Indian Property News on 'October, 2008'

Diwali Boom for Home Buyers

With the festive season of Diwali just past us, developers are going hammer and tongs at wooing prospective homebuyers with more and more special offers. However, if sources are to be believed, these discounts and gifts have only come about because the real estate market is heading for correction in a big way. Sources say developers are finding themselves stuck in a liquidity crunch and are therefore offloading some spaces at lower margins.

On the one hand, most of the big names in the real estate industry today are putting up a brave front. This is because they feel nothing will change significantly because of the year-long slowdown in the market that has been brought about due to a meltdown global finance, the US subprime crisis and the crash on the Indian stock market. On the other hand, right from global property consultants to local estate agents, talk about the correction occurring at ground level has led to a reduction in transactions, an increase in lucrative offers and discounts negotiated with those who are ready to deal in this rough weather. Some unusual offers by a few developers have made ripples in the market.

Some stunning new offers from around Mumbai have started to make earlier offers — such as free parking and waiver of stamp duty – fade in comparison. One offer claims: “Buy a house and get a car free”. Swastik Group offers 12 months of free stay for home buyers as they will have to pay neither rentals nor maintenance for that period. Earlier, the group was also offering discounted home loan interest. Property rates at Navi Mumbai have also plunged by a couple of thousand rupees per square foot.

Mantri Realty has now offered a buy-back scheme for their clients. After a minimum lock-in period of three years, homebuyers can now give back their flats and get back their buying price if the market value of the flats has gone below the purchase price at that time. At Mira Road, on the outskirts of the island city, prices have reportedly fallen by Rs 1,000 per square foot. But an offer by Cosmos Group for its projects at Thane beats them all – “Buy one, get one free”. And it’s not about a pair of jeans that we’re talking about here. We are referring to a 2-BHK flat. The deal says that if one buys a two-and-a-half BHK flat, you get a 1-BHK flat free. If one opts for a 2-BHK apartment, you get a one-room-kitchen unit at no cost.

DLF Demands Decline in home loan rates

Top DLF officials, including chairman Kushal Pal Singh and vice-chairman Rajiv Singh, on Thursday met finance ministry officials to press for a lowering of interest rates on housing loans to ease the liquidity squeeze in real estate. A source told DNA Money, “The DLF executives were also pushing for declaring real estate an industry rather than just a sector.” Indian real estate is the second-largest employer in the country and the downward spiral of the realty market would severely impact the Indian growth story.” The Delhi-based developer wants the ministry to ask the Reserve Bank of India to ease norms for bank lending to real estate firms.

Most banks have stopped giving loans to developers as they consider the real estate market risky at moment. This has forced realtors to raise funds from private investors and other sources with interest rates as high as 30%, way above the 13-15% they are paying on their outstanding debt to banks. Earlier this month, sources had said DLF is looking at offloading stake in its power venture DLF Utilities and in special purpose vehicles to private equity investors. The realtor plans to raise around $1-1.25 billion from the divestments.

The developer is also the sole bidder for the Rail Land Development Authority’s 45,371 sq m land in Bandra (east) — near the railway station and adjacent to the Western Express Highway — for development of commercial space. The reserve bid for the land price has been kept at Rs 3,960 crore. Akruti City, HDIL and Reliance Infrastructure were also eyeing the piece of land but backed out due to higher valuations.

Real estate crunch Affects IIM Bangalore

Faced with the prospect of escalating real estate costs and the lack of adequate finances, the Indian Institute of Management-Bangalore (IIM-B) is experimenting with “off-campus housing” to accommodate additional students from the next academic year. If the experiment works, it may set a precedent for other IIMs. With its campus in Bannerghatta already brimming, the institute has decided to take 50 apartments (150 rooms) on lease in a nearby residential building called Ajmera Complex. The plan is to lodge students from the one-year full time Executive Post Graduate Programme in Management (EPGP) — to be launched in April 2009 — in the leased apartments.

