Indian Property News on 'June, 2008'

Real Estate Developers Bet on Eco-Friendly Buildings to Woo Buyers

Call it green revolution in the real estate business. Top developers are now betting on green buildings – that use less energy, water and natural resources, creates less waste and is healthier for the people living inside compared to a standard building – to woo large tenants. Even though green buildings involve an incremental cost of 7-10% over traditional buildings, developers see it as an opportunity for differentiation in a growing market.

The trigger is a growing environment consciousness among topnotch tenants, particularly the multinationals. In the request for proposals (RFPs) that are coming in, many MNCs are starting to ask the question about the green quotient. “It may not be mandatory today but going forward, many MNCs will make it mandatory,” says Jones Lang Lasalle-Meghraj chairman and country head Anuj Puri. Developers such as K Raheja and RMZ have decided to go all green.

RMZ’s 1.9 million sq ft mall, RMZ Galleria, in Bangalore is currently under construction and will be a green development. So will be K Raheja’s Mindspace projects at Mumbai and Hyderabad, both of which are currently under development. According to CII-Indian Green Building Council (IGBC), 147 million sq ft of green space has been registered in India to date across a total of 239 projects. At the moment, K Raheja is planning and developing around 14.5 million sq ft of green space across the country. “We are looking at the long-term and want to be the first ones to go green in a big way,” says K Raheja associate vice-president Shabbir Kanchwala.

The company has also signed an MoU with CII to train their architects and engineers in green technology, as there is a “dearth of green staff in India,” he adds. M Selvarasu, GM-Projects at RMZ, estimates the payback to be 7-8 years for gold-rated buildings and about 12 years for platinum rating. “The certification level will differ from project to project but all of it will be green,” he says. At the moment, RMZ is developing a gold-rated building in Chennai and platinum-rated building in Kolkata, both of which have been pre-certified by the CII-IGBC, with another 4-5 buildings in the pipeline.

The Lodha Group, though, is getting into it only partially. “Only our commercial buildings will be green,” says Lodha Group senior vice-president Bharat Dhuppar. Lodha has about twelve buildings in the pipeline and most of them will be commissioned between 2009 and 2010.

In their projects, K Raheja expects the cost to be around 7-8% higher. The savings, though, will be considerable. “We are looking at 30-40% power saving and about 20% water saving,” confirms Kanchwala. “Also in construction, we try and use a lot of recycled materials — aluminum and glass — as well as mix fly ash with the concrete that is used,” he adds. The use of glass too is being reduced. “We keep the use of glass to the minimum, to about 35% in commercial and about 20% in retail,” says Selvarasu.

In a world where energy costs are going up by the day and investments in energy are peaking, a green building which saves precious energy and comes at the same rental for the occupier is a decent marketing tool for developers. “Many of our customers are Fortune 500 companies who understand and prefer green buildings,” says Kanchwala. “The future is in sustainability,” says Selvarasu.

Realty at its Premium Best

With an aim to help discerning customers realise their dreams, Vancouver-based Royal Indian Raj International Corporation (RIRIC) plans its foray into the Indian market. With Manoj C Benjamin at the helm of affairs, the group comes to Bangalore with a pioneering concept of self sustained townships, under its Royal Garden City projects and its Royal Garden Villas & Resorts’ brand.

The Royal Garden Villas and Resort in Bangalore is a master-planned gated community with exclusive amenities, including a chateau winery, opulent club house, world-class spa and pool. Besides these, the property also boasts a five-star hotel, Vijay Amritraj Tennis & Fitness Center, internationally renowned shops, restaurants , an equestrian center and supermarkets.

Also included in the plans is a movie theatre, which is slated for phases 2 and 3. “We see the integrated township format as a key driver of future housing supply and as a catalyst for the much needed infrastructure investments in India. The Indian government has spelt out key incentive policies to provide an impetus towards easing the flow of private investments and Royal Garden City is one of the first to have been conceptualised and planned to meet this objective,” says Manoj.

Under this initiative, RIRIC plans to develop firstclass resort communities and modern satellite cities in India, with the first project coming up near the new Bangalore airport. The project is touted to be one of Asia’s largest new city developments and is expected to become a model for such projects. The company has also planned similar projects in Mumbai, Delhi and Kolkata.

