Indian Property News on 'December, 2007'

Real Estate Prices Pose Danger for Retail Sector

India has been rated at the top of the global retail development index for the second successive year by AT Kearney. However the consultant has acknowledged at least 10 holdups that need attention. The list includes underdeveloped supply chain capabilities, inadequate utilities, IT infrastructure hurdles, supply base hurdles, inadequate human resources, limited consumer insights, taxation challenges, real estate hurdles, insufficient government incentives and policy-related hurdles.

Among all these, the major hindrance is Real Estate. The fact that retailers have to spend 25-30% of their revenues among rentals, just to operate in metropolitan makes the situation worse. According to CB Richard Ellis South Asia head Anshuman Magazine, the current commercial rentals are actually unaffordable and correction is inevitable,” says.

The concern has started to reflect in either slowing down of many a retailers’ expansion plans or change in strategy. For instance, franchise-driven operations is finding more favor now. “For Westside we plan to involve more franchisees in our expansion plans,” says Trent marketing head Neeta Chopra.

On the infrastructure side, supply chain is pegged to be the biggest hurdle, in food as well as non-food category retailing. Obviously, the magnitude of the problems arising from supply chain issues vary from market to market. “Factors such as logistics infrastructure, the availability of a cold chain network and the presence of distribution hubs and networks is a much bigger challenge in small towns and rural areas than in the large metros,” says Dhruv Prasher, COO, Decube Retail Plus, a New Delhi-based consultant.

Sourcing is another major hurdle being faced by organised retail in India. Experts attribute this mainly to lack of a sustainable vendor base and trained manpower. “In my view the biggest challenge facing the sourcing function comprises trained people and order fulfilment. While we have a lot many purchase managers, we have a very few sourcing strategists,” says Arabind Das, head of sourcing at Aditya Birla Group’s retail venture.

The biggest problem is the non-intervention of Government into the retail sector. Retails in South Africa and China have been able to progress only because of active government participation.

But as far as India is concerned the approach of some state governments have been hostile towards organized retail, that of the central government has been quite indifferent. The sector has attracted opposition of the entire trading community. This community not only forms a formidable vote bank, but is also considered to be a powerful pressure group at the grassroots level.

By and large, some areas where organized retailers have been lobbying for government support in their retail ventures include granting of industry status to retail, reform the Urban Land Ceiling and Regulation Act, reducing license requirements, creation of a single-window facility, ample power supply, creation of commercial space in urban centers, amending labor laws to be more supportive of retail requirements and eliminating octroi taxes.

Massive Growth in Real Estate

The booming Indian Real Estate has made Property developers billionaires overnight, with profit overflowing in the sector. Office and shopping mall rentals continued their upward trend, the pace being very vigorous in Delhi and Mumbai. At present Mumbai is at the second place in the list of most expensive office markets in the world with Delhi at eighth.

The real estate industry is estimated to reach $60 billion by 2010 with a growth rate of 30 per cent. The industry entered the Dalal Street in a big way and floated 12 public issues in the year, making it a leading sector in terms of fund raising.

India’s biggest realty developer, DLF continued its supremacy over others. The firm launched the country’s largest IPO of over Rs 9,000crore, followed by HDIL’s Rs 1,700 crore and Puravankara Projects’ Rs 850 crore.

The fact that India’s seven Real Estate biggies are their in the Forbes list of 54 Indian billionaires crystallizes the sector’s strenght. DLF’s K P Singh, Unitech chairman Ramesh Chandra and Omaxe’s Rohtas Goel were among the richest Indians.

“Kushal Pal Singh is fourth on the 2007 Indian rich list with a net worth of $35 billion, making him the world’s richest real estate developer,” Forbes said in November.

Industry was able to attract significant interest from domestic and foreign investors keen to be a part of the real estate growth story that started from 2005 when the foreign direct investment norms was liberalised for the sector.

Investor’s participation was not restricted to only public offers as many private equity deals were struck. For instance, DLF sold 49 per cent stake in its seven townships to Merrill Lynch and Brahma Investments to raise Rs 1,675 crore.

Unitech Plans Aggressive Entry in South India Real Estate

Unitech is making a volatile entry into the mushrooming South India Real Estate market. One of the largest Real Estate Developers of the country, Unitech is about to announce two joint development deals, covering a prime area of around 1400 acres in Hyderabad and Chennai.

