Indian Property News on 'October, 2008'

India’s Drooping Real Estate Quivers London AIM

India’s sagging real estate story has conveyed negative signals to the Alternative Investment Market (AIM) in London where at least five India-focused real estate funds are listed. Investors in funds such as Hirco, floated by Hiranandani Developers, Trikona Capital and Raheja’s Ishaan Real Estate have called for a shake up in the corporate and investment strategy of the funds following a 50% dip in their net asset value (NAV) over the past few months, industry officials said.

All Indian firms, which had raised funds from the London market, are facing redemption pressure from their investors since the stocks are trading at steep discount to the NAVs. Unitech Corporate Park, a AIM-listed company of India’s second biggest developer, Unitech, is trading at a little over 90% discount to its NAV declared on March 31, ‘08. Similarly, the K Raheja Group-promoted Ishaan is trading at 65% discount to its NAV. Hiranandani-promoted subsidiary Hirco is also trading at 90% discount to the NAV declared on the same date.

Laxey Partners, one of the active shareholders in Hirco, has called for a shake-up in the corporate strategy of the fund. Laxy has asked Hirco management to bring forward proposals to resolve the company’s large trading discount to its NAV. Laxy holds more than 9% stake in Hirco. In a letter to Hirco management, Laxy said that the significant cash holding in various subsidiaries could be used to address the discount. This could be in the form of a share buyback, according to international media reports. When contacted, Hirco chairman Niranjan Hiranandani refused to comment.

On Monday, Hirco shares were trading at 75p. On Friday, the company’s shares closed at 75p compared with a stated net asset per share of 6.82 pounds in March. It means that the company is trading at a discount of almost 90%. Hirco, at its time of floatation in 2006,was the largest real estate investment company. “Investors in markets like AIM are very active investors, particularly the hedge funds, which are currently facing a lot of redemption pressure. In the wake of larger market environment, these investors are more sensitive to adverse situations,” said KPMG infrastructure and real estate executive director Jai Mavani.

Developers Face Deadline Pressure

As the Indian economy faces a liquidity crisis, banks remain wary of lending money to the real estate sector. The developers, facing deadline pressures for delivery of projects, are forced to tap private money lending sources. Consequently, they have been forced to borrow money at steep rates.According to Sanjay Khanna, managing director of Kailash Nath Associates, this rate could be as high as 5% per month. A rate of 5% interest per month translates to a whopping 60% per annum. It means that a developer will have to pay Rs6000 for every Rs10,000 it raises. Builders do not have the money to construct and have approaching delivery deadlines. Real estate experts fear that some builders may even default.

Santhosh Kumar, deputy CEO of property consultants and brokers Jones LaSalle Meghraj agrees with Khanna but says that players with better fundamentals may still find money at 15-20% rate of interest. “But others may have to pay upwards of 30% as well,” he says. As demand slows, the price of residential and commercial real estate in the country has been sliding. It has fallen by 15-20% across metros over the past nine to twelve months and is expected to fall by another 30-40% over the next few months. In such a scenario, developers who went aggressive on land acquisitions, based on the presumption that prices will continue to rise, find themselves in a tight spot. They are now forced to borrow money from the market at unsustainable rates.

Ashish Mathur, Head-Business development and marketing for Mahindra World City says, that some small developers may have to exit the business all together if the market does not pick up soon. The problem is worsened by a slowing economy and over supply of office space and it’s slow off take as reported by real estate consultants Cushman & Wakefield and CB Richard Ellis among others. Expensive home loans have turned away the residential buyers as well. Almost 90% buyers use bank finance for home purchases. Santhosh Kumar says that developers are expected to cut prices by 30-50% or more to boost offtake in the coming months. He warns, there may even be distress sales by developers. The bad news for realtors extends to the stock markets as well. The BSE realty index fell 24% on Friday on worries that the real estate sector is heavily leveraged. As the economy slows down and money gets dearer, the pain is only expected to get worse for real estate developers.

