Indian Property News on 'July, 2008'

Ranchi: Steeling up for Industrial Push

Ranchi, once the summer capital of unified Bihar, is still a favourite destination of many people, especially those in search of peace of mind. The city, with a population of over 15 lakh, still attracts people because of its comparatively pleasant climate and good schools. It has all the indicators of a modern city but it has not lost its traditional flavour, and that is where lies its charm.

The city has seen a phenomenal growth in real estate sector ever since it became the capital of Jharkhand in 2000. There is huge gap in demand and supply, primarily because of unavailability of land in the city area. “Ranchi witnessed huge influx of people from outside after becoming the capital. Many big companies started setting up offices here. All this resulted in a boom in the real estate sector — both residential and commercial,” says S N Singh, president of Jharkhand unit of Confederation of Real Estate Developers Association of India (CREDAI).

The city is also witnessing a retail boom. Big companies like Spencer, Reliance Fresh, Big Bazaar have already opened outlets. Reliance Hypermart will also be ready soon. Besides there are offices of most of the big companies and multinational banks. One multiplex has opened and another four are in the pipeline. This has resulted in a sudden growth in the sector. A few five-star hotels are also coming up in the city.

However, the basic demand comes from sectors like banking, insurance, finance, telecom, coaching institutes etc. According to an estimate, more than 10 million sq ft structure is being created to meet the demand. Also, there is not much scope for speculators as the buyers are those who want to purchase for self use or want to settle in future.

According to a government official, a new capital township — Greater Ranchi — is to be developed for which a global tender ha been invited. “Ranchi has also been selected as one of the Millennium cities, to be developed under the Jawaharlal Nehru National Urban Renewable Mission (JNNURM). All this is expected to give a fillip to the real estate,” he added.

With the state government announcing its rehabilitation and resettlement (R&R) policy, Jharkhand is poised for a big industrial boom. More than 60 companies, including ArcelorMittal, Tata Steel, Jindal Steel, Ispat Industries and Hindalco, have signed MoUs with the state government for setting up steel and power plants. Most of them have set up their offices in Ranchi while the rest are in the process of doing so. This has brightened the hope of developers.

“A majority of the development is taking place within the city. Unlike other cities, people here generally tend to avoid satellite areas because of poor connectivity in terms or road and public transport,” says Mr Singh. At present the concentration of development is in areas like Mahatma Gandhi Road, Circular Road, Ashok Nagar, Bariatu, Ratu Road and Kanke Road, where it is really difficult to get land. A majority of the projects are being carried out in joint venture or collaboration. “But we hope that once the Ring Road project, which is in the execution stage, is complete, the city will have a more defined area. In that scenario, connectivity of peripheral areas will also improve leading to further boom in the sector,” he adds.

According to Singh, the Chotanagpur Tenancy Act which prohibits sale of tribal land to non-tribals has been a major hurdle in the growth of real estate sector. “Due to the Act, we often find it hard to buy land for a project, despite being available in the municipal area. As a result, land prices are high but plots are less. The government must abolish this Act, at least in the urban areas, to facilitate real estate growth,” he adds.

Private Equity Firms Build up on Indian Realty Firms

Real estate and infrastructure management sector saw Private Equity (PE) deals worth $2.32 billion in the first half of 2008, nearly three per cent higher than the year-ago period, even as the average deal size fell over nine per cent reflecting the sluggishness in the market.

According to Grant Thornton, 33 deals were inked in the first six months of the 2008 compared to 29 deals in the January-June 2007.

PE deals, during the month of June, stood at about $247.5 million, almost half the level seen in May 2008 when about $ 478 million of PE money was infused into various projects.

Low valuations

“The valuations are certainly down as the market is in the midst of a slowdown.

“With access to capital market out of question and bank debt getting tighter, we see more and more developers tapping PE sources to bridge the fund gap for projects.

“Although in the short-term PE players may take a cautious stance, over a 12 – month horizon, the number of PE deals is likely to go up,” says Mr Subhash Bedi, Director and Partner, Red Fort Capital.

Red Fort Capital has concluded seven transactions in the first six months of 2008 compared to six deals during entire 2007.

