Indian Property News on 'July, 2008'

Realty Projects, Home Loans set to get Costlier

The Reserve Bank of India’s decision to revise repo rate and cash reserve ratio is expected to bite the realty industry, which is already burning under a slowdown and price correction.

Loans for housing will get dearer and interest sensitive sectors like real estate will be hit hard, said Mallinath Madineni of Arthaeon Financial Services.

“We expect banking and real estate stocks to under-perform in the near term,” Madineni added.

Punjab National Bank on Wednesday raised its prime lending rate by 100 basis points or one percentage point to 14 per cent from August 1. Other public and private sector banks are expected to follow suit.

Nahar group chairman Sukhraj Nahar said an increase in the cost of borrowing would in turn raise the cost of a real estate project.

“The cost of borrowing goes up not only for builders but for all ancillary and input industries as well, leading to a higher price tag for the real estate product,” Nahar told IANS in Mumbai.

He said the rate hikes would eventually hurt the balance sheets.

Sunil Malhotra, vice-president (finance) at real estate firm Omaxe Ltd, said the flow of money to the sector would be tighter than before.

“Developers will now have to look towards other sources of funds, which could be on higher rates,” he added.

Agreed an analyst with a leading Mumbai-based brokering firm, who wished to be unnamed. “Developers will now have to look to other sources of funds like foreign direct investments and so on,” he said.

Parsvnath Developers chairman Pradeep Jain said the cost of funds for the company’s upcoming power projects would go up significantly.

“This will in turn be passed on to the buyer,” he said.

Echoing a similar sentiment, Punjab National Bank chairman and managing director KC Chakrabarty said the pressure seems inevitable. “Bankers would pass on the burden to customers.”

A 0.5 per cent increase in home loan rates – which appears most likely – will increase the tenure of a Rs 3 million, 20-year loan by nearly three years.

Real estate demand in major Indian cities has been hit this year as urban middle class buyers, fretting over a five-year high in property prices, have stayed away from investing in property as interest rates climbed rapidly.

“Demand has slackened 10-15 per cent since the beginning of the year,” Sarang Wadhawan, head of HDIL, India’s third largest developer, said last week.

However, a few real estate agents said the rate hike could cause a possible softening of property prices, even in markets such as Mumbai.

“Developers are sitting on unsold stocks of completed apartments. But potential buyers are sitting still in anticipation that prices will come down,” said a real estate agent in Mumbai declining to be named.

RBI move adds to real estate sector’s woes

The Reserve Bank of India’s decision to raise repo rate and cash reserve ratio is expected to add to woes of the real estate sector.

The realty industry — which is already smarting under a sluggish demand and price correction — feels that RBI’s move would tighten the liquidity crunch for developers, and dampen end user demand by putting pressure on home loan rates.

“The hike in repo rate and CRR will negatively impact real estate sector. The hike would mean flow of money to the sector would be tighter than before.

The developers will now have to look towards other sources of funds, which could be on higher rates thus impacting the cost-benefit ratio of each company.

However at Omaxe we may not feel slowdown in the company’s investment plans and they stay as announced earlier,” Mr Sunil Malhotra, Vice-President (Finance), Omaxe Ltd, said.

Delay projects According to Mr Sanjay Verma, Executive Managing Director (South Asia) of Cushman & Wakefield, the credit policy has set the stage for hardening of interest rates.

“This is bad news for developers. Already, the credit crunch is hurting project financing, which is leading to delays in residential and commercial projects. Projects could now get delayed further,” he said.

Real estate players are currently grappling with dwindling sales, correction in land prices, tepid demand, and rising input costs, even as they face a liquidity squeeze. In such a scenario, if banks hike the interest rates on home loans further, the residential demand is likely to get hit, said industry observers.

Mr Pradeep Jain, Chairman, Parsvnath Developers Ltd, agreed that increase in cost of borrowing (for developers) would escalate the cost of the real estate project — the burden would ultimately be passed on to consumers. “The cost of borrowing goes up not only for builders but for all ancillary and input industries as well, leading to a higher price tag for the real estate product.

Moreover, it has an impact on home loans,” he said, but pointed out that foreign direct investment still remained a viable option for the players to raise capital.