The first phase of the 6,000-acre development in Bangalore is conceived to be built on 3,000 acres and will include 13.59 million square meters of built-up space. Further to these developments , RIRIC has partnered with one of the worlds largest hotel chain’s to build budget style hotel rooms throughout India at an estimated investment of US $ 5 billion. The firm also has plans to announce exclusive rights in India with one of the world’s largest realty marketing groups by June.

The Royal Garden Villas & Resort, Bangalore, RIRIC’s inaugural project, lies on approximately 400 acres of prime land situated between downtown Bangalore and the new Bangalore International Airport. The project will offer residential apartments from bungalows to townhouses and the ones modelled after luxurious western subdivisions. Manoj says, “We will offer affordable homes from $ 80,000 to $ 300,000, as well as high-end villas that are in the half million dollar range.”

Through ingenious landscaping and architectural designs, Royal Garden Villas & Resort has been endowed with the look, feel, grace and sense of community enjoyed in Tuscany, but also offers amenities that could never even be imagined in rural Italy. Tuscany Square, in the heart of the Royal Garden Villas, is not just elegant but a standing testimony to refined living. In the charming piazza, with its feeling of a friendly neighborhood, residents, along with their children and guests, can sample fine cuisine or casual fare, the best of local and imported goods, or simply relax by the fountain and plan the rest of the day.

Real Estate FDI inflow up Nearly Five-Fold

The Indian real estate and housing space emerged as the darling of foreign investors in 2007-08, clinching FDI equity inflows of about Rs 8,749 crore, a near five-fold increase over FY07.

“The investors have seen that the real estate potential in India is huge. The returns are quite attractive. In fact, we see the trend picking up even further this year as the prices are getting more attractive for investors,” Ramesh Sanka, Chief Financial Officer at DLF said.

Late last year, DLF Ltd had sold 49 per cent stake in eight residential project SPVs to private equity investors for a total consideration of Rs 1,675 crore.

A Merrill Lynch & Co entity had bought 49 per cent equity in seven residential projects in Chennai, Bangalore, Kochi and Indore for Rs 1,481 crore. The company — headed by K P Singh — has also diluted 49 per cent stake, in another middle-income housing project in Panchkula, Haryana, to Brahma Investments for Rs 194 crore.

According to data released by the Government on Tuesday, the real estate sector, thrown open in 2004-05, saw the FDI picking up significantly between FY05 and FY08; it was Rs 171 crore in 2005-06 surging to Rs 2,121 crore in 2006-07.

“Over the last three years, there has been a build-up in investor interest. We saw the impact of that interest and euphoria for FY07 and FY08 as new townships and projects were announced. Depending on the asset class within real estate sector, the average rate of return stood at 25-35 per cent for India, against a global average of single digit return,” Sanjay Verma, Executive Managing Director, South Asia, of Cushman & Wakefield said.

“However, at the beginning of the current year we have seen some asset bubble deflation. With prices moving southwards, choppiness in the stock markets, pressure on interest rates and global issues, while deals will still happen, pricing will be the question,” Verma added.

Developers take to new routes as loans get costlier

Real estate developers, who are already straddled with stagnant demand for housing and high costs of construction, have now to reckon with a major liquidity crunch in the banking system and high interest rates on loans. While developers are optimistic that the current phase is temporary and the market is likely to rebound after the general elections, they are also seeking alternative funding methods including private equity players to fund their projects.

Currently, real estate developers pay interest rates as high as 18% on funds, due to their shortage. Niranjan Hiranandani, managing director, Hiranandani Constructions told FE, “I feel this is a temporary phenomenon and the liquidity crunch in the banking system will not have a major impact in the long term on the real estate market. Such ups and downs have happened earlier, too. There are many people who are still willing to invest and the years 2008 and 2009 will see more investors investing in the real estate market. Hence, we now need more construction. This is despite the fact that the cost of construction is going up due to rising inflation and limited supply.”

Earlier, Hiranandani had raised funds to the tune of $500 million internationally through UK’s Alternative Exchange. This means that the company is sitting on good cash reserves. Hiranandani said, “This is the right time for us to enter into new land deals as there is an expected correction in the Economy.” Similarly, many other builders who have sourced money from private equity players will now start buying land.

