Indian Property News on 'December, 2008'

Oversupply in Commercial Real Estate

The over-supply scenario that 2008 had witnessed in the commercial real estate space could well continue in 2009, says the annual year-end report by Cushman & Wakefield, real estate services firm. While some companies, which had committed to larger spaces earlier, have scaled down their absorption as a prudent step to mitigate the cost on real estate others, which had taken up space based on anticipated expansion plans, are considering sub-leasing the excess space.

“With this trend continuing in the coming year, coupled with the additional proposed supply and the already existing increasing vacancy levels, the over supply situation is likely to see no early respite. Hence, rental corrections across micro-markets seem probable over the short term,” says Kaustuv Roy, Director of Tenant Strategies and Solutions at Cushman & Wakefield. The south, central and select suburban locations of Mumbai witnessed rental correction over the year and more recently, Thane Belapur Road (IT) and Malad (non-IT) too recorded a southward movement. Vashi and the non IT-projects in Thane Belapur Road recorded a stable trend. Central and Suburban locations of Lower Parel, Bandra-Kurla, Andheri and Powai are likely to witness a further fall in rentals with all other major markets expected to stabilise.

In Bangalore, the rental market continued to strengthen recording 4-9 per cent annual appreciation in the peripheral locations and nearly 18 per cent year-on-year growth in the CBD and off-CBD regions. Outer Ring Road and the suburban areas are likely to strengthen further in the coming months, whereas ITPB, Whitefield and Electronics City are expected to stabilise, says the report. Chennai witnessed a drop of 5-10 per cent in rentals in the in the CBD and off-CBD locations of T. Nagar, Alwarpet, Anna Salai and Radhakrishnan Salai, while the suburban and peripheral regions witnessed a 7-9 per cent drop.

Rajiv Gandhi Salai in the peripheries is the only market in the city that has begun to show signs of stabilisation and is likely to continue with the trend as all other major micro markets are anticipated to record a further fall in rentals, adds the report. In Hyderabad, the CBD, off-CBD regions such as Banjara Hills, Begumpet, Raj Bhavan Road, SP Road and the peripheral regions of Pocharam and Shamshabad recorded a 6-19 per cent annual appreciation in rentals, while the suburban regions of Madhapur, Gachibowli-Nanakramguda, Manikonda and Raidurga witnessed a 5 per cent fall. Banjara Hills, Jubilee Hills, Bachupally and Uppal have also recorded a fall in rental values.

Rentals in the National Capital Region dropped between 1 and 13 per cent from last year across micro markets, with Noida (IT SEZ) recording about 32 per cent annual depreciation. Over the last quarter, rentals recorded 6-16 per cent dip with the likelihood of a further correction in the months to come. Though rentals in Pune seem to have appreciated over the last year, the last two quarters recorded a 4-10 per cent dip across locations with the exception of Sholapur Road and Hinjewadi in the peripheries that remained stable and are expected to continue remaining so. All other major micro markets in the city are likely to witness a fall in rentals over the short term.

Bangalore Continues its Dominance in IT Space Race

Bangalore continues to be the number one destination for IT/ITeS companies in the country. For all those who thought Chennai and Hyderabad were eating into Bangalore’s status as the IT capital of India, here are some facts. The annual year-end report by global real estate consultants Cushman & Wakefield shows that Bangalore witnessed the highest commercial space absorption in the country of 10.4 million sqft – the highest in the country for the fifth consecutive year. Of that, IT and ITeS companies absorbed 88%, followed by automotive, telecommunications and other sectors.

Leading the way was i-Flex Solution, which absorbed 1,100,000 sqft of commercial space in Whitefield, followed by 350,000 sqft of space each by ABB and ANZ IT in Whitefield and the Marathalli-Sarjapur belt. Chennai absorbed only 4.1 million sqft of commercial space of the 9.8 million sqft of supply this year, as against its absorption of 6.5 million sqft of space in 2007. Hyderabad witnessed a whopping 67% drop in commercial space absorption — from last year’s figure of 4 million sqft to only 1.3 million sqft this year. The total supply in the city amounted to nearly 3.8 million sqft.

Mumbai and the National Capital Region (NCR) absorbed 8.5 million sqft and 8.6 million sqft of commercial space in 2008 respectively. “Bangalore & Mumbai were the only two cities that showed an increase in absorption from last year,” reads the C&W report. Meanwhile, commercial rental rates in Bangalore appreciated between 4% and 9% in the peripheral areas and by a whopping 18% in the central business districts.