Mr Jain also opined that end users or first time home buyers are unlikely to get deterred by a marginal hike in the home loan rates.

The board consensus in the industry is that increase in home loan rates would certainly have a detrimental effect on the mid and upper-end segment of home buyers. Mr Kunal Banerji, President, Marketing, Ansal Infrastructure and Properties Ltd, said “Although, we do not predict any drastic change in the overall robust demand for quality housing at this stage, there could be a long-term effect on the speed of the overall growth, particularly in the residential real estate category.”

Echoing the sentiments, Mr Ajay Mangal, Director (Finance), Uppal Group, felt that demand will surely be hit once the home loans become costlier.

Dubai Realty Market still Lacks Transparency

Dubai’s real estate sector still lacks transparency despite efforts to clean up its image, property and investment management company Jones Lang LaSalle said yesterday.

Dubai’s real estate market now ranks as a tier three, or semitransparent market, up from a tier four, or low-transparent market in 2006.

“Dubai still has a long way to go before it can catch up with other global real estate markets, but it’s improving more quickly than BRIC (Brazil, Russia, India, China) economies,” Blair Hagkull, managing director of Jones Lang’s Middle East unit, told reporters at a press conference to launch its biannual Open For Business: Real Estate Transparency in the Middle East & North Africa report.

Tier one real estate markets, which include cities such as New York and London, are classed as highly transparent, while tier four, or semi-opaque markets, include Middle Eastern countries such as Saudi Arabia, Oman, Kuwait, Qatar and other UAE emirates such as Ras Al Khaimah and Fujairah. Syria, Sudan and Algeria rank as tier five, or opaque markets. Dubai is at the center of the Gulf region’s construction boom triggered by the introduction of foreign ownership rights in 2002. In recent years, Dubai has tried to tighten up its real-estate regulations in a bid to attract more foreign investors from places such as the UK, Russia and India.

Jones Lang says improved transparency has led to a 12-fold increase in sales activity in Dubai since the freehold property law was introduced.

The emirate now has the most transparent property market in the Middle East and North Africa region, and the world’s most improved between 2006 and 2008, the property firm said.

The value of real estate transactions in Dubai has risen from 38.7bn dirhams ($10.6bn) in 2002 to 462bn dirhams in 2007, according to the Dubai Lands Department. DLD estimates that the value of transactions will rise to 717bn dirhams in 2008.

“This isn’t just a flash in the pan. Dubai has been steadily improving,” Craig Plumb, Jones Lang’s head of research in the Middle East, told reporters. “We are confident that by 2010 Dubai will be in the tier two of countries.” – Zawya Dow Jones

PE Fund picks 40% in Amrapali SPV

Private equity fund SUN-Apollo Ventures has invested Rs 300 crore for 35-40% equity in an SPV of Noida-based realty firm Amrapali group.

SUN-Apollo is a joint venture between Delhi-based Khemka family’s SUN group and US-based private equity fund Apollo Real Estate Advisors. Apollo’s development and investment portfolio is spread across US, UK, Russia and other European countries, besides India. SUN Group, which has interests in oil & gas, mining, real estate, infrastructure, food & beverage and technology, has been active in India, Russia and other emerging markets.

“The SPV will develop a 200-acre township in Jaipur and a 15-acre high-end housing project in Noida. Both projects are likely to be completed in two-and-a-half years,” Amrapali group chairman Anil Sharma said. The Jaipur township will have housing, retail, commercial and IT space. Amrapali group, which has developed six urban residential colonies in the national capital region, is at present executing real estate projects worth Rs 8,000 crore in several cities.

The SUN-Apollo fund infusion is the latest in the series of PE funding in the Indian real estate despite a slowdown. Many PE funds had raised funds when the going was good for the realty sector as well as the financial markets. SUN-Apollo had closed a $630-million fund last year.

Therefore, the PE infusions in Indian realty are mostly the deployment of funds raised earlier. But now with credit crisis gripping the globe, fund raising has considerably slowed. Meanwhile, demand has slowed down and bank credit is largely unavailable to realty firms, forcing them to seek cash from PE players at a not so favourable term. Real estate players are said to be settling for a project valuation of 30-40% less than what they could have got a year ago.

