Indian Property News on 'September, 2008'

Kerela Govt gives green signal to SEZ policy

The Kerala Government cleared the road for private special economic zones. The Government has brought in a state-specific SEZ policy which would be binding on all SEZs, including the 11 which had already got the Centre’s clearance.

Chief Minister V S Achuthanandan said that 10 SEZ applications, nine of them in the private sector, would be rushed to the Centre for its final approval. The state’s SEZ policy contains a dozen conditions, mainly to ensure the welfare of workers and to curb the real estate interest of the developers. The state government has insisted that 70 per cent of the land should be utilised for industrial purpose. This is a major shift from the Centre’s policy, which stipulates that only 50 per cent of the land needs to be used for industry.

Banks unlikely to offer festival discounts to home buyers

Banks in India will not be providing discounts to home buyers this festival season. Between October and December, when almost 60 per cent of home-buying happens, banks offer discounts like reduced rates and waivers on administrative and processing fees to lure customers. Most of the banks admit that tight monetary conditions are making things very difficult for them. “Given that there is a tight liquidity situation, there is very little chance of banks offering anything special this season,” said a senior manager in a housing finance company. Another home loan head of a private sector bank said that the banking sector’s cost of borrowing was as high as 12-13 per cent. “In such circumstances, it is hard to think of any drop in rates,” he added.

There could be some relief for buyers from builders though. At a recent meeting of the Maharashtra Chamber of Housing Industry (MCHI), a body of builders, proposals were mooted that developers should bear stamp duty, registration and floor rise charges. Also, it was advocated that builders should take upon themselves a part of the interest cost in the initial years to kick-start home buying. In other parts of the country as well, developers are moving towards building cheaper houses. A large number of developers are offering houses for the middle class at Rs 25-35 lakh. However, property experts believe that buyers will not be too enthused with just sops if the rates do not go down. “Given that property rates have really shot up, unless there is a fall in the per square feet rate of flats, it is unlikely that buyers will come in,” said a banker.

Banks, on their part, are looking forward to the Reserve Bank of India’s (RBI’s) Mid-Term Review of the Monetary Policy on October 24 for some positive signals. But most of them are worried that inflationary conditions coupled with financial crisis in the world markets are the prime concerns for the apex bank. The only hope comes from the recent fall in crude oil prices. “If the inflation rate comes down, RBI might be encouraged to tinker with the indicative rates,” said a senior banker. On the other hand, the worst is being contemplated. Industry sources, in fact, are expecting that there could be a further hike in the interest rates. Sources said that some banks were already discussing a 50-75 basis point hike in the next fortnight. “Interest rates could go up further because banks are finding it rather difficult to hold on to the present rates,” said a banker. Home loan rates have shot up from just over 7 per cent to10-13 per cent in the last three years. Another round of hikes would imply that the floating rates would cross 13 per cent thereby increasing the burden for the existing and serve as a deterrent for new borrowers.

Parsvnath launches ‘Parsvnath Pratishtha’ at Pune

Parsvnath Developers announced the launch of Parsvnath Pratishtha, a Group Housing project at Pune. The project is located at Pimpri Chinchwad, 10 kms away from the Mumbai-Pune expressway and 25 kms from the upcoming New International Airport at Chakan. It is spread over an area of approx. 11, 000 sq mt., has a built up area of approx. 1.23 lac sq. ft. The project comprises of 96 apartments, has basement parking plus four floors and is equipped with two and three BHK apartments with an offering of forty eight houses each for two and three BHK apartments with a lucrative price tag of approx. 3 million and 42 million respectively.

The construction for the project has already started after performing the Bhoomi Pujan and is scheduled to be completed by 2010, the company said in a release. “Through our maiden residential project in the city we have tried to address the needs of the people by providing quality construction with safest specifications to safeguard against natural calamities. Parsvnath Pratishtha apart from other state of the art facilities offers earthquake resistant RCC framed structure with brick-filler walls and making it one of the safest houses to reside in”, said Pradeep Jain, Parsvnath Developers.

Berggruen eyeing Dawnay Days hotel chain in India

Berggruen Holdings, a New York-based investment company is in talks with UK investment group Dawnay Day to acquire its four-star hotel chain Ten Hotels in India. The deal will be worth over $50 million. Dawnay Day had initiated the process to sell its investments in financial services, hotels and real estate ventures in India as the UK firm fell victim to post-subprime credit crunch following which an administrator, BDO Stoy Hayward, was appointed. The administrator is now disposing the firm’s assets across the world.