Real Estate Prices may Fall in Maharashtra

Indicative property rates, based on which Maharashtra levies its stamp duty in Mumbai and other key cities of the state, may fall marginally for the first time in about a decade as real estate transactions drop, according to sources in the revenue ministry.The property rates in the ready reckoner for Mahrashtra may drop marginally reflecting the subdued sentiments, sources said. A final decision may be taken tomorrow. The property ready reckoner is prepared by the office of the inspector general of registration and stamp duties (IGR) on the basis of transactions in real estate sector in respective areas.

Property prices across key cities of the state have witnessed a decline owing to an economic slowdown that has forced companies to curb expansion plans. Reflecting depressed sentiments property, transactions have also dipped as buyers anticipate a further softening of prices. Still, the assurance given by Minister of State for Revenue Rana Jagjit Singh in the state legislature to maintain status quo has created a piquant situation. Pune-based Maharashtra Lawyers Association’s President M P Bendre this week filed a petition in the Bombay High Court requesting the court to direct the state government to publish rates that reflect the market sentiments. The petition pointed out that the assurance given by Singh amounts to injustice to consumers.

Investment Potential for NRIs in Realty and Infrastructure

As the global financial crisis continues to unravel, the real estate sector around the world continues to take a hit with credit in short supply and consumer demand in housing witnessing record lows. India too has seen real estate values decline while the government undertakes a two-pronged approach of investing in infrastructure and facilitating consumer spending in real estate through interest rate cuts and easing of liquidity norms for banks. However, the slowdown also highlights the great investment potential especially for NRIs in realty and infrastructure. A recent report in the Times of India shed more light on the options and benefits given to NRI investors in real estate.Though government regulations prohibit investments in agricultural land, plantation properties, farmlands etc, those who have inherited them from relatives can retain them.

Their disposal however, has to be according to government regulations. For end users who are planning on eventually returning home, investments in residential property continues to be the best option. Investment in greenfield projects is also an option as it reduces the upfront payment liability and home loans are available through banks which have already branched out in countries with high NRI populations to extend these services.A number of integrated townships are already coming up thick and fast especially around the peripheries of metropolitans and tier II cities in India and provide an investment outlet for those on the lookout for lifestyle projects.

These townships are self-sufficient in nature with integrated schools, malls, office blocks etc. Since land price appreciation is much higher in peripheral and suburban areas, these are also great as pure investment opportunities. High net-worth individuals looking for a periodical rental income can look to invest in city based properties given the demand across varied groups from families to corporations. Interest rate concessions of upto 1.5 lakhs and principal repayment upto 1 lakh is also offered to those seeking investment loans in immovable property and wealth tax benefits are available subject to the residential property being leased for a minimum period of 300 days in a calendar year.

Steps that can Boost Realty Sector

The Confederation of Indian Industry (CII) has circulated a consultative note that stresses upon the need to give a major push to the country’s real estate sector through primary and supplementary measures. Among other things, the industry body has asked for an extension of municipal limits of the existing cities, simplification of procedures for conversion of land use from agriculture to non-agriculture, offering infrastructure status to township projects and a complete revision of the floor space index policy. “The prevailing high interest rate has dampened the overall demand and has severely affected the affordability, thus making housing a distant dream for the common man. The 5 per cent subsidy, approved by the cabinet for the economically weaker section (EWS) and low income group, is thus a move in the right direction which will serve the twin objective of providing much needed relief to general masses and at the same time boosting demand in the economy,” said Chandrajit Banerjee, director general, CII.

While appreciating the subsidy scheme, which is a part of the holistic approach suggested by CII for augmenting affordable housing, the confederation has called for supplementary measures to further strengthen it. The note said that availability of land the most central issue nagging the realty sector can be eased by extending the municipal limits of the existing cities. However, this needs to be followed with a very committed, time-bound programme to upgrade the infrastructure of the expanded areas, particularly the accessibility through public transport, the note stressed. The CII has also asked for simplification of the process of conversion of land from agricultural to residential or commercial. “The land that is available in the periphery of cities most of the time is agriculture land. For development of a residential project in such areas would require the conversion of land from agricultural to residential/ commercial. This process represents a major procedural bottleneck and needs simplification,” the note observed.

Another measure would be to encourage development of tier II and III cities and construction of integrated satellite townships, the note said, elaborating that the availability of well-developed and commercially viable land would bring down the prices in the current markets. A major recommendation in this respect is to provide infrastructure status to integrated township development, the note added. A liberalised Floor Space Index (FSI) policy that takes in to account the current advanced construction technologies will give a thrust to the development of existing infrastructure, the note pointed out. The CII has also demanded allocation of specific land in the city master plans for economically weaker section of the community. These stretches of land could be made available at a reasonable rate to developers to build affordable housing meant for economically weaker section of the society, it said.