Says Rana Kapoor, managing director and CEO at YES Bank, “These days, most real estate developers are opting to get funded from private equity players for specific projects, as banks are charging high rates. Also, the traditional method of getting funded through banks are getting constrained, as the capital adequacy ratio and provisioning requirements is high on real estate exposure. This is one sector where banks have to exercise caution. In the long run, we believe, demand will soften and there will be a serious price correction in real estate properties.”

Rate hike to delay realty projects

Real estate developers see further slowdown in demand and price correction due to RBI’s move to raise interest rate. Caught between sluggish demand and rising cost of capital and construction, developers are deferring launch of new projects. Some even fear that ongoing projects may get delayed.

“Interest rate hike has dampened the sentiment in the real estate market, which will result in further slowdown. We see 5-15% price correction in the real estate sector in the next few months depending on the project and its location,” says real estate player Indiabulls’ group spokesperson Gagan Banga.

Real estate market has been under pressure for the past six months with sales declining by up to 70% in several markets and prices declining by up to 20% in overheated pockets like Gurgaon, Greater Noida, Ghaziabad and Kundli in the national capital region and some Mumbai suburbs.

“There is no alternative to credit. Land transactions have dried up due to developers’ inability to bring funds. The fund-raising plans of developers have also changed and some have limited their expansion plans,” says Cushman & Wakefield South Asia MD Sanjay Verma.

Some developers, especially smaller ones, also fear that their project might get stuck due to unavailability of funds. The bank credit had already dried up for small developers and they now fear rising interest rate will further increase their borrowing cost from NBFCs or private moneylenders. With homeloan rates, likely to go up, the advance money received from customers too will dry up forcing them to slow the pace of project execution.

Unitech general manager (corporate planning & strategy) R Nagraju, however, feels that high borrowing cost will have only a marginal impact on company’s margins. He pointed out that a bigger concern is slackening demand.

“We can’t do anything about high interest rates, but we need to stimulate demand by adapting our products suited to the current market needs. This could mean cutting down on frills and making houses more affordable to the end user,” says Mr Nagraju.

Unitech plans to launch houses at Rs 40 lakh in Gurgaon and at even lower price points in smaller cities, which it thinks will find large number of buyers. Similarly, Ansal Properties and Infrastructure (API) is tweaking its plans to suit the changing demand scenario.

“We plan to launch plotted development projects soon, which still has a good demand. Besides, we would focus on execution of projects rather than launching more housing projects,” says API CEO Anil Kumar.

State govt to build Mumbai sea link on its own

The Maharashtra government has decided to scrap the bidding process for the 22-km sea link between Sewri and Nhava Sheva and build the project on its own. The government said the decision was taken as it didn’t want to delay the Rs 6,000-crore project further because of the warring Ambani brothers, the main contenders for the contract.

“One can’t deny the fact that the project has been delayed because of the two warring brothers. If we had decided to go for re-bidding, we would have faced the same problem. So, we decided to do it on our own,” Public Works Minister Anil Deshmukh said after a meeting of the Cabinet Committee on Infrastructure (CCI).

The only two bidders for the project were the RELINFRA-Hyundai consortium and the SeaKing Infrastructure Ltd (SKIL)-IL&FS consortium. RELINFRA is led by Anil Ambani while SKIL is controlled by Mukesh Ambani. Last week, the bid granted to the RELINFRA-led consortium was treated as invalid by the Maharashtra State Road Development Corporation (MSRDC), the nodal agency for the project, as it did not respond positively to its request to extend the bid validity.

Officials said the MSRDC would now work out the financial model with other state infrastructure agencies like the Mumbai Metropolitan Region Development Authority (MMRDA) and the City and Industrial Development Corporation (CIDCO) and place it before the Cabinet panel within the next fortnight.

“After the panel approves the model, we will call bids for the engineering contract,” Deshmukh said, but refused to give any deadline for awarding the engineering contract. Deshmukh said the state government was also contemplating increasing the number of lanes on the link from six to eight. The state government, an official said, might consider options like levying an impact premium on real estate transactions in the vicinity as real estate rates would rise considerably after the link starts.