Leading hotel and real estate developers such as ITC, Royal Orchid, Pride Hotels, Sarovar group, Lemon Tree, DLF and Paraswanath were part of the race to buy out Dawnay Day’s three hotel properties and other real estate assets in India. Dawnay Day controls its real estate and hotel subsidiary in India through its two subsidiaries—Dawnay Day Hotels India and Dawnay Day India Land

The hotel arm has three properties in Jaipur, Ahmedabad and Pune. The Jaipur property may be ready by year-end while Ahmedabad property will be ready by the end of next year. The Pune property, which is likely to be ready by the end of 2010, is currently facing complications, sources said. “The Pune property may not be part of the package due to some complications,” a source said. The company hopes to be a major player in the mid-range segment, owning and managing 100-room, full-service hotels operating in the Rs 1,000 to Rs 2,000 pricing segment. The hotels will be spread across tier I, II and III cities with a mixed focus on industrial, business and tourism centres.

Indian realty goes ‘Green’

The Indian Real estate sector is taking the initiative to contribute to the save the environment by developing green buildings. Jones Lang LaSalle Meghraj, in its research report titled, ‘Greenomics,’ states that the Indian construction industry is growing at 10% as compared to the world average of 5.2%, and that the country is expected to develop 110 million sq ft of green space over the next few years. The report focuses on the cost benefit analysis for green buildings. One of the major findings from the analysis is that a green building aiming for LEED (Leadership in Environment and Energy Design) – GOLD certification can recover its additional costs in a payback period of 2-3 years.

Anuj Puri, Chairman and Country Head, Jones Lang LaSalle Meghraj, says, “The challenges faced inherent in the development of green buildings in India are the extra investment in an unstable real estate market scenario, and the difficulty in sourcing green building material and sustainability consultants. Extra investments can be recovered in the medium-to-long term from the non-sustainability discount, which gives green buildings a higher rental value than conventional buildings in their vicinity, and via the carbon credits that can be earned from the reduced GHG emissions.”

Most green buildings in India are coming up in Mumbai and Chennai. Mumbai, being India’s financial hub, is more preferred by large MNCs, especially financial conglomerates. Similarly, Chennai has seen a tremendous influx of IT and multinational manufacturing firms. The concept of green buildings is gradually catching up in other cities like Kolkata, NCR, Bangalore and Hyderabad. Green Buildings are more energy efficient, consume less water and reduce construction waste. The intangible benefits are generated from a healthy living environment and better working conditions within the building.

Growing awareness on the benefits of green buildings among international and domestic occupiers is decisively driving the demand for green buildings. The green building movement has also catalyzed the emergence of various green rating systems that provide tools to enable comparison of building on their sustainability credentials. Among all these rating systems, Leadership in Environment and Energy Design (LEED) has emerged as the most popular and is followed in 24 countries across the globe – including India.

The Government has launched the Energy Conservation Building Code (ECBC) under the National Building Codes and Standards to promote green buildings in India. The Confederation of Indian Industries (CII), along with the Indian Green Building Council (IGBC) and other professionals, is also working to mitigate the challenges green buildings will face, thereby enabling developers to develop and operate green buildings with ease. As the green building industry matures, the green funds industry will also emerge. Therefore, the entire green ecosystem is ramping up in India, opening new investment opportunities for developers and giving them good reason to get involved in developing sustainable buildings.

Realty stocks tumble, record 52week low

Realty stocks took a tumble on the bourses and many logged their 52-week low The BSE Realty Index closed at a 52-week low at 3,407.87, down 5.26 per cent. It had dropped 16.79 per cent over the week from 4,095.50, and 31.78 per cent over the month. Over the week, almost all real estate company stocks have taken a hammering, dovetailing the Sensex’s fall with the negative market sentiment at an all-time high, which this week is compounded by the wait for the US congressional nod for the $700-billion bailout package for bankrupt investment firms there.