Pumping in Earlier in June, Lehman Brothers Real Estate Partners had announced an investment of Rs 740 crore ($185 million) for 50 per cent stake in the initial phase of a Unitech project, located on the Western Expressway of Mumbai.

During the same month, Axis Bank too invested Rs 250 crore in Lavasa Corporation, a subsidiary of Hindustan Construction Company, in the form of convertible preference shares and convertible debentures.

An industry official pointed out that while investors were still interested in the real estate market, they had adopted a selective approach towards projects.

“With more projects on the negation table now, and given the current market sentiments, PE players will pick and choose. Only those projects which have the required approvals in place would hold their interest,” the officials said.

Pradeep Jain to tie up with Sabeer Bhatia

Over a year ago, Pradeep Jain, the 43-year-old chairman of Parsvnath Developers Ltd, was gung-ho about the Indian property market. Asked about the slowdown in the property market, Jain countered by wanting to know a single property whose price had actually fallen. Of course, today things are markedly different and prices have fallen, but that is another debate.

For now, public attention is focused on Jain and his company, due to his latest tie-up with Hotmail founder Sabeer Bhatia for a hi-tech city spread over nearly 11,200 acres in Panchkula, in the vicinity of the landmark city of Chandigarh. Widely perceived as the white knight for Nanocity Haryana Ltd, Jain has picked up a 38 per cent stake in the firm for Rs 41.5 crore and has promised to invest another Rs 400 crore in equity and debt to develop the city.

The partnership had been widely expected. Bhatia has spoken of the project as his dream. In Jain, he has found a stockbroker turned realty developer who has over 210 million square feet under the works within 18 years of having founded his firm. The Nanocity is premised on the dream of developing a knowledge city, and a green-field one at that, next to Chandigarh, which once was seen as the electronics and semiconductor manufacturing hub in North India.

The suburb of Mohali , which abuts Le Corbusier’s famous creation, is home to the country’s oldest and largest chip manufacturing facility — the government-owned Semiconductor Complex Ltd — and the likes of Punwire, Fujitsu Communications and a TV picture tube company among others (some of which have since shut down).

In doing this deal, Jain has also put behind him last year’s disappointment of not having been granted a licence to operate mobile phone services in the country. Knowing Jain, and having heard and seen so much of Bhatia, this may well be the beginning of a partnership that seeks to link the grimy brick-and-mortar world to that of invisible nano-particles.

Retail Industry Going Slow on Recruitments

The hiring frenzy that India’s booming retail sector witnessed in the last two years appears to be cooling off, particularly at the middle and senior management levels. Recruitment firms suggest that the April-June quarter has seen a slowdown in hiring at senior levels as most retailers already have their middle and senior management in place and the tepid hiring is seen continuing into the next quarter as well.

A report by staffing company says that growth in retail sector hiring will be flattish in the coming months. “On the managerial side, we have already filled a major part of our requirements. Since the back-end is firmly in place, we do not need to add too many people. But we will continue to hire at the shopfloor level as we are expanding rapidly,” Bijou Kurien, president and chief executive (lifestyle), Reliance Retail, said.

A mid-level employee would typically have between four and eight years of experience and salaries could range between Rs 8 lakh and Rs 20 lakh. The retail sector is also expected to see some rationalisation in salary levels. Increments this year are expected to hover around 10-15 % compared to an average 25% last year.

The retail sector is also in a cautious mood now because of the depressed macroeconomic environment and high rentals severely impacting consumer spending and growth plans, respectively. In fact, there is a ready pool of talent waiting to be absorbed as several small brands struggle to survive and employees are restless to move from companies that have not been performing too well. Retailers agree that they are now getting more job applications than ever before and suggest that companies should now implement more aggressive retention strategies.

“This is a good time to hire talent at sensible salaries,” Shailesh Chaturvedi, CEO, Tommy Hilfiger India, says. Echoing the view, Benetton India managing director Sanjeev Mohanty remarks that people are now ready to join companies with fewer demands.