“Unless we experiment, we wouldn’t know if this is the way ahead,” reasoned Pankaj Chandra, Director of IIM-B, on the initiative. IIM-B may also accommodate some students from the Post Graduate Programme (PGP) and doctoral programme at off-campus locations. The institute is planning a bus service from its premises to the off-campus housing to make it convenient for students to travel.

In its recent report, the IIM Review Committee — led by Maruti Suzuki India Chairman RC Bhargava — suggested that IIM faculty and administrative staff residences could be moved to off-campus sites, and accommodation bought/rented there so that “the existing infrastructure could be more intensively used”. Chandra said the institute had received Rs 29 crore from the human resources development (HRD) ministry for the OBC quota expansion, but the overall expenses of accommodating new faculty and students is expected to be much higher than that. Subsequently, the institute is keenly looking at financial support from corporate houses and alumni.

Unlike IIM-Ahmedabad and IIM-Lucknow, which have two campuses, IIM-B hasn’t had any major construction activity in the last 10 years. Chandra added that the institute has taken up the off-campus option despite plans to commission some construction from this December. The institute has hired an architect for a new hostel facility, 10 classrooms and 24 faculty homes. The institute has over 950 students from various programmes on its campus at present. From the academic year of 2009-10, the number of students in the PGP and doctoral programme is expected to go up from 640 to 690, the Post Graduate Programme in Public Policy and Management (PGPPM) will have an increased intake of 63 from 33, and the one-year EPGP is expected to have 75 seats, making it an intake of 150 new seats at the campus.

Further Slump Expected in Real Estate India Prices

With a slump in the Indian real estate sector due to excessive credit crunch and demand slowdown, home buyers can expect a further correction in real estate prices in the range of 15-20% in next six months. There are several factors working against the Indian real estate sector that can bring about such a price correction. With the Reserve Bank of India (RBI) tightening money supply and increasing interest rates to fight inflation, the developers are facing liquidity crunch. Banks are getting jittery over loan disbursals to real estate developers. Even if the developers manage to get loans from banks, they are hardpressed to keep more collateral with the banks.

“With debt market getting dried up, developers facing the heat of liquidity crunch and PE funds shying away from real estate investments and speculative investments at an all-time low, we can expect a 15-20% correction by the first quarter of 2009,” Jones Lang LaSalle managing director Anuj Puri said. The global credit crunch which has affected the Indian market has taken the sheen off large property firms like DLF and Unitech. The two are seeing their market cap eroding almost completely and their fund raising plans hitting a rut due to unavailability of funds. To further aggravate the situation, the property market has also been witnessing a drop in PE fund flow.

PE investors, who had been happily picking realty deals earlier this year, appear to have tightened their purse strings now, with September witnessing only two transactions worth just $12 mn compared with August, when PE funds pumped in $427 mn into Indian realty sector. According to data compiled by Grant Thornton, while the number of deals during January-September was higher at 45 against last year’s 39 deals, the average ticket size of the transactions has come down substantially in the first three quarters of 2008, reflecting softening valuations across the crisis-ridden real estate sector.

The rate of interest on home loans has drastically shot up from around 7.75% in 2004 to around 12.75% now. Almost 90% of home buyers opt for loans to buy homes. With interest rate on home loans on a rise and the severe liquidity crunch in the banking sector on the back of the global financial turmoil, fuelled by real estate crises, banks are unwilling to lend. “Now the time has come when you have only genuine buyers for a property. Speculators who believed in short-term investments in properties have completely vanished from the scene. Therefore, to help genuine buyers , developers will have to cut prices,” real estate consultancy realty verticals head Rajan Ahuja said.