Delhi-based DLF Ltd stock closed at Rs 350. 60, 5.12 per cent lower than its previous close. The DLF issue was priced at Rs 525. Sobha Developers’ stock suffered a 9.59 per cent drop, closing at Rs 171.55. At close, Omaxe stock traded at Rs 96.05, down 4.38 per cent, far below its issue price of Rs 310 (Rs 613, Rs 93.60). Housing Development and Infrastructure Ltd was at Rs 166.05, down 13.72 per cent lower than its previous close (Rs 1,432, Rs 160.20). Parsvnath Developers was down 7.04 per cent at Rs 89.85 (Rs 598, Rs 86.60).Among the marginal declines, was Ansal Infrastructure at Rs 77.30, down 4.13 per cent, and Unitech, which lost 1.98 per cent at Rs 108.85, but recovered from day’s of low Rs 97.5, which is its 52-week low. Of the many investments Lehman Brothers made in India, Delhi-based Unitech received about $175 million (Rs 740 crore).

Enam Securities Researchers pointed out that aggressive land acquisition at peak prices through short-term high cost debt and huge working capital mismanagement (short-term debt used for long-term projects) were some of the ills that plagued real estate sector. Moreover, developers had stubbornly held on to selling prices and high-cost inventories, hoping for a renewal of demand and hike in prices.

Sliding realty prices forcing retailers to renegotiate rentals

Indian retailers are facing tough times as the realty prices are falling. They have been left with no choice but to renegotiate rentals. In some cases, they are even shutting and relocating stores to offset the drag on profitability. Kishore Biyani, managing director of Pantaloon Retail (India) Ltd, India’s biggest publicly traded retailer, said store rentals are down by 25-50%. “We are renegotiating the rentals in some cases,” he said, but declined to elaborate.

The latest to join the pack is The MobileStore Ltd, a venture of the Essar Group that sells telecom products such as mobile phones. “We have signed deals on high rentals a year back and now the rentals are coming down by almost 50%,” said chief executive officer Rajiv Agarwal. “We are renegotiating with the owners and whoever is refusing to revise the prices, we are relocating the store to a viable location having lesser rentals.” The company currently operates some 1,200 stores and plans to shutter 5% of those — primarily in metros — if rentals can’t be renegotiated, Agarwal said. Three stores have already been shut, even as the company plans to add another 600 shops across India, because volumes have gone up, he said. The company is not alone in walking away from contracts signed at a time when the economy looked better; oil had yet to cross $100 (Rs4, 640) a barrel and inflation was in single digits.

Rentals typically are 15% of gross revenues for small properties, 5% for hypermarkets and 7% for departmental stores, said Shubhranshu Pani, Mumbai-based managing director of retail services at real-estate consulting firm Jones Lang LaSalle Meghraj. Other retailers Mint spoke with also said they were trying to take advantage of cheaper commercial space and moving to more affordable places when renegotiations fail. “We have started renegotiating the rentals with property owners where it is unreasonable, especially in places like Bangalore, Chennai and other metros,” said Suresh J., chief executive officer of Arvind Brands Ltd, which operates the Megamart retail chain. Rentals have come down by around 50-80% depending on location, he said. However, the company will not close shops should negotiations fail, since they have long-term agreements with property owners and could face lawsuits if it terminates such deals.

Samar Shiekhawat, vice-president of marketing at Spencer’s Retail Ltd, an RPG group company, said that since rentals have started declining by around 20-25%, the company is renegotiating with owners. The retailer plans to relocate some 46 stores this year, of which 20 have already been shuttered, a key reason being high rentals, Shiekhawat said. However, the company will continue with plans to have 300 more stores by next March, in addition to the 365 small and 35 large shops it now runs.

Anuj Puri, chairman and country head of Jones Lang LaSalle Meghraj, agreed rentals are falling in select malls and smaller stores. “Only in those malls where the turnover was less, the rentals are coming down,” he said. “However, rentals in malls like Select Citywalk in Delhi, Inorbit and Phoenix in Mumbai and a few others in Bangalore are not coming down since the sales turnover is very good in these malls.”For smaller stores, rentals are down by 15-20%, he said, adding that prices are likely to be stable and unlikely to fall further. Puri said retailers who got small stores in malls last year typically paid between 35% and 40% more than the anchor — the largest store in a mall. These rents are now coming down by 25-30%, effectively reducing the gap between the smaller stores and anchors. But the profits of retailers that are relocating will be impacted negatively, he said. “Already, the margins are squeezed and to continue with high-rental outlets does not make sense. With the rentals coming down by around 40-50%, I want the reduced rentals,” said Agarwal of MobileStore. “Why should the company carry on with properties which have been signed at unreasonable rentals?”

