Indian Property News on 'September, 2008'

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.

Kerela Govt. postpones decision on SEZ policy

The LDF government in Kerala postponed a decision on finalising a policy framework for setting up special economic zones, (SEZ) in the state after CPI insisted on firm guarantees on issues like labour rights in SEZs. Despite a broad understanding reached at the LDF liaison last week, CPI state council had last night directed its ministers to insist on a clear set of conditions, preferably legislation for sanctioning SEZs without compromising on the party’s position on the matter. After the cabinet meeting, Chief Minister V S Achuthanandan said a final decision on SEZs would be taken by the cabinet next week after detailed discussion looking into all aspects of the matter. The question whether legislation was required as demanded by CPI would also be decided, he said.

The LDF had last week recommended the government to work out a condition-based policy framework and forward 10 pending proposals to the Centre. However, a powerful section in the CPI including its trade union and youth wings was of the view that SEZs should be based on stringent conditions to ensure labour rights, state control and proper utilisation of the land.

DLF bags “golden Peacock” award

Real estate developer DLF Ltd has received ‘Golden Peacock Award’ for excellence in corporate governance. “We are happy to receive the Golden Peacock Award for excellence in corporate governance as it validates DLF’s focus on following policies and processes which serve shareholders and stakeholders of the company in the best possible manner,” a DLF spokesperson said in a statement.

The Golden Peacock Global Award for Corporate Governance was instituted by the World Council for Corporate Governance in January 2001 to foster competitiveness among businesses to improve the quality of corporate governance.

Credit crisis to hit commercial realty projects

The US financial crisis is expected to have a cascading effect on the Indian realty sector, especially on the commercial sector that has already slowed down considerably over the past one year. According to industry sources, there could be a softening in the values of commercial property to the tune of 10% to 15% post-US meltdown. As a result, vacancy levels in commercial space across the country are expected to touch 10% by the end of this year from 6% last June.

Marketmen see prices cooling and projects being held up because of the drying up of cheap funds. In fact, now raising funds from US and Western European investors, who accounted for a bulk of FDI in the sector, will be difficult. Says Anuj Puri chairman, Jones Lang LaSalle Meghraj: “Flow of funds from the US will definitely come down, at least in the short term. Funds to both private and public equities of developers are likely to fall. They will have to look at new avenues like middle-east and Korea. Although this development (the declaration of bankruptcy) will have no direct impact on the real estate sector, there may be indirect ramifications. Foreign capital for private equity investments in Indian real estate may be affected, and the stock of listed companies invested in these portfolios could take a beating due to negative sentiments.”

Property market to pick up soon: Adi Godrej

The slowdown in the real estate sector is expected to reverse as soon as interest rates become reasonable, a top industry official said. “The property development market is down today. It has seen a strong growth and continues to grow at 20 per cent per annum. As soon as interest rates become reasonable, it will pick up,” the Godrej Group’s Chairman, Adi Godrej, said while addressing the Globoil India conference here. People were willing to take mortgages which were growing rapidly. The mortgages market has increased a 100 fold during 1999-2008. The growth of the Indian middle-class was driving the property development sector, he said.

“Nearly 80 per cent of all property development is residential property. Besides, IT and IT-enabled services were driving commercial space. The investment in infrastructure and retail sector was also driving growth in the property development sector, he said. On the agri sector, Godrej said that “I am bullish on the agri sector. India has large acreable land after the USA. It is larger than even China and Russia. However, India’s eastern part remains underdeveloped as compared to its western parts which were largely developed. Godrej said that quality needed to be substantially upgraded in the infrastructure space. Much work needs to be done in the ports and airports segment, he added.

Chandigarh Realty Market Witnessing New Trends

India’s first planned city, Chandigarh, is witnessing a surge in the demand of new real estate segments like luxury homes, studio apartments and friend flats. People prefer small, cozy homes to the huge bungalows as has been the trend there in the past. And so, these are being converted to flats. Single professionals and new couples lift small, cozy homes that are easy on budget and have low maintenance costs. Elaborate housing usually spells immense infrastructure and high maintenance costs for them. New constructions are witnessing a boom in the demand for partner housing as compared to 2 BHK or 3 BHK apartments.

