insights report also reveals that 35 per cent of global high net worth individuals do not trust their children or step-children to protect their inheritance.


“When it comes to passing on wealth, 35 per cent of global high net worth individuals do not trust their children or step-children to protect their inheritance,” the report says.


The Barclays Wealth Insights report, titled, ‘The Transfer of Trust: Wealth and Succession in a Changing World’, was released here on Monday. It is based on a global survey of more than 2,000 high net worth individuals.


Globally, developed countries display higher levels of uncertainty when it comes to trusting their children and stepchildren to look after their wealth.


Respondents in the Middle East (78 per cent), Africa (77 per cent) and Latin America (75 per cent) show high levels of trust in their children and step-children when it comes to money management and protecting their inheritance when compared to Australia (59 per cent), North America (61 per cent) and Europe (62 per cent), the report said.