The industry, however, will continue to see front-end jobs growing at a fast clip. In the next two-three years, according to the Retailers Association of India, at least two lakh people would be required by the industry , a major chunk of the jobs being on the shop floor.

According to Teamlease, companies are likely to increase the scope of work of existing employees. “Companies seem to have gone into a consolidation phase in the last three months. We see this continuing over the next quarter also. They will look at increasing productivity from the current pool,” says Sampath Shetty, vice-president , TeamLease Services.

Retail Industry Going Slow on Recruitments

The hiring frenzy that India’s booming retail sector witnessed in the last two years appears to be cooling off, particularly at the middle and senior management levels. Recruitment firms suggest that the April-June quarter has seen a slowdown in hiring at senior levels as most retailers already have their middle and senior management in place and the tepid hiring is seen continuing into the next quarter as well.

A report by staffing company says that growth in retail sector hiring will be flattish in the coming months. “On the managerial side, we have already filled a major part of our requirements. Since the back-end is firmly in place, we do not need to add too many people. But we will continue to hire at the shopfloor level as we are expanding rapidly,” Bijou Kurien, president and chief executive (lifestyle), Reliance Retail, said.

A mid-level employee would typically have between four and eight years of experience and salaries could range between Rs 8 lakh and Rs 20 lakh. The retail sector is also expected to see some rationalisation in salary levels. Increments this year are expected to hover around 10-15 % compared to an average 25% last year.

The retail sector is also in a cautious mood now because of the depressed macroeconomic environment and high rentals severely impacting consumer spending and growth plans, respectively. In fact, there is a ready pool of talent waiting to be absorbed as several small brands struggle to survive and employees are restless to move from companies that have not been performing too well. Retailers agree that they are now getting more job applications than ever before and suggest that companies should now implement more aggressive retention strategies.

“This is a good time to hire talent at sensible salaries,” Shailesh Chaturvedi, CEO, Tommy Hilfiger India, says. Echoing the view, Benetton India managing director Sanjeev Mohanty remarks that people are now ready to join companies with fewer demands.

The industry, however, will continue to see front-end jobs growing at a fast clip. In the next two-three years, according to the Retailers Association of India, at least two lakh people would be required by the industry , a major chunk of the jobs being on the shop floor.

According to Teamlease, companies are likely to increase the scope of work of existing employees. “Companies seem to have gone into a consolidation phase in the last three months. We see this continuing over the next quarter also. They will look at increasing productivity from the current pool,” says Sampath Shetty, vice-president , TeamLease Services.

India’s Unitech Realty Fund raises $300 mln

A realty fund launched by India’s No. 2 listed developer, Unitech Ltd, has raised $300 million from international investors for the firm’s projects, a company spokesman said on Thursday.

“This is the first tranche. Another $300 million will be raised by September,” the spokesman said. He declined to name the investors.

The Economic Times newspaper, citing an identified senior Unitech executive, said a Japanese bank and some Europe-based wealthy individuals were the investors in the Unitech International Real Estate Fund.

Property firms have been chasing private equity investors to tide over a cash crunch caused by rising lending rates, high inflation and falling stock markets.

Unitech Ltd last month sold half its stake in the first phase of a commercial real estate project in Mumbai to Lehman Brothers Real Estate Partners for $175 million rupees and said it was looking for private equity investments of about $1 billion for its hotel and other projects.

India’s Beaten Property Sector May Now Offer Some Bargains

Amid the debris of a battered Indian real-estate sector, some analysts say investment bargains may be emerging. Their favorites: blue-chip property companies DLF and Unitech.

This has been a miserable year for Indian property stocks. Rising inflation and interest rates have delivered a double whammy: Capital is more expensive, and consumers are scaling back spending.

“The real-estate sector has been witnessing a cash crunch,” says Shaleen Silori, a real-estate associate at ICICI Securities in Mumbai.

As a result, Indian real-estate stocks have taken a bashing. So far in 2008, shares of key players DLF and Unitech have skidded 58% and 61%, respectively. In comparison, India’s benchmark index, the Bombay Stock Exchange’s Sensex, is down 33%.