This demand has been fuelled by the migratory population. The city is no longer a home of the retired scores people. In fact young professionals and students from nearby areas of Punjab, Haryana, Himachal Pradesh and even Delhi commune to Chandigarh in search of better lifestyle and good infrastructure at low costs. Most of the old residential properties in Chandigarh are bungalows that are 2 – 3 storey gangling structures. The owners are remodeling these bungalows into single apartments, 2 BHK and 3 BHK and paying guest accommodations. This way, the owners can mint more money from rent and many family units can be accommodated within the same bungalow. This formula seems to be catching on with the residents and many people are opting for such remodeled accommodations.

This trend is becoming popular with new settlements in peripheral areas like Zirakpur, Mohali, Mani Majra etc. Most of the new construction here is the single apartments as there are many takers to such accommodations.

Bangalore resale market on an upswing

Bangalore real estate prices are soaring, thus forcing the home buyers to look at the secondary, or resale market, for that dream home. The secondary residential sales market in the city has witnessed an increase in transactions in recent months due to a host of factors. In the light of rising interest rates, coupled with developers announcing a hike in sale prices, the primary market conditions are becoming less attractive for the end-user, feel industry experts.

“Simultaneously, the rental market has stabilised, with a few micro-markets such as the east and south-east regions witnessing a correction. The segment that has benefited from this scenario is the secondary sales market (essentially driven by investors), where the buyer can avail of discounts on capital values,” says Mr Sandeep Trivedi, National Head – Development Consulting, Cushman & Wakefield, real-estate services firm. Moreover, the primary market has been moving relatively slowly in terms of project completion and “that, coupled with the ready-to-move-in option offered by a secondary sale property, has boosted the demand for the latter from an end-user perspective,” he adds. According to him, new projects are priced relatively higher and project completion is seldom within timelines as per current market trend. For investors too, the ready-to-move-in option offers immediate returns, he feels.

In some areas such as the Central Business District (CBD), the demand for resale properties is strong, as there is a short supply. So, people looking for properties in that area have little or no option left but to look at existing old buildings. “And in the case of the peripheral areas, those who bought property earlier are selling at prices lower than what builders quote for their developments in the same locality. This is because they bought at lower pre-launch prices. Now, with the costs of construction going up, builders have hiked prices between Rs 300 and Rs 700 per sq.ft. Investors who bought earlier are cashing in on this opportunity in the secondary market,” says Mr Farook Mahmood, Managing Director, Silverline Realty. Explaining the nature of the secondary market, Mr Balaji says that two types of properties come up for resale — the existing properties and new ones, some of which are still under construction. “The demand for existing properties is high. One of the reasons is that the cost of first supply has increased,” he adds. Many times, resale of apartments happens even before the construction of a new property is complete. “This is done by small individual investors who are looking for short-term gains,” he says.

Besides, the buyer opting for a bank loan for a primary market property would have to make pre-EMI interest payment along with the rental for existing dwelling, while EMI on a loan for a resale property would include basic cost, car park, deposit on statutory bodies, maintenance, wood work, and fittings and fixtures, says Mr Balaji.

Mr Trivedi identifies areas such as Whitefield, Bannerghatta Road, Outer Ring Road, Sarjapur Road, Hebbal and North Bangalore among the front runners in the secondary property market. Mr Mahmood says that while all central areas and localities such as Indiranagar, Koramangala, Palace Orchards, Jayamahal, Frazer Town, Richmond Town, Malleswaram, and parts of north and south Bangalore command high premiums, suburban Whitefield has gone through a correction phase because of excess supply. Parts of Kanakapura Road, J.P. Nagar and Mysore Road are also in the grip of a correction phase, he adds. According to him, there is very little supply in the central areas and moderate supply in the peripheral areas.

Most of the projects that were launched in 2004-06 are only now ready for possession, says Mr Trivedi. “Property owners/investors (second and third flat owners) who are unable to derive good rents or who are feeling the pressure of the increased EMIs are the people who are essentially willing to sell their property.”

“Pantnagar Land Given By Govt”-Tata Motors

A group of farmers in Uttarakhand’s Pantnagar area, under the banner of ‘Kisan Kisani Abhiyan’, had taken up cudgels against the state government’s purported plan to allot more land to the company with its leader Hanif Gandhi threatening an agitation. Reacting to the reports of agitation, Tata Motors today stated that the Uttarakhand government had given its own 1,000 acre real estate to the company, on which it has already set up manufacturing facilities along with that of vendors.