DLF to Invest Rs.1250 Crores in Multiplex Business

Real estate developer DLF will be expanding its multiplex business by investing about Rs 1,250 crore. About 500 screens will be added to DT cinemas in the next four to five years. Currently, DLF is at a pre-operative stage with about seven screens. Once these initial projects start, the mid-term aim is to have about 150 screens operational within two years.

Apart from north Indian cities, DT Cinema plans to set up multiplexes in Hyderabad, Chennai, Kochi, Bangalore, Mumbai, Pune, Ahmedabad, Goa and Kolkata. The size of each multiplex could be between 35,000 sq ft to 90,000 sq ft. DLF believes that the multiplex business offered a big opportunity as there is a shortage of nearly 40,000 screens in India.

Oversupply to affect realty revenue

The number of information technology parks and special economic zones in the 21-km Old Mahabalipuram Road — popularly known as OMR — in Chennai has exceeded the demand in the entire IT industry in India. “It will be difficult for builders to raise finances for their other developments and in subsequent phases, projects will also be postponed,” Nipun Sahni, director and global head of commercial real estate at Merrill Lynch Capital, stated.

Two other plum areas that are likely to face the same fate, they said, are Lower Parel in Mumbai and Noida in the National Capital Region, both of which are hotspots for A-grade office space. Lower Parel has a ready office space of 4.5 million sq ft and will add a minimum 5 million sq ft by 2009, taking the total commercial space to 9.5 million sq ft. Of this, DLF, India’s largest realtor, alone will add 3.8 million sq ft through office space and a mall. Indiabulls Real Estate, Peninsula Land and Orbit Corporation are also busy completing their projects in the locality. To boot, top players such as DLF, Unitech, Emaar-MGF, Akruti City, Puravankara and others have expanded to states they were not present in, and have ended up in close proximity to each other, creating oversupply pockets.

What started as a building boom in 2007 across emerging markets such as Chennai, Hyderabad, Bangalore and Indore is a year later, a very different story thanks to the Reserve Bank of India’s rate hikes, the wealth-depletion effect of falling stock markets and economic headwinds.

Realty firms hit by FMPs exit

The Mutual Funds’ fixed maturity plans (FMPs) are avoiding investment in the cash-strapped realty firms due to the global economic slowdown. This has made investors doubtful about credit repayment by Indian firms. They are turning risk averse in this scenario of global turmoil which is worsening situations for the developers. A slowdown in demand, price correction and increasing inventory are factors causing pain to real estate developers.

Fitch recently claimed the short-term outlook for India’s real estate sector to be negative. He said, “Growing liquidity concerns may lead to a possible negative impact on the credit profiles of real estate companies.” In fact all this has also graded down the short-term debt rating of Sobha Developers and Parsvnath from F1 to F2 and from A to A – respectively. Ramanathan K, the head of Fixed Income at ING Mutual Fund, said, “Now, one can get good rates in normal bank CDs (certificates of deposit). Earlier, when rates were low, people were willing to take higher credit risk.”

Mutual fund houses, which offer FMPs, invest the proceeds in corporate debt, securitized paper, certificates of deposit and commercial paper. But recently these fund houses have taken cautious move and parked their funds in banks. Even the foreign bank papers are considered to be risky in today’s situation. FMPs are debt schemes, where the corpus is invested in fixed-income securities. The tenure can be of different maturities, from one month to three years. They are closed-ended in nature, which means that once the NFO (new fund offer) closes, the scheme cannot accept any further investment. FMP portfolio is generally invested in debt instruments and money market instruments like commercial papers issued by companies and certificates of deposits issued by banks that have a similar maturity period. Investors have been reluctant to put their money in schemes that invest in foreign bank papers. Though Citigroup and DSP Merrill Lynch’s debt papers were downgraded a few months ago, there is no such risk currently with Indian operations, say experts.

A distribution agency head said, “In terms of credit, people are opting for superior-quality papers. They have become more conscious about ratings. Basically, they are looking for credit-worthiness and do not want to take risks for only slightly more returns. Investors are backing out of schemes with such exposure In fact large corporate investors are shifting their investments from FMPs to even safer instruments like fixed deposits (FDs). They are worried about the credit quality of some assets in the FMPs.