On further price correction in real estate, Unitech MD Sanjay Chandra said: “The prime issue is of affordability. It’s not about per sqft rate, but about the overall price tag of a house. We are reducing ticket size. We now offer three-bed room flats, which is much smaller in size than we earlier used to sell, thereby bringing down the price of a flat.” According to a report on the Indian office market by CB Richard Ellis, a global real estate consultant, seven major Indian cities, including Delhi, Mumbai, Kolkata and Bangalore, showed a marked decline in demand during the quarter ending September. The report also said leasing of office space had slowed down in the first two quarters of the year.

15% Drop in Real Estate Prices in India

Property prices in India‘s metropolitan cities have dropped by 10 per cent to 15pc, says an award-winning Indian builder. This is the right time for people to invest in the real estate market in India, said Mumbai-based National Builders chairman and managing director M C Sunny. The Indian real estate market has experienced a slowdown, following the global economic crisis, he told the GDN.

“It has resulted in a standstill in some areas, with no major transactions taking place,” said Mr Sunny. “In metropolitan cities like Mumbai and Delhi, prices have dropped by 10pc to 15pc. “However, in Kerala, from where there is a large concentration of people working in the Gulf, prices are remaining steady. “Builders are not in a position to reduce prices because of an increase in construction costs.” Mr Sunny said he expected this trend to continue for at least one year.

DLF Denies Job Cut

DLF Ltd., the nation’s biggest real-estate developer, on Oct. 23 denied a report in the Economic Times newspaper that it planned to cut jobs. Companies in India don’t have the option to fire people because of the prevalent labor laws, the Federation of Indian Chambers of Commerce and Industry, or Ficci, another industry grouping, said in an e-mailed statement yesterday.

“The critical question is not how many jobs would be lost, but rather how the growth momentum could be maintained to generate gainful employment for the additional 12 million people who would be joining the workforce annually,” the federation said. “Feedback gathered by Ficci shows it is fresh hiring that has gone into a slowdown mode and therefore steps must be taken to revive growth.”

Developers Likely to Slash Prices

Indian real estate developers are expected to cut prices by 30% and more over the next three to six months. At a recent TiE-Indian Angel Network, summit in the capital, industry players including real estate developers, private equity players and real estate brokers and consultants, all answered in the affirmative when asked whether they see the possibility of a price cut in future. The Indian realty sector has been in a meltdown over the past few months. Prices for both commercial and residential property have come off by 20-25% over the past few months. Industry experts and players say they expect them to go down further.

Real estate builders Kailashnath Group’s managing director and owner Sanjay Khanna says those who are not reducing prices now will be forced to do so in some time. Yet another real estate developer Ashish Mathur, head of business development and marketing for Mahindra World City simply says, “Yes they will”, in answer to Sanjay Bansal’s question on the 30% plus fall for realty prices coming forward. Anil Chawla, private equity head for of DE Shaw & Company, one of the biggest private equity investors in real estate in the country, says he also expects the prices to fall. “I have already begun hearing rumours that some developers are planning major price reduction plans by Diwali,” he says. Similarly Santhosh Kumar, deputy CEO of Jones Lang LaSalle Meghraj, one of India’s leading real estate consultants and brokers, says that there are definite prices discounts available for people who are willing to pay upfront even now. “They may get 30% to 50% discounts even now,” he says.

There are several factors going against the realty sector. The main one is the lack of demand from homebuyers and the slow off take and over supply of commercial real estate. In the case of residential property, the rate of interest on home loans has gone up from around 7.75% in 2004 to around 12.75% now. Almost 90% of home buyers take the home loan route. For a person taking a home loan, the rate of interest has increased 5% in the last four years. If a person borrowed a lakh for 20 years at 7.75% in 2004, he would have to pay around Rs 96 thousand as interest eventually. At the present rates, the interest rate burden has now increased to more than Rs 2 lakh on the same amount. Also, as home loans become expensive, the slowing Indian economy and the global financial crisis have translated into a liquidity crunch. So even if someone is willing to get a home loan at a higher rate, the banks may not have the money to lend.