The Real estate major will soon disclose its 50:50 joint venture deal with serial entrepreneur Prasad V Potluri’s PVP Enterprises which owns around 1,300 acres in Hyderabad’s Shamshadabad region, the most well known part of the city in regards to property development.

Another important deal on the card is a 55:45 joint venture deal for developing 8.8 million sq ft of residential property on the 70-acre Binny land near Perambur in north Chennai, owned by SSI, sources privy to the development told ET.

In February this year, PVP Enterprises picked up a controlling stake in SSI. It now owns 62% equity stake in SSI, which include acquisition of 42% equity stake held by the Kalpathi brothers – Aghoram, Ganesh and Suresh, as well as 20% acquired from the public through an open offer in October.

PVP Enterprises pumped in Rs 750-800 crore for the stake. Kalpathis still hold 29% stake in SSI, the rest 9% with QIBs and others. Besides the 70 acre Binny property, SSI also owns prime property, including an IT Park, developed over 100 grounds (one ground = 2,400 sq ft), at Vadapalani in West Chennai, as well as the Dasaprakash Hotel property in Ooty.

A merger is expected between SSI and PVP Enterprise, a formal announcement is expected in a day or two, even as the merger ratio between the two companies has been tentatively finalized. “For every three shares of SSI, one share of PVP Enterprise will be allotted. While the process for merger has been set in motion, it is still not clear whether SSI will undergo a name change,” sources privy to the deal said.

Sources revealed that all existing loans of PVP Enterprise are being converted into equity. This will make it a debt-free company, after the merger. The move will result in a huge scaleable opportunity on the infrastructure front for the merged entity that will also be cash rich.

The development on the Binny land alone involves construction of over 5,000 residential flats, besides retail and commercial space. Even at a reasonably price level of Rs 5,000 per sq ft, the sale proceeds of developing 8.8 million sq ft comes to around Rs 4,400 crore.

Real Estate Investment Products- All Set to Hit the Market

Real Estate Investment Products are all set to hit market, SEBI Chairman, Mr. M. Damodaran said in a statement to Business Line. He further added that the only problem which was a barrier in the launch has been overcome with the Association of Mutual Fund Industry and the Institute of Chartered Accountants of India having firmed up the valuation norms for these products. “We should be able to clear the guidelines soon. Our expectation is that in the next couple of months, we should be able to streamline it.”

Elaborating the whole procedure Mr. Damodaran that the two bodies looked at whether it was possible at all to accord a valuation and the frequency with which one needed to do it. Valuation, almost on a continuing basis, is needed as people enter and exit schemes on a regular basis.

“Real estate is an asset class that has grown rapidly” Mr. Damodaran said: “Why keep the small man out because he does not have money to buy land?” Real Estate Investment Trusts (REITs), for example, are something that will soon happen in the Indian market, he explained.

However, the real and the penultimate tester of the success of Real Estate Investment Trusts will be the taxation treatment. Those markets that have not given favorable tax treatment to REITs, the product hasn’t taken off because you need to see the capital gains angle, he said. In some jurisdictions that have welcomed this product, notably the US to begin with and later the Asian markets, the product has taken off as the tax treatment was favorable.

Mr. Damodaran also said that while the product will be available, the additional attractiveness of the product by way of appropriate tax treatment is something that the Ministry of Finance will have to decide.

“Should that happen, I think the way the real estate is growing in this country, this is going to be not just an attractive product, but I think it will bring some discipline into this (real estate) industry.

“You don’t have a real estate regulator anyway. Into that space we are hoping to bring through this product a certain discipline that is tried and tested in other countries.”

The category of investors in ‘REITs’ will be slightly different. I don’t think in the first flush you will see the retail (investors). I do not think that the investments will be in the same kind of assets.

You will see initially, just to get over the teething problems, a certain restricted universe of assets. But if one wants REITs to really take off then even projects under construction will have to be thrown open for investor participation, he emphasised. After all, investors in these instruments will be people investing, staying the course and taking out money after a while. These are people who look for appreciation more than income (current) on a regular basis. They will capture the upside over a period of time, he said.

Global Asia Real Estate Fund Concludes Its Third Acquisition

Global continues its golden run in the Asian market. With the announcement of its latest acquisition in the People’s Republic of China, as part of its Asia Real Estate Fund investment strategy, Global Investment house added the third feather in its portfolio of assets.

Global Asia Real Estate Fund had announced the successful closure of two investments; In China and India last month.