Real Estate Developers come up with Strategy to woo flat buyers

Given the current global economic slowdown and its impact on the Indian economy, real estate developers have hit upon novel marketing strategies to woo reluctant flat buyers. Real estate players such as Mantri Synergy, Jains Sunderbans, ETA Rosedale and Hirco Palace Gardens have come out with new schemes to attract buyers.

In what is seen as a clear move to shore up the ‘sagging morale’ of prospective buyers, property developers have now come forward to pay pre-EMI (equated monthly instalment) interest on part-money disbursed on the housing loan taken by a flat buyer “Given the current situation, builders are taking a conscious decision to bear the interest burden of the consumer,” Prakash Challa, President, Confederation of Real Estate Developers Association of India (CREDAI). In the current tight liquidity situation, developers find it difficult to raise finances. When one buys a flat on mortgage, the money is disbursed by his/her bank to the developer in stages. This way, the developer gets the money upfront.

This usual practice obviates the need for him to go in for market borrowing to fund his project.In the changed economic context, the prospective flat buyers have turned cautious and are postponing their buys, anticipating a drop in real estate prices. This has put the developers in a tight corner. In order to retain the buyer, especially during the slump period, the real estate players are now opting to dish out freebees such as payment of pre-EMI.

“Only few developers are offering this now for their new projects. It seems more developers are set to follow this when they announce their new projects,” according to K. P. Senthil Kumar, Director of roofbird.com, a residential real estate portal and service provider. This is an added advantage to a buyer as it reduces his/her financial burden to a large extent during the construction phase. This cleverly laid out strategy also helps developers retain price lines in a sliding market.

DAMAC Gets Second Spot in Gulf Real Estate Study

DAMAC Properties Group, leadingluxury lifestyle provider – has secured its leading position among property developers across the GCC. DAMAC Properties is now rated as number two in the latest Gulf Real Estate Study by Future Brand, the US-based global brand consultancy. The study was conducted across key GCC markets – Saudi Arabia, Qatar and the UAE. The key drivers behind the ranking were high-quality construction, trustworthiness, responsive customer service, good value for money and focus on reliability.

Based on the overall drivers, only Emaar scored higher than DAMAC. Other factors covered in the study were familiarity, perception and preference, consideration of various home types, amenities and locations. In last year’s study conducted in the UAE and Bahrain, DAMAC Properties came in third place and DAMAC Properties’ CEO Peter Riddoch said that to make the move to second place was a hugely significant and positive step. He said: ‘This is a reflection of the hard work, commitment and dedication shown by everyone involved with DAMAC Properties. I would like to thank our staff, our partners and our customers for helping us reach this far.

”The study shows that we are second only to Emaar. We have achieved this in just six years and we are well on the way to achieve our vision of becoming the world’s best luxury property developer”. ‘Last year we were positioned number three. As a result of our customer-centric approach to all aspects of our business and the integrated efforts by our marketing, sales, public relations, customer relations management, development and projects teams to deliver an enhanced customer experience, we are glad to see this reflected in the improved customer confidence towards DAMAC”, continued Riddoch.

‘We are working at redefining the proposition of luxury and creating a niche for ourselves. Identifying the right opportunity at the right time, especially in markets like the UAE, which continue to out-perform global trends, we have capitalized by offering products that appeal to investors and end customers.” Speaking on the redefining of luxury, Riddoch said: “It is not enough just to talk about luxury anymore – luxury has almost become the standard that investors and residents expect from a property. DAMAC Properties stands out as an organization that takes the wishes & aspirations of its customers and turns them into a reality by focusing on the benefits of luxury and not just the features.

Opportunity for Retail Investors

There are times when the analyst is only as good as the astrologer. Some may say that this is true at all times. But this is particularly true right now. In the corporate world, the future is suddenly looking a bit foggy. Will the credit situation ease? Has the world done enough to calm the storm unleashed by the subprime crisis? Is India really decoupled? Even though the financial pandemic is less than two months old, it has had severe implications. Liquidity is tight and it is expected to remain so at least for the next several months forcing banks to shut their doors on approved limits despite the high earning potential. The Fed’s interest rate cut of 75 bps is for the time being having a calming effect on the US economy. Yet investors remain nervous both in India and the rest of the world.

