Tuesday, February 15, 2011

India's biggest bust

Real estate: it looks like the drift will never end. In January 2008, BSE's Realty sector index peaked at 13848. Consider for a moment an investor who bought into this index (or the shares it represents) at that price. Add to that figure 30%, to represent the cost of capital, at 8% compounded for 3 years. That's 18000.

Any guesses what that money is worth today?

A little over 2000. 2112, to be exact, as of yesterday's closing. That's 12 paisa in the rupee. That puts India's real estate boom and bust in the same league as the dot-com bust. And that's despite the fact that real estate prices are no lower than they were in 2008. This dichotomy is explained by two things - firstly, the incredible hype around real estate in 2008; secondly, the leverage in this sector. Good times make for bad loans...

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