Cash crunch has forced several real estate ty players to focus on executing existing projects, rather than expand into new areas. Some, however, are still exploring new themes. Amrapali group is foraying into hospitality with a 230-room hotel in Greater Noida.

Realty Slump Spells Boom Time for Foreign Investors

Country’s real estate sector might be witnessing ebbs but the downturn is only making things attractive for foreign investors. The slowdown, in fact, has set in more realistic valuations and growth-oriented investment opportunities for biggies to close in on lucrative deals.

The US slowdown and the fact that China is tightening its FDI policy is also aiding a remarkable shift in investment. Experts reckon that cities like Mumbai, Bangalore and the NCR region are hot investment destinations owing to their strategic importance.

Consider this: While Donald Trump Junior is setting up a $1bn fund to buy property in India, Lehman Brothers Real Estate Partners has recently acquired a 50 % stake in Unitech’s Mumbai project. Also, Taib Bank, a leading private bank based in Bahrain, recently picked up a 26% stake into a project of Anant Raj Industries.

Similarly, global financial services firm JP Morgan Chase has reportedly bought a 33% stake in a Special Purpose Vehicle (SPV) of real estate firm Alok Infrastructure and Damac Properties, a luxury lifestyle provider in the Middle East, plans to invest $5 bn over the next three years in the Indian luxury homes sector.

In a similar development, Blackstone Real Estate Partners, an affiliate of the Blackstone group, recently announced the purchase of a minority stake in Bangalore-based Synergy Property Development Services for $18 mn. The latter is a leading project and construction management company of India.

“We are excited to be doing this innovative deal and about teaming up with the best project manager in India as we build our business in the region. In the longer term, we believe there will be attractive real estate investment opportunities that follow from this partnership,” Chad Pike, senior managing director and co-head of Blackstone’s real estate group said. JP Morgan Chase and Lehman Brothers however refused to comment on the developments when contacted by ET.

But Industry experts do feel that most investors have been cashing in on the domestic market over the last six months. Shobhit Agarwal, MD, Capital Markets of global real estate consultancy Jones Lang LaSalle Meghraj (JLLM), feels that most foreign finance institutions and funds sponsored by Wall Street banks are eyeing the Indian market at this time.

“Besides the slowdown, the US recession has made money move out into more suitable markets like India, while property valuations are amenable for investment at reasonable entry costs.”

In fact, government figures on the sectors attracting the highest FDI equity inflows further validate this claim. Housing and real estate sector attracted Rs 1,510 crore in the month of April ‘08 alone, higher than the automobile industry at Rs 1,368 crore for the same month or even telecommunications at Rs 747 crore.

“Till now, most of these investors were standing in the fence. Naturally so, as the earlier valuations were very high in terms of viability of projects…however, now they are much more feasible,” says Ganesh Raj, Partner & National Leader, real estate practice, Ernst & Young.

Peter Riddoch, CEO, DAMAC Properties feels that the Indian real estate market has huge demand potential, even at this time. “We are currently looking at Tier I and Tier II cities. We are in the evaluation phase. Definitely Tier I will command a premium but overall, the country is on a great growth path.”

There are some who view the slump in real estate as a necessary correction. Kanwar Deep Singh, Chairman, Alchemist Group sums up the trend: “All private equity firms that have invested in India in the last five years have made money at the rate of 30% per annum.

We have offers from most leading private equity firms to invest and in future, we will roll out many SPVs to tap the investment,” he says. The Rs 7,000-crore Alchemist group’s arm Alchemist Realty has a JV with the Rennaissance Group, an international real estate company, and has projects worth over $2 bn afloat in India.

Milestone`s Rs 600 cr PE Fund on anvil

Milestone Capital Advisors, the real estate venture capital fund promoted by Ved Prakash Arya, is planning to launch a private equity fund with a corpus close to Rs 600 crore. The announcement will be made in a few weeks.

The PE fund, the first from Milestone’s stable, will focus on sectors such as education and infrastructure. “Right now, I am bullish on these two sectors as there is lot of scope for companies to expand and reach a mass base,” said Ved Prakash Arya, managing director, Milestone Capital Advisors.

Its fourth real estate fund — Milestone Domestic Fund Part-II — has raised Rs 430 crore and will close shortly. The fund house is proposing to raise Rs 500 crore from this fund. Despite the rough market weather, the fund house’s track record and investment strategy have helped in getting investor commitments, Arya said.