The view from within industry in India is a bit different though. Yes, the general sentiment has had its impact if one looks around the boardrooms. By the standards of the festive season, the retail and consumer durable sector’s growth has been sluggish. Business is down 10 to 15 per cent with discretionary spending coming down and demand for goods with credit-based buying taking a tumble. It is worse off when they converge. Net importers are finding the going tough while borrowers looking for foreign currency are shooed away by banks.

Just a few months ago, it looked as if every company had hung a board outside its doors – Trespassers will be offered jobs. The situation has changed. The bravado of India Inc after acquisitions like Jaguar, Corus and Arcelor is looking shaky. Those who have relied on instruments like FCCBs and borrowings against promoter stake have been hit most. Lay-offs are being contemplated. Yet there are traces of optimism and opportunities. The optimist in me sees the tilt towards opportunity rather than threat.

Even though it is becoming more expensive to do business in India, dollar exports are getting more lucrative. The business pressures in corporate America will result in increased outsourcing opportunities to India. As the cost of oil, steel, machinery, commodities and infrastructure fall, crucial investments will become cheaper. We have already marked down the cost of ongoing and planned projects. Cost of land and commercial space has begun to correct and all retail sector players are revisiting strategies to take home the benefits. Demand for essential goods remains strong. Rural India’s liquidity is at decent levels and expectations are that some of the FMCG majors will show impressive Q2 numbers.

The government and the RBI have been on high alert and responding to the situation quickly. The situation has also re-emphasised that the Indian financial system is mature and well managed. The financial turmoil has affected China too. In a phenomenon unprecedented in recent times, China is cutting production. Suddenly, there is a possibility that the Chinese threat to India might be blunted.

Usually in such situations, good companies emerge leaner and stronger. Companies are taking a good look at the pay packages of executives which had shot through the roof. Salary cuts are becoming a live issue. Also, hiring fresh talent from premier institutions that have sunk will become easier. The likes of Lehman Brothers and Goldman Sachs are not visiting the IIMs anymore. That presents a new opportunity for Indian companies, to hire the cream of talent. Similarly, attrition should see a drop and the present scenario offers the opportunity to lay off unnecessary manpower and to outsource work. There is also an options for Indian companies to hire global talent. This is a good time for clever acquisitions as good businesses that have been seriously affected by the crisis will be available at attractive prices.

Let me talk about two sectors where we are involved – IT and retail. In the IT sector, though there are not too many fresh projects being sanctioned in the US, the existing infrastructure and application maintenance jobs will increase, accompanied by the bonus of a favourable exchange rate. Outsourcing will rise as US firms try to cut costs even further with gains for the BPO sector. Acquisitions will gain momentum in the IT space. In retail, there will be more rational thinking and cautious expansion. Private label sales should see improvement as customers seek out more utility and less brand value. The lower margin stores will improve as rentals that rose sensationally will fall and retail players will close laggard stores at a quicker rate than before.

The coming together of the two rival airlines, Jet and Kingfisher, was possible only due to the current situation. Earlier, such understandings were products of greed but today these treaties are survival tools. Over the next several months, industry will see cost of services fall sharply as we have seen with commodities. That will help bring in some respite to production costs which have been spiralling for the past few months. For the moment as liquidity goes into crisis mode, cash will be king. Profit margins will take the next slot in order of priority while top-line growth and dreams will take a back seat. India’s present need is not heroics but hard work; not novelty but normalcy; not revolution but restoration; not surgery but serenity; not the dramatic but the dispassionate; not experiment but execution; not submergence in internationality but sustainment in triumphant nationality.

HDFC Bank opens Overseas Branch for NRIs

Private sector HDFC Bank, has opened its first overseas full-fledged branch in Bahrain with a 25-member strong staff. The branch would offer cash management and trade finance solutions to corporate clients and wealth management services for NRIs, a release issued here on Wednesday stated.