In case of commercial property, the slowing economy has meant that companies are shelving hiring plans and cutting back on production. Both imply they require less commercial space. According to a report on the Indian office market by CB Richard Ellis, a global real estate consultant, seven major Indian cities including Delhi, Mumbai, Kolkata and Bangalore showed a marked decline in demand during the quarter ending September 30. The report also said leasing of office space had slowed down in the first two quarters of the year.

Top Realtors seek govt help to Fight Crisis

The doyens of the country’s real estate sector — K P Singh of DLF and Ramesh Chandra of Unitech — recently met top UPA government functionaries to seek higher tax breaks on housing loans and easier lending by banks to the sector. The meeting comes in the wake of these companies seeing a massive erosion in their market capitalisation. Singh and Chandra recently came together to call on a leading UPA minister and top Congress politician to sound him out about the travails of the real estate sector, which has seen realty prices falling and credit for builders disappearing. Both DLF and Unitech, the firms listed on the Bombay Stock Exchange, have seen their scrip dropping over 80-90 per cent since January this year. The duo is expected to meet other authorities too.

At the centre of this lobbying is the developers’ belief that a housing market crash in India would spell further bad news. “The top five real estate developers currently are providing direct and indirect employment to nearly 250,000 people across thousands of sites in the country. The impact of a depressed market will not be only felt on our share values, but also on jobs and the overall economic growth,” said a developer close to the effort to convince the UPA to ease up things for homeowners and developers. The realtors want the UPA to push for policy amendments, which would see banks lowering the risk weight attached to investment in the real estate sector. In 2007, the central bank had increased the amount of money that banks set aside as a proportion of their total lending to the sector.

Separately, it also raised interest rates in order to control inflation, a cycle that was only recently broken in order to ease liquidity in the financial system. “We are really an industry. Yet, we are not treated as one. We create infrastructure, but the norms are skewed against us. The government earns so much revenue from us in taxes, but continues to look down upon the sector as a bubble that needs to be broken,” the developer added.

UPA sources confirmed that Singh and Chandra had come calling to explain their difficulties. Realising the success that other sectors like civil aviation and telecom have had by lobbying with the government, real estate developers are expected to continue their lobbying effort. Already, several mid- and small-size developers in the National Capital Region of Delhi are meeting once a week to evolve a common agenda.

Pune Can Become Seventh Metro City

Pune will soon acquire the status of being a metropolitan city in India. According to an Assocham report on ‘The 7th emerging metro city in India’ it owes its upgradation to a fast development pace in the area of infrastructural facilities, friendly business environment, education avenues and employment opportunities. Contributing factors include the high real estate prices and a large population base as compared to other upcoming cities. The study was carried out in four tier II cities including Pune, Ahmedabad, Lucknow and Chandigarh ranking them on eight parameters necessary for a metro city. They included social infrastructure, infrastructure availability, real estate cost and availability, transportation facility (connectivity), presence of quality educational institutes, employment opportunity, facility of financial services and business environment.

Pune occupied first position overall though it needs to improve on transportation, social infrastructure and financial services. Ahmedabad was the second most potential city providing good infrastructure and facilities and connectivity. Lucknow was placed with third rank as it needs to pick up on infrastructure, business environment and social infrastructure. Chandigarh, the smallest city among the four in terms of area size and population was ranked at the fourth position though it was ranked foremost in financial services and business environment. Among the four cities, Ahmedabad occupied first rank on the parameter of social infrastructure. The city with literacy rate of 79.89% has high-grade institutes like IIM, NID, NIFT, EDII etc. The city of Nawabs, Lucknow with a literacy rate of 83.5% and presence of quality educational institutes including IIM, SGPGIMS etc was placed at second position.