Realty funds have been finding it difficult to raise funds from high networth individuals (HNIs) and institutions owing to a credit crisis in the US, the impact of which has been felt in India as well.

Rising interest rates and curbs on external commercial borrowings have added to the woes of real estate companies as well as funds. A correction in the real estate sector has further soured the mood of investors like PE funds towards this sector. The company currently manages four real estate funds worth Rs 2400 crore.

Bahrain’s TAIB Bank shells out Rs 216 cr for 26% in Anant Raj

In the midst of a general slow down in the Indian real estate market, TAIB Bank, a leading private bank based in Bahrain, has picked up a 26% stake in Anant Raj Projects for Rs 216 crore. The deal, one of the first Shari’ah-compliant transactions in the Indian real estate industry, puts the valuation of the subsidiary of New Delhi-based Anant Raj Industries (ARIL) at Rs 831 crore.

TAIB Bank has routed the investment through its real estate investment arm Acacia Real Estate. Anand Raj Projects plans to develop of 600,000 sqft of retail space which is expected to be operational by first half of 2009. The proceeds of the transaction will be invested in this project. DTZ India, the Indian subsidiary of DTZ Holdings, and International Property Consultant were the advisors to the transaction.

Confirming the development, ARIL executive director Amar Sarin said: “Though the real estate market is passing through a tough phase, the investors are still keen to invest in bankable projects. Our deal with Acacia reinforces the fact that in real estate and, especially, in retail sector, location still remains the fundamental value generator.”

India’s real estate market is experiencing a slow down. Developers are facing a cash crunch due to the slow down in sales as well as tight liquidity conditions. This has perhaps forced them to look at raising funds from PE investors.

“This deal proves that despite prevailing market condition, investors are ready to pay a premium for participating in projects promoted by reputed developers with established track record, adequate experience and expertise in creating quality product,” Rajeev Bairathi, associate director, investment advisory, DTZ said.

International Real Estate transactions dip 46%

Credit crunch and economic uncertainty have taken their toll on the global property market, with transaction volumes falling by 46 per cent in the first quarter, according to a property report.

Investment throughout Asia and other emerging markets continued to grow, as sales of major commercial properties globally totalled $154 billion (Dh565bn) in first quarter against $283bn of property that changed hands in first quarter of 2007, New York-based Real Capital Analytics said in its latest report.

Property sales figures for April and preliminary results for May show sales in Asia have started to weaken and drop in sales in the United States and Europe have become more severe.

The United Kingdom has led price declines with the United States following behind. Since September, the initial yield on acquisitions of commercial property has increased by more than 25 basis points in the Americas and by almost 40 basis points in Europe.

Cap rates in Asia have continued to fall, reflecting both the growing wave of capital and expected upside for its emerging markets.

Acquisition of land and development rights in Asia has totalled almost $29bn so far this year, making it the most popular target for investors.

Office properties in Europe are a distant second with just under $20bn of transactions, followed by offices in the Americas and Asia with each recording between $15bn and $16bn of transactions through April.

Developable land in Asia posted not only the greatest growth in transaction activity but also the largest gains in pricing in the first quarter. However, all other property types in Asia except apartments recorded gains in both volume and prices. Prices fell lower for all property types in Europe, but several did manage gains in volume. Conversely, no property types posted higher sales volume in the Americas although average prices in the industrial, retail and hotel sectors did increase modestly. Sellers in the United States in particular are opting not to sell at discounted prices, causing volume to plunge while prices for the few transactions that are successfully completed appear rather resilient. However, land prices in the US are falling quickly and have experienced the greatest decline in value so far this year.

Nearly $56bn of major commercial property sales were completed throughout Europe, Africa and the Middle East in the first quarter. In a significant turn of events, Europe surpassed North America as the most active marketplace for property transactions. However, since this status was achieved while suffering a 40 per cent drop in sales compared to the 70 per cent decline experienced in North America, this victory could be considered pyrrhic. It may also be short-lived, as property sales in Asia are not far behind and are growing fast. Additionally, property sales in Europe are off to a very weak start in second quarter by plunging 71 per cent in April when compared to a year earlier.