“Bahrain has always been the financial gateway and the banking hub to the Gulf with a firm regulatory framework and an overall dynamic financial sector,” HDFC Bank Executive Director Harish Engineer said. “With increased bilateral business partnerships and investments between GCC nations and India, it was logical for HDFC Bank to use Bahrain as its first stepping stone to increase its direct international presence by opening its first full-fledged overseas branch here to tap the growth potential in the region,” he added.

FDI in Multi-brand Retail

The global financial mess may have a silver lining for the Foreign Direct Investment in Multi-brand Retail with the government hinting the FDI may soon be allowed though the majority may have to be with the Indian promoters. The global economic turmoil may have achieved what the bureaucrats have not been able to achieve for retail sector in India which has not yet allowed any FDI in multi-brand retail due to strong political opposition, particularly from the Left. who feel it could ruin livelihood of small traders and people employed with traditional form of retail business.

With fears of more outflow of foreign funds, the government has begun to seriously think in terms of revisiting its policy on FDI in the retail sector, says a report by Indiaretailbiz.com. If allowed, this will encourage inflow of new capital as foreign retail majors are very keen to enter India’s retail sector. The possibility of wine retail in the regions where it is legally allowed through super markets cannot be ruled out too, thus making availability easier.

At the present time, infusion of 100 per cent FDI is allowed only in ‘cash and carry’ (B2B) retail, with only 51 per cent FD allowed in single brand retail. No FDI is, however, permitted in case of multi-brand retail. While, companies like Metro AG (Germany) and Shoprite (South Africa) have already taken advantage of 100 per cent FDI in ‘cash and carry’ business and Carrefour (France) and Tesco (UK) have announced their intention to do so, single brand retailers like Marks & Spencer (UK) and Vision Express (Netherlands) have been forced to accept partnerships with local business houses for entry into single brand retail. Given the choice, many of them would have liked to go on their own.

Multi brand retail giants like Wal-Mart, Carrefour, and Tesco, on the other hand, due to current FDI policy, have been compelled to either take franchise route or provide technical (back-end) services. Some have even chosen to wait until the policy is completely changed to meet their requirements. Although, no major policy decisions are expected as the general elections are due in the next six months, the government is believed to be considering relaxation in FDI norms for both single and multi-brand retail.

Kamal Nath, the union minister of commerce and industries, at a recent trade conference in Paris, had announced that the government is seriously considering permitting up to 100 per cent FDI (as against 51 per cent at present) in single brand retail, specifically in the area of luxury retail. The official line so far has been to consider allowing 100 per cent FDI in single brand retail in the segments that do not adversely affect local employment It is also believed that, despite pronouncements to the contrary, the commerce ministry has mooted a proposal that seeks to allow up to 49 per cent (as against Zero per cent at present) FDI in multi-brand retail.

Finance Minister asks States to Reduce Tax on Transfer of Property

The Finance Minister, Mr P Chidambaram on Wednesday called upon States to reduce tax rates on transfer of property to enhance their tax revenue from this sector. “I think we must look at taxes on transfer of property in India, reduce the tax rates, reduce the transaction cost and therefore that is a big source of revenue,” Mr Chidambaram said at a USAID function here. He said a large number of transactions in pr operty goes untaxed since the tax rates and the transaction costs are so high.

“As my friend just said there will never be a real estate asset bubble in India because the (revenue from) taxes are so depressed to the real price,” he added. However, tax on property is the one area where States have put some efforts, though not enti rely satisfactory, he said. He said effectively states’ taxing powers are limited. “There are two kinds of taxes (at the states levels) — one the sales tax and the other taxes on liquor and related products. Although the other tax, that is tax on agricultural income is available to states… it is hardly likely that any state will tax the agricultural income,” he said. He asked states to look at alternative tax policies, make revenue choices and enhance the revenue mobilisation.