Sources close to SKIL and IL&FS welcomed the decision saying “this will ensure speedy completion of the project without creating any legal problems and give impetus to industrial development in the region”.

Moneylenders funding Realty Boom in Hard times

They could be dismissed as a nondescript group of people chatting on the lawns of an exclusive club or strolling down Marine Drive in Mumbai. Their clothes are quiet, their gait without swagger. Indeed, it’s hard to believe that these are the very men who have a vice-like grip over some of the biggest builders in the country. They are India’s wealthiest moneylenders who, even as the banks tighten their belts, loosen their own purse-strings.

With financial institutions and banks increasingly restricting loans to developers, these moneylenders — primarily belonging to the Sindhi, Marwari and Kutchi communities — have stepped in to play their part.

“Builders have been approaching them in droves for loans at phenomenal interest rates ranging anywhere from 20% to 36% annually,” said an insider, who is aware of this powerful financial world that operates in secret. “These moneylenders are mainly active in three cities — Mumbai, Bangalore and Chennai. When money has to be raised, telephone conversations are avoided,” one of them said.

The source refused to guesstimate the total quantum of loans these unofficial moneylenders may have disbursed, but confidently said the figure would run into thousands of crores. The loans are given to builders for short periods, from three to six months. The amounts could range from a couple of crores to as much as Rs 100 crore. If the amount is substantial, about 10 to 15 of those in the group are believed to come together to fund the project.

Builders are in a spot over banks being cagey to lend them money. The builder has to mortgage his property to the investor in case he fails to pay up. The loan is given both by cheque and cash — the latter comprising as much as 40% of the total sum.

“They are literally sitting on tonnes of cash and some of their families have been in the business of moneylending for the last 500 years,” a leading investor told TOI recently, requesting anonymity. He elaborated: “Over a century ago, these families had such a strong reputation that their cheques and promissory notes were honoured by the emperor of Japan, the czar of Russia and the shah of Iran.”

Private money lending has had a big role to play not just in real estate but in entertainment in the days when official funding was hard to come by. “In the 1940s, the Hindi film industry survived on their money,” said the investor.

“It was from the 1950s onwards that they entered the real estate field. Today, some of the biggest developers in the country turn to them for loans.” Among other big investors in construction are diamond merchants who, it is believed, have a stake in some of the biggest residential and commercial projects in the city.

Real Estate to feel the Heat as Inflation Soars

The recent fate of real estate stocks on the bourses mirrored the first signs of trouble ahead for the industry. Fuel price hike and lower IIP (Index of Industrial Production) numbers were recent setbacks to the sector and now with a 11.05% growth in WPI (wholesale price index), inflation has emerged as a serious threat to the sector, which has been cooling off in recent times.

Market experts predict further softening of prices. “Even though prices have corrected by 10-20% and even beyond in some regions, it has not yet touched the bottom. It is advisable to wait till at least the year-end to buy homes,” says Jai Mavani, real estate practice head, KPMG.

However, since many developers are holding onto prices and even operating as a cartel in some prime pockets like Mumbai, postponing purchase decisions may not really be a solution. Despite the fact that volumes have fallen sharply, established developers are clearly unwilling to drop prices. According to Kotak Institutional Equities’ research report, home prices in Mumbai market continue to rise since last October.

“Our Mumbai price index shows a 155 increase over the past six months. Indicative prices in key locations in Mumbai vary between Rs 6,500 and Rs 35,000.”

“Many Mumbai developers have raised funds through PE route. The surplus funds these developers have raised allow them to hold on to properties with out releasing the same into the market, thus creating an artificial demand supply mis-match in the system., In Mumbai market, many pocket developers are acting as cartels,” a senior official with a real estate fund said.

Liquidity crunch has already forced developers to go in for high interest loans. While the primary market for real estate has virtually dried up, private equity players are also following a very cautious approach.

Only those developers who have internal cash flows and have not gone for recent land acquisitions will be able to sustain these tougher times. Earlier they were seeking mortgage against property but now credit requirement has forced them to pledge their own shares for securing mortgage, industry officials said.

“The current market meltdown has put downward pressure on sales and further weakened market sentiment. These higher inflationary trends will call for some regulatory moves which will ensure better affordability” said. Sunil Rohokale, head mortgagee & real estate, ICICI Bank.