Executive Vice President at Global, Mr. Sameer A. Al-Gharaballi, quoted in a statement that the investment will give the fund an excellent opportunity to invest in the development of a mixed usage project consisting of residential and retail space in Changzhou city, China.

He further revealed that the investment is a joint venture with a Chinese real estate development and construction company. He also added that a significant driver of their decision to invest in Changzhou relates to the fact that in recent years, there has been a strong demand in the real estate sector, especially in the residential segment.”

Changzhou city is strategically located in the Yangtze River Delta and it will benefit from the booming economy in the area. The site selected for the construction is easily accessible to all the supporting facilities.

Mr. Rakesh Patnaik, Head of Real Estate Funds at Global, disclosed that the total cost of the project is approximately USD62 million in which the fund is contributing USD11 million as equity into the project.

The fund looks forward to have a strategic stake of 49% in the project, with this equity investment. He also said that the fund is in the process of conducting due diligence of two more transactions situated in India and South Korea. Patnaik expects the fund to be fully invested very soon.

Speaking on the successful acquisition, Helen Wong, CEO of Cushman & Wakefield Capital Asia -the fund advisor- stressed that the fund will benefit from strata-titled sale strategy of the residential and retail units.

The pre-sales of these units is expected to start shortly with complete exit through retail sales by 2010. The expected return to the fund anticipated to be greater than 25% on a gross basis.

It is worth mentioning here that Global Asia Real Estate Fund was offered to investors last year. The Fund specializes in investing in Chinese and Indian Real Estate markets in addition to its ability to invest in other Asian Real Estate Markets.

Arab Investors Seek Investment Opportunities in India

Lucrative investment options in India are attracting a number of cash-rich private equity funds from the Arab world. If numbers are to be believed, around 15 Gulf Co-operation Council institutions, with a massive fund size of $10,464 million (about Rs 42,000 crore), are willing to invest a considerable part of fund into Indian equities and other private equity opportunities.

The post 9/11 change in the political scenario of America and Europe and the concerns of a likely slowdown in developed economies are encouraging for Gulf-based investors to turn their focus to developing economies like India and China.

Some of the prominent factors that are attracting Gulf investors in India are infrastructure and real estate and high returns on equity. India’s legal framework which protects foreign investors is one of the best in emerging countries,” said Gulf-based Global Investment House’s senior vice-president and international investment head Shailesh Dash.

Arab investors (from GCC countries) are interested in sectors like infrastructure, real estate, financial services, and logistics.

According to experts, Government’s thrust toward infrastructure development via public-private partnership is likely to bolster further investments in that space. Buoyancy in manufacturing and services sector activities coupled with booming stock markets provide an opportunity for foreign capital to flow in India.

“Gulf investment in India is on a rise and many more fund pools are waiting on the sidelines to take a plunge. The Qatari Government alone is planning to invest a considerable sum into India,” a senior official at Qatar International Islamic Bank told ET.

According to Global Investment House data, Abraaj Capital is planning to come out with three separate funds totaling around $2,700 million; Ithmaar Bank is launching a $500 million balanced fund, with a view to invest in infrastructure.

Indian Real Estate Industry Witnesses Deluge of Funds

Despite the recent predictions of a property bubble in U.S, which is a major source of concern, the Indian Realty Sector continues to witness a deluge of funds. Funds are flowing not only from private equity investors but also from builders seeking a toehold in this market.

In between the six months from April 2007 to September 2007 twenty-one private equity deals worth $1,292 million were struck in the realty sector. As per Real Estate Intelligence – a research and consulting firm, this is a substantial increase over eight deals worth $282 million inked in the same period last year.

From investment banking majors Morgan Stanley and Blackstone to UAE-based Khaleej Finance and Investment and Ras Al-Khaimah Investment Authority, Indian realty companies have been attracting a wide range of institutional investors. Institutional investors expect $5 billion to be pumped into Indian real estate over the next three years, says the recent FICCI-Ernst & Young India Real Estate Report 2007.

Barclays Targets double-digit Share in Indian Retail Sector

World reckoned banking major, Barclays, have plans to get a double digit market share in the Indian Retail Sector. The banking major has recently invested USD 70-million into India’s retail operations.

Despite being a late entrant into the retail segment, Barclays target’s to make a strong mark in the sub-continent. Samir Bhatia, Managing Director-Indian Ocean told reporters that they are planning to open a new branch in Gujarat by the new-year.