Indian property developers Promoting Products among Indians in Gulf

With property prices and rents spiraling in the Gulf and the rupee depreciating, Indian real estate developers are actively promoting their products among expatriate Indians in the Gulf. “Because of spiraling rentals in Dubai and elsewhere in the region, Indians working here prefer to keep their families back home,” Haseeb Ahamed, chairman of the Calicut chapter of the Kerala Builders’ Forum (KBF), told IANS here Wednesday.

“Also because of the depreciation of the rupee, Indians here can invest their disposable income in real estate back home. Given the current global financial crisis, it is better to invest in real estate in India instead of investing in stocks or other investment options,” he added. KBF Calicut is holding a Malabar Property Show here Oct 23-25 to showcase villas, apartments and commercial space.

“It is a rare region-specific real estate exhibition coming from India,” Ahamed said. The show is bringing 16 builders from the Malabar region of northern Kerala, who will promote projects in Kozhikode, Kannur, Thalassery and Malappuram. Of the around 1.5 million expatriate Indians in the UAE, a large number hail from Kerala. According to Ahamed, Malabar, a trade and tourism centre of yesteryears, is slowly coming back to the limelight after a period of neglect.

“Malabar has been witnessing a lot of development in the healthcare, education, hospitality, transportation and tourism sectors in recent times,” he said. “The presence of a number of world class hospitals have also come up in the region,” he said, adding Kozhikode was also becoming an educational hub with some premier institutions setting up base. “Also with the opening of Karipur International Airport, there is good air connectivity with several international airlines coming in,” Ahamed said. According to KBF Calicut secretary Nityanand Kamath, a lot of expatriate Indians are already investing in property back home.

The government has announced a new airport in Kannur. “Also, two IT parks are being set up in Malabar by the Kerala IT Mission and Kinfra (Kerala Industrial Infrastructure Development Corp),” Kamath said. Developers participating at the Malabar Property Show are Ace Structures, Alfaone Builders, Alhind Builders, Apollo Build Tec, Crescent Builders, Cosmos Builders, Galaxy Builders, Hi-lite Builders, Calicut LandMark Builders, Malabar Builders, Prisunic Buiders, PVS Aparments, Queens Habitat, Sea Star Holdings, Seiken Proerties, Skyline Builders and Sreerosh Properties. Leading Indian banks State Bank of India and HDFC Bank have also been brought into offer finance options to prospective buyers at the show.

30-35% Drop Expected in Residential Price in Mumbai

Centrum Broking Pvt Ltd today shared findings from its research report on the Mumbai Real Estate Sector. It expects a 30-35% fall in India’s residential prices from the peak, with the Mumbai Metropolitan Region (MMR) estimated to witness the lowest fall of 20-30% until April 2009. Residential demand in Mumbai is estimated at 66mn.sq.ft. vs 55mn.sq.ft supply The report says that the decline in real estate prices in Mumbai will bring back affordability and is expected to boost demand. The factors that are likely to result in a lesser price drop in MMR include

The favorable demand supply equation shields against steep correction in Mumbai – Owing to its geography and high population density, Mumbai has limited land area and demand for quality properties tends to far outstrip supply, resulting in high prices. Slum rehabilitation, redevelopment unique business opportunity in Mumbai Mumbai provides opportunity to real estate players participating in the highly lucrative slum rehabilitation and development business considering that half of Mumbai’s 12 million population lives in slums.

Strong cash flow visibility for Mumbai focused property developers – Stable cash flow of Mumbai focused developers will help these companies tide over the liquidity crunch. Mumbai suburbs to witness huge supply – The trend for suburbanization is likely to continue with suburban locations capturing demand for small to medium format spaces. Redevelopment of properties – Mumbai offers huge opportunities for developers in the redevelopment space. According to a survey done by the Maharashtra Housing Area Development Authority (MHADA) in 2006, Mumbai has 19642 dilapidated buildings that are more than 40-100 years old.

Harendra Kumar Head of Research, Centrum Broking Pvt Ltd says “Mumbai is uniquely placed as compared to other cities because of its huge population, need for housing and the opportunities that are available. We are optimistic that with the correction in the prices there will be a spurt in the demand.”