Both Pune and Chandigarh were assigned 3rd positions respectively on the social infrastructure parameter. Pune has a literacy rate of 80.73% and skilled population, the city is a place of high grade institutes including NIBM, NIC etc. However, 81.9 per cent is the literacy rate in Chandigarh with prominent institutes being Institute of Microbial Technology (IMTECH), Centre for Defence and National Strategic Studies (CDNSS) etc. The infrastructure parameter rank cities on the basis of sub parameters including number of entertainment avenues, malls and multiplexes along with the presence of star category hotels. The Queen of Deccan, Pune with maximum number of malls and multiplexes (26) and star category hotels (25) notched the top position. The second rank was occupied by Ahmedabad, with the city having 25 malls & multiplexes and 17 star category hotels. Chandigarh and Lucknow was placed at 3rd and 4th position respectively. The favourable location and smoothen process of acquiring land along with the high property prices are few sub parameters of real estate cost and availability that attracts corporate sector to expand their business.

Pune has outpaced the other three cities on the parameter of real estate prices and availability. After Pune, Chandigarh is considered to be the next emerging real estate market. Ahmedabad occupied 3rd rank while Lucknow at the bottom position was considered as most time consuming city in terms of process for acquiring land. On the employment parameter, among the four upcoming tier II cities, Pune carved the maximum share of 32.74% in the total jobs tracked for the period January-June 2008. The prominent sectors attracting large number of aspirants include IT, manufacturing, engineering and academics among others. The four cities are ranked on the parameter of financial services, taking into account the sub parameters including number of offices of scheduled commercial banks (as on march 2007), density of offices of scheduled commercial banks per population, number of accounts of the scheduled commercial banks per population, presence of brokerage firms, presence of stock exchange, transparency in trading system. In terms of providing financial services facility to the natives of the city in respect of above parameters, Lucknow occupied first position. The second rank was grabbed by Chandigarh. However, both Pune and Ahmedabad occupied third rank.

Banks refuse to cut home loan rates

The festive mood has been a little subdued in the realty market this season as home buyers are kept waiting and watching for a cut in loan rates, while bankers citing high deposit rates have decided not to tinker with the rates for now. With rising interest costs and high property prices, buyers were pinning their hopes on loan rate cuts to buy homes this festive season. For developers, who are staring at a demand slowdown, unchanged rates meant they could not prop up the sales in a traditionally busy season. “We will maintain a status quo (on home loan rates). I don’t find any scope to reduce my lending rates unless deposit rates come down,” Canara Bank Chairman and Managing Director A C Mahajan said.

High interest rates have already dented property demand in the past few quarters and expectations were that rates would soften after the Reserve Bank of India (RBI) announced a 100-basis point cut in the repo rate to 8 per cent and another 250 basis points cut in the Cash Reserve Ratio (CRR) to 6.50 per cent. However, the country’s largest bank, State Bank of India, on Monday said it would keep its lending rates, including home loan rates, unaltered.

Business Standard had reported that ICICI Bank, the country’s largest private sector bank, had hiked housing loan rates for new borrowers by 100 basis points. Small banks, like Karnataka Bank and Vijaya Bank, have also indicated that lending rates are likely to stabilise at the current levels. Karnataka Bank Chairman and Chief Executive Officer Ananthakrishna said the bank would not be able to reduce its lending rates. “We have not increased interest rates on home loan when rates went up, so there is no question of a rate cut on that front,” he said.

“Banks may not have the ability to cut lending rates. I think interest rates should be stable at this level, unless deposit rates come down,” Vijaya Bank Executive Director S C Kalia said. But developers said this reasoning by banks was disappointing. “With inflation coming down and liquidity there, there is no reason why interest rates should not come down. The reason why interest rates went up, the situation has now reversed. You have to be dynamic in this environment,” Confederation of Real Estate Developers’ Associations of India Chairman Kumar Gera said.

Brokerage Religare, in a recent research report to its clients, noted, “Equated monthly instalment (EMI) payments for existing home loan borrowers have escalated, which could result in loan defaults. Further, bankers have decreased the loan-to-property value from 85 per cent to 65-80 per cent, which means higher down-payments for buyers. All these factors have served to dampen the realty demand.”