Property companies have been hit hard because they are vulnerable to a downturn from two directions. Borrowing is becoming more expensive as interest rates rise. At the same time, raising fresh funds in equity markets isn’t easy either: India’s market for initial public offerings is lackluster, and both Unitech and DLF have delayed plans to raise money through real-estate-investment-trust issues in Singapore.

More expensive credit can be a particular problem for property companies, because they often borrow a large portion of their land-development outlays up front and depend on advance sales to repay loans.

But on the demand side, rising inflation — running at an annual rate of 11.89% for the week ended June 28 — and higher interest rates, which have jumped to 11% from 7.5%-8% three years ago, mean many consumers are putting real-estate purchases on the back burner. A rise in mortgage rates would affect residential-property purchases and lead to delay in some project launches, say analysts at Macquarie in Mumbai.

Meanwhile, costs for steel and cement, two key building materials, have been rising.

Given that gloomy environment, some sector watchers say investors should stick with India’s biggest real-estate companies, whose share performance they expect to improve over the longer term.

“DLF is a real-estate company with relatively greater stability,” says Deven Choksey, managing director of K.R. Choksey Securities in Mumbai. Delhi-based DLF, India’s biggest real-estate company by market capitalization, is well diversified, selling property in the housing, commercial, multiplex and retail sectors, he notes.

The company has steady sales, unlike some of the smaller companies in the sector. DLF is also adequately capitalized, Mr. Choksey says, and “provides a robust business model.”

Last week, DLF’s board approved an 11 billion rupee ($257 million) share-buyback plan aimed at boosting investor confidence after the stock price fell below its IPO level. The plan involves a buyback of 22 million shares at a maximum price of 600 rupees each. Prior to the board’s approval, some investors reacted negatively when Macquarie said in a report that it felt the proposed buyback was negative for DLF’s cash flow. On July 3, DLF shares tumbled 9.9%.

To some analysts, DLF shares look attractive after this year’s sharp fall. Mr. Choksey, who recommends the stock, has a 12-month target of 800 rupees. He says the price-earnings ratio for the stock for the current year, which ends March 31, 2009, is less than eight, which he calls attractive. Analysts at Citigroup rate Unitech, India’s second-biggest real-estate company by revenue, a “buy” too. They cut their 12- to 15-month target for Unitech to 375 rupees from 454 rupees in April. The reduced target is 98% above the level at which Unitech shares closed Friday, 189.15 rupees.

Unitech, based in Gurgaon, reported on June 27 that net profit for the quarter ended March 31 fell 52% from a year earlier, to 3.6 billion rupees. Citigroup estimates Unitech’s P/E ratio at 17.6 times for the year ending March 2009 and 12.8 times for the following year, which they consider attractive. Stock analysts say Unitech, which listed earlier than DLF and which publicly sold a larger percentage of its shares, has steadily had a higher P/E ratio than DLF.

In India, there are bears who think things could get even worse for property investments, including stalwarts like DLF and Unitech. Shailesh Kanani, an analyst with Angel Broking in Mumbai, says both stocks should be avoided: “It would not be good to invest in DLF and Unitech at the moment, as an underperformance of this sector is highly likely for the next six to 12 months.”

Mr. Kanani says that real-estate companies need to lower the selling prices of homes in order to revive demand. Once they have done that, he contends, the situation for property companies “is likely to become more stable.”

India’s Beaten Property Sector may Now offer Some Bargains

Amid the debris of a battered Indian real-estate sector, some analysts say investment bargains may be emerging. Their favorites: blue-chip property companies DLF and Unitech.

This has been a miserable year for Indian property stocks. Rising inflation and interest rates have delivered a double whammy: Capital is more expensive, and consumers are scaling back spending.

“The real-estate sector has been witnessing a cash crunch,” says Shaleen Silori, a real-estate associate at ICICI Securities in Mumbai.

As a result, Indian real-estate stocks have taken a bashing. So far in 2008, shares of key players DLF and Unitech have skidded 58% and 61%, respectively. In comparison, India’s benchmark index, the Bombay Stock Exchange’s Sensex, is down 33%.