He further added that Barclay’s understands the customers well and are aware of the kind of products demanded by this market. The company has bee growing well since its launch in the retail segment.

As of now, Barclays has four branches in the country in Delhi, Bangalore, Mumbai and Chennai. The fifth branch, expected to be opened by the New Year, will be in Junagarh, Bhatia said.

The bank is a strong player in the investment banking segment and has already infused USD 300-million to equip this division face competition from other players.

Asked whether Barclays would adopt the inorganic growth path in the country, Bhatia said that “it is too early to comment on the matter.”

Barclays, the first bank to introduce ATMs in 1967, is also the first credit card issuer in the UK. The bank has nearly 27-million customers worldwide and an employee strength of about 1, 27, 000.

Hypo Ready for Second Innings in India: Invests Rs 600 cr in Shriram

Hypo Real Estate Group, the German commercial real estate financing conglomerate is ready for its second innings in India. Hypo Group is planning to invest in Shriram Realty Rs 600 crore. The Bangalore based Shriram Properties will execute the three projects which would be financed by Hypo Group. However management of Sriram Properties has not confirmed the development yet.Shriram Properties is a Rs 450 crore real estate arm of the Rs 25,000 crore diversified Shriram Group which has business interests covering real estate, truck financing, insurance, consumer finance and information technology and employs over 15,000 people in its various verticals.

In the past Hypo had taken over the reins of Rs 380 crore Tanglin Development promoted by VG Siddhartha who runs the Café Coffee Day chain. So this investment in India is the second one for Hypo and Hypo is looking out to consolidate its market hold in South India with the key emphasis on Chennai market for its commercial projects that is expected to spread over 6 million square feet. Though it is not clear whether Hypo had taken an equity exposure or channeled this as debt.

Shriram Properties, in the recent past has been on a fund-raising spree and has raised around Rs 1,000 crore from US-based private equity players Walton Capital and and Starwood Capital Group. In addition to investing substantially in an integrated township project being developed by Shriram in Kolkata, Walton and Starwood recently invested $100 million at the enterprise level in Shriram Properties.

Estimated at around 5,000 crores, The Kolkata project is one of the largest-scale partnering of global real estate private equity firms in India, will be on land previously belonging to the Hindustan Motors plant in Uttarpara, and will comprise approximately 20 million square feet of residential, retail, office and civic infrastructure.

Shriram Properties was founded in 1995, and over the past 12 years has built over 4.5 million square feet of residential and commercial space in Bangalore, Chennai, Coimbatore and Hyderabad. The company has built a team of almost 300 people in five offices throughout India, and is presently developing a portfolio of 70 million square feet of space across India, including residential, office, retail, hotel and civic infrastructure. The company after establishing a decent presence in South India is now looking to branch out to Northern and Western Indian markets.

According to industry sources Shriram Properties is also gearing up for an initial public offer next year through which the company is expected to raise close to Rs 900 crore.

US based Polycom turns to South India

US-based Polycom Inc, one of the largest providers of communications equipment which enables enterprise users to conduct video, voice, data and web communications, is eyeing South India for its growth and development plans. The growing demands for its products from state governments, tele-medicine and tele-education projects have spurred Plycom to shift its focus to South India.

“We are seeing a strong growth from the south in non-IT sector. Plenty of telemedicine projects are being launched. Similarly, most states are gearing up for tele-education and e-governance initiatives. Besides, the real estate sector is witnessing a boom in the south. We expect sales in South India to be on a par with the north in the coming days. To begin with, we will focus on the state capitals. Later, we will venture into secondary cities like Kochi, Madurai and Thiruvananthapuram to target the real estate and education sectors.” Polycom India Head Business (North & South) Roshan Gupta said.

At present, North India is the largest market for the company, generating 35 per cent of the business in India while South India contributes around 25 per cent with an equal spread between the western and eastern regions.

Polycom has been operating in India from 2003. Polycom’s product range includes communications servers for audio conference, monitors and cameras for video conference and networking devices and its products have been installed by most IT firms in Bangalore. The firm considers the IT sector to be its traditional market and has recently opened office in Bangalore with plans to open more branches in Chennai and Hyderabad as well.

Plycom’s products have been deployed by various central government ministries, universities, hospitals and real estate firms.

From participation in the statewide area network projects to e-governance projects in Maharashtra, West Bengal and Andhra Pradesh, Plycom also extends its video conferencing facility to most central jails for ‘tele justice’.