Though the sector has already factored some of the news impact, there is scope for further correction. Some of the Tier II cities might further see some 5-7% correction, says Vipin Aggarwal, executive director, Omaxe.

Rs 8,000 Crore Premium Realty Projects Face Delay

According to industry estimates, around Rs 8,000 crore of real estate projects covering over 40 million square feet are facing delays.

Analysts said the construction cost for large commercial projects was Rs 2,000 per square foot, on average.

In the process, developers are facing huge cost overruns. According to analysts, construction cost is growing 20 per cent every year and the developers are carrying a compounded interest burden of 30 to 40 per cent after three years.

Real estate observers believe that cost of the projects has doubled in the last three or four years owing to the rise in input and construction costs, and increase in interest rates. Steel and cement prices, which are the main components in property projects apart from labour, have risen nearly 50 per cent since December 2005.

The reasons for the delays are varied: tardy government approvals, stop-work notices from the municipality, construction delays, labour unavailability and so on.

“All the developers who bought land from NTC had to pay upfront and raised huge sums from the market. Even if they raised money at 10 per cent, the interest rate comes to 40 to 50 per cent compounded after four years,” said Akshaya Kumar, managing director of Park Lane Property Advisors.

Anuj Puri, chairman of property consultancy Jones Lang LaSalle Meghraj, said developers had not been able to take advantage of the property boom in the last three years due to these delays.

“In the coming days, when new supply hits market, prices could soften,” he said. By 2008-end, Mumbai and its suburbs will add 15.4 million square feet of office space, which analysts said will have a sobering impact on property prices. Office rentals in Mumbai’s central business district such as Nariman Point have increased 50 per cent in the last three years and places such as Worli and Lower Parel saw a 30 to 40 per cent increase in this period.

Though developers maintain that their projects are on schedule, in private they blame the delay in getting government approvals.

“In Mumbai, developers need to obtain 56 approvals from environment and forest department, pollution control board and others. It takes over a year to get these approvals,” said a leading developer who is setting up a large project in Central Mumbai.

Adds Pranay Vakil, chairman of property consultancy Knight Frank: “There was a lack of clarity on approvals in the mill land case. Some of the approvals were revoked with retrospective effect which caused delays. Shift in policy stands also resulted some delays,” he said.

For instance, Brihanmumbai Municipal Corporation (BMC)’s stop-work notices in October 2007 to the developers of mill lands for violation of development control (DC) rules and subsequent revoking of notices in early 2008 caused much delay in the development of mill lands. The DC rule allowed mill owners to redevelop or sell their land provided the owner would hand over one-third of the open land on the premises to the BMC and MHADA each.

When asked about delays, a DLF spokesperson said: “Our Lower Parel project is on time and proceeding smoothly. We are not in a hurry to complete the development and we can take our own time to finish the project. We cannot specify any reasons for the delay,” the spokesperson said.

A Matoshree Realtors executive said: “We have decided to sell the land but not finalised the buyers. We received good offers for the land so we did not want to go ahead with development,” she said.

Rajesh Jaggi, managing director of Peninsula Land said: “Due to stop-work notice, our project was delayed three or four months. Beyond that there is no delay.”

Langham Hotels forays into India with Wadhwa Developers

Hong Kong-based Langham Hotels International (LHI) is all set to foray into the Indian hospitality segment. It has recently tied up with Mumbai-based real estate developer Wadhwa Developers for the same. The hotel chain entered into a management agreement with the developer for a five-star property being developed in Pune. It will introduce its five-star brand Langham Place Hotel for the same. The property located near Koregaon Park, one of the prime locations in Pune, is slated for operations by 2010 end.

The property will consist of around 180 rooms, a coffee shop and a speciality restaurant. It will also house Chuan Spa, the group’s spa brand. The group will also focus on developing an extensive conferencing facility to cater to the meetings, incentives, conferences and exhibitions (MICE) segment.

Besides this property, LHI also plans to expand its presence in the Indian market. “We’re in discussions with several real estate developers in India, and are considering locations in key cities like Mumbai, Ahmedabad, Delhi, Chennai, Kolkata, Goa and Bengaluru,” says Helmut Knipp, Senior Vice President – Development, Langham Hotels International.