Property companies have been hit hard because they are vulnerable to a downturn from two directions. Borrowing is becoming more expensive as interest rates rise. At the same time, raising fresh funds in equity markets isn’t easy either: India’s market for initial public offerings is lackluster, and both Unitech and DLF have delayed plans to raise money through real-estate-investment-trust issues in Singapore.

More expensive credit can be a particular problem for property companies, because they often borrow a large portion of their land-development outlays up front and depend on advance sales to repay loans.

But on the demand side, rising inflation — running at an annual rate of 11.89% for the week ended June 28 — and higher interest rates, which have jumped to 11% from 7.5%-8% three years ago, mean many consumers are putting real-estate purchases on the back burner. A rise in mortgage rates would affect residential-property purchases and lead to delay in some project launches, say analysts at Macquarie in Mumbai.

Meanwhile, costs for steel and cement, two key building materials, have been rising.

Given that gloomy environment, some sector watchers say investors should stick with India’s biggest real-estate companies, whose share performance they expect to improve over the longer term.

“DLF is a real-estate company with relatively greater stability,” says Deven Choksey, managing director of K.R. Choksey Securities in Mumbai. Delhi-based DLF, India’s biggest real-estate company by market capitalization, is well diversified, selling property in the housing, commercial, multiplex and retail sectors, he notes.

The company has steady sales, unlike some of the smaller companies in the sector. DLF is also adequately capitalized, Mr. Choksey says, and “provides a robust business model.”

Last week, DLF’s board approved an 11 billion rupee ($257 million) share-buyback plan aimed at boosting investor confidence after the stock price fell below its IPO level. The plan involves a buyback of 22 million shares at a maximum price of 600 rupees each. Prior to the board’s approval, some investors reacted negatively when Macquarie said in a report that it felt the proposed buyback was negative for DLF’s cash flow. On July 3, DLF shares tumbled 9.9%.

To some analysts, DLF shares look attractive after this year’s sharp fall. Mr. Choksey, who recommends the stock, has a 12-month target of 800 rupees. He says the price-earnings ratio for the stock for the current year, which ends March 31, 2009, is less than eight, which he calls attractive. Analysts at Citigroup rate Unitech, India’s second-biggest real-estate company by revenue, a “buy” too. They cut their 12- to 15-month target for Unitech to 375 rupees from 454 rupees in April. The reduced target is 98% above the level at which Unitech shares closed Friday, 189.15 rupees.

Unitech, based in Gurgaon, reported on June 27 that net profit for the quarter ended March 31 fell 52% from a year earlier, to 3.6 billion rupees. Citigroup estimates Unitech’s P/E ratio at 17.6 times for the year ending March 2009 and 12.8 times for the following year, which they consider attractive. Stock analysts say Unitech, which listed earlier than DLF and which publicly sold a larger percentage of its shares, has steadily had a higher P/E ratio than DLF.

In India, there are bears who think things could get even worse for property investments, including stalwarts like DLF and Unitech. Shailesh Kanani, an analyst with Angel Broking in Mumbai, says both stocks should be avoided: “It would not be good to invest in DLF and Unitech at the moment, as an underperformance of this sector is highly likely for the next six to 12 months.”

Mr. Kanani says that real-estate companies need to lower the selling prices of homes in order to revive demand. Once they have done that, he contends, the situation for property companies “is likely to become more stable.”

Real Estate TV to air from DTH Platform

Real Estate TV, a 24×7 TV channel dedicated to real estate and infrastructure, on Sunday said it is in talks with leading direct-to-home operators, including Dish TV and TataSky, to beam its signals.

“We are at an initial stages of discussions with DishTV, TataSky and Reliance. Most probably by next week we will be finalising our partner,” Real Estate TV CEO Prem Menon said.

“There are issues to be sorted out over pricing among others with the DTH operators after which we will come to some conclusion,” he added.

The channel, launched by Alliance Broadcasting, the media company of the Rs 4,400-crore Alliance Group, is available across the country through cable television.

Menon said the company also has plans to foray into the overseas countries, including the US, the Middle East, Canada, Australia among others.

By February next year, the channel will be going into the overseas countries to cater to Indian population abroad, he added.