“The government had agreed to offer 1,100 acre of land in the area, of which the company has already set up a mother plant and vendor park on 1,000 acres. The government is yet to give the rest 100 acre for setting up residential colonies”, a Tata spokesperson said. He said that since no part of the land for the existing facilities, from where it’s rolling out commercial vehicle Ace, has come from the farmers and hence there is no ground for any agitation. On whether the company had decided to shift the Nano project from West Bengal to Uttarakhand, he said that the company had earlier said in a statement that it could explore options at other existing facilities.

Realty downfall continues

The realty sector is still witnessing a downfall. As people still are reluctant to buy residential properties, developers are going an extra mile to dress up their wares this festive season. According to industry sources, the average drop in sales for the industry in the last calendar year was more than 60%. Since April, there has been another drop of 30-40% in sales compared with those last year. What’s more, the drop has not just been in the bigger metros, but in tier-II and tier-III cities as well. They have seen an average fall of more than 25% between February and August, according to the data compiled by the Associated Chambers of Commerce and Industry of India.

The home buying season typically starts during the festival season (Diwali) and ends in March and most developers do almost 60% of their business in this period. Says S K Sayal, CEO, Alpha G Corp: “We just hope Diwali brings us some relief as we have suffered enough in the last four months. If things do not improve we will be seeing lot of distress sales and massive price cuts.” To counter the downturn, many developers are now in the process of offering discounts to lure prospective buyers. For instance, Mumbai-based Orbit Corporation has announced a discount of 15% at a residential project in Lower Parel and many others are expected to follow suit. However, there still many developers who are holding on to their prices in the hope that Diwali, considered an auspicious time to buy flats, will revive the sagging market.

In fact, with the Reserve Bank of India tightening lending rules, it has become difficult for developers to secure finance. Also, interest rates on home loans have increased tremendously, causing several families to postpone house purchase plans. Now, adding to the turmoil is the financial collapse of global investment banking giants such as Lehman Brothers and Merrill Lynch. Says Niranjan Hiranandani, MD, Hiranandani Developers: “There will be softening of prices till April 2009, but things will look up from May onwards. This is a temporary slowdown and the market will pick up.” Although opinions differ, the scenario has changed a lot now and the reality market may soon become a consumer’s paradise with affordable houses.

Realty firms float funds for asset buys

Corporates such as the Aditya Birla Group, GMR Infrastructure, Akruti City, Bangalore-based Nitesh Group and Saffron Advisors have either floated or are in the process of floating funds with corpus ranging between Rs 500 crore and Rs 1,000 crore. This is because of the huge value erosion expected in the real estate sector. “As far as Indian realty is concerned, for the right projects, funds are still available,” said Saffron Advisors MD Ajoy Kapoor. “Conservative European investors, after conducting extensive due diligence and research, are more comfortable with investing in Indian real estate provided they are able to align with the right partners.”

Munich-based retail aggregator Deutsche Capital Management AG (DCM) has underwritten $20 million for Saffron India Real Estate Fund I (SIREF I), an India-focused real estate fund floated by Saffron Advisors. DCM is raising a specific fund for investing in Indian real estate through Saffron Advisors. SIREF I is currently raising funds in the US, the UK, Europe, the Middle East and the Asia Pacific. It is a $350-400 million real estate fund with a maximum limit of $500 million. Bangalore’s Nitesh Group is in the process of floating a Rs 1,000-crore property fund to invest in the group’s real estate arm Nitesh Estates’ upcoming project and to buy assets.

“We have initiated talks with many European institutions and HNIs to invest in the fund. The initial response is very positive,” said Nitesh Group chairman Nitesh Shetty. Akruti City is also planning to float a Rs 400-crore fund to acquire more properties as valuations drop across India. “We have got SEBI approval to float a real estate fund,” said MD Vimal Shah. “We have initiated talks with domestic banks to raise the funds,” he added. In the next six months to one year, the property value would fall further, which would open opportunities for acquiring cheaper real estate assets, he added.

Tough lending norms, an unfavourable primary market and US financial worries have started to limit money flow into the domestic property market. The number of real estate deals has reduced and fancy valuations projected by developers witnessed a deep correction, said industry officials.