In India, Real Estate TV has tied up with cable service providers such as Hathway, InCable, Seven Star and Asianet.

Menon said the channel is targeting high net worth viewers in metros through its programmes comprising latest updates on all aspects of real estate, including infrastructure.

Real Estate TV has recently appointed MQ Networks for undertaking its marketing and advertisement activities.

As per the agreement signed between the two firms, MQ would look after sales promotion, marketing, media sales of the channel.

Realty PEs to Execute Real Estate Projects on their own

Private equity (PE) funds in the real estate space are starting to don the developers’ hat. Funds such as Trikona Capital, South Asian Real Estate (SARE) and Yatra Capital have started to create in-house teams that can execute real estate projects on their own.

For some, the opportunity has already arrived. For the funds, the idea is to have better control over their development partners while others are clear that they also want to make the kind of margins that construction offers (25-35%). Apart from the cost advantage, this would also mean a lower dependence on construction companies in a scenario where execution capability bottlenecks are threatening to derail projects.

Trikona Capital, which has over $1-billion investments committed in India, is setting up a development group, which will be headed by the ex-chairman of HUDCO, Dr PS Rana. “There is very little scalability in India. My best development partner has at best developed 5 million sq ft of space,” says Trikona MD Aashish Kalra. Execution is the most important thing, he says.

It is this search for execution that is driving them on to setting up a full-fledged development group within Trikona Capital, which, says Mr Kalra, will oversee all developments, even by their development partners and enhance value. Kalra also sees this is an insurance against partner default too. “If your development partner defaults in any case, you could take control of the project. You can do that only if you know the business yourself,” explains Mr Kalra.

At Saffron Group, which advises Yatra Capital on their real estate investments in India, there is an existing project management team which, says their MD Ajoy Vir Kapoor is being expanded significantly to a 13-15 member team. “This team will add value to the construction partner. There may be an opportunity in doing projects on our own, but not yet,” he adds.

At Trikona though, Mr Kalra does not deny that “we will do our own developments if we are not able to find an appropriate partner for a particular project.” Kotak Realty Fund had recently made an enterprise level investment in Lalith Ganga Constructions. Kotak’s stake in the company has not been disclosed. Lalith Ganga Constructions is a start-up promoted by Kotak Realty Fund along with Girish Puravankara, the erstwhile deputy managing director of Puravankara Projects.

Kotak Realty Fund’s website says: “The said start-up company will be identifying land where Kotak Realty Fund would invest directly and manage the same on behalf of the Fund. The company will be entitled to a project management fee and share in profits over a specified hurdle rate. Kotak Realty Group has an opportunity to create its own real estate company with a highly reputed entrepreneur, who has in the past built a large real estate business and has relationships in Bangalore, Hyderabad, Coimbatore and Pune.”

Though the relationship between the two is not very clear at the moment, a company spokesperson said “that the decision to partner with companies for development depends on location to location. The startup though will be executing some of Kotak Realty Fund’s projects.”

“The funds have realised that there are good margins to be made in real estate development,” explains DTZ investment advisory director Ambar Maheshwari. The margins in development in India are in the range of 25-35%. In its investments, SARE wants to have the flexibility to either invest in a project of a developer (and mostly take a majority stake) or execute the project themselves. The fund has developed suitable development capability and is already executing a project on its own in India.

“There needs to be a degree of control over your projects. We also believe that there is a development margin to be made here and that will now come to us,” says Sunil Agarwal, chief development & acquisition officer at SARE. SARE has $200 million committed across several projects in India.

Angel Broking real estate analyst Shailesh Kanani says that if these funds are able to execute and manage these projects, it is a good move. “Over the years with even subcontractors becoming big and their order books swelling, execution is a huge hurdle for large and small real estate companies alike,” he adds.

This might be the reason funds are looking for execution capabilities apart from the fact that they can save costs and boost their margins. Infinite India Investment Management is also doing a project on its own but they are not looking at getting into full-fledged development.

“In one of our projects where we own 100% we are doing the development on our own because we have the capability and also because the asset is very prime,” says the fund’s director, Jagdeep Pahwa.