In addition to the above, CII has also suggested that government should consider either waiving off or substantially reducing the stamp duty for EWS and also promotion of appropriate low-cost housing technologies. With the phenomenal increase in population and urbanisation, the shortage of housing is expected to increase from 24.7 million dwelling units in 2007 to 26.5 dwelling units by 2011. About 90 per cent of the shortage of housing is in this segment. Any fillip to this segment of housing will spur economic activities, stimulate demand and generate employment, the CII note said.

Hoteliers Suffer Major Setback

The hospitality industry is likely to suffer revenue losses worth Rs 4,000 crore due to the economic slowdown and the Mumbai terror attacks. As per industry estimates and a white paper submitted by HVS Consultants to the tourism ministry, the hotel industry would close 2008-09 with earnings of a little over Rs 13,700 crore, down from Rs 17,709 crore in 2007-08. Occupancy levels have dropped 6-15% across the top 11 cities. In the first six months of 2008-09, Delhi and Mumbai had already registered a drop of 9-10% and the average stood at 64%. But October, November and December saw a further drop, and occupancies in Delhi, Mumbai, Goa and Hyderabad came down to 55%.

The trend may continue through the next three months. The all-India average occupancy level, which was 64.5% till September, is likely to fall to 58% by the end of March 2009. Says HVS India executive director Siddharth Thaker: “The boom of the past two-and-a-half years seems to have been wiped out in the last four months of this year. Revenues, occupancies are all hurting and we believe that no hotel will be able to increase prices in 2009.” He added that the hotel industry might have to further cut rates to attract demand.

The average room rate (ARRs) in Delhi, which was around Rs 12,000 in April-September this year, is now down to Rs 10,200. Similarly, a hotel room in Mumbai, which would earlier cost around Rs 12,754, is now down to Rs 10,175. In the past three months, ARRs in Bangalore, Calcutta and Hyderabad have dropped to Rs 10,215, Rs 6,700 and Rs 5,500, respectively. Explaining the drop in occupancies, E&Y associate director (infrastructure & real estate) Mona Chhabra said: “Foreign footfalls have been adversely affected due to the economic slowdown. Even corporates have cut travel budgets and, increasingly, corporate travellers are staying at company guesthouses, looking at day travel and skipping staying at hotels.”

Hotels have been discounting by 18-19% to maintain occupancy levels. Says CEO of a Delhi-based hotel: “One of the top three hotel chains is operating at 49% average occupancy level across all its properties. Clearly, the hotel industry is going to see tough times ahead. But hotels across the country are now trying to woo domestic tourists to maintain occupancies.”

Realty Face to Face with Reality

The five-year boom in India’s realty industry came to a crashing halt in 2008, following an acute liquidity crunch, falling sales and rising interest rates. The year, though, started on a positive note. The Dubai-based Emaar MGF raised $1.64 from the primary market in late January, and two motnhs later, Delhi-based realtor BPTP registered the country’s largest land deal, shelling out over Rs.50 bn ($1 bn) for 94 acres of land in Noida, on the outskirts of the national capital. But after that, the fairy tale run for the industry ended. As apartment prices shot through the roof, and interest rates soared, buyers turned away, which immediately hit sales. Subsequently, over the rest of the year, realty stocks began to get hammered on the bourses.

“Slowdown and higher interest rates started spilling over on the realty sector and the immediate impact was visible in realty stocks,” said Sanjay Verma, managing director of South Asia operations for realty consultancy Cushman and Wakefield. The realty index of 14 real estate stocks was the worst performer and slumped 80 percent, outpacing the 58 percent drop in the Sensex, the benchmark sensitive index of the Bombay Stock Exchange. As a result, valuations of realty stocks of even major developers such as DLF, Unitech, Omaxe and Parsvnath were greatly eroded. DLF, which had raised Rs.100 bn (over $2 bn) in June 2007 in what was then the largest-ever initial public offering (IPO) in India, saw its share value dropping by 79 percent.

Emaar MGF scrapped a proposed $1.64-bn public offer in February after failing to attract investors, while Indiabulls Properties Investment Trust, backed by billionaire Lakshmi Mittal, dropped 10 percent on its trading debut in Singapore. BPTP hit the news once gain in May as the company failed to pay the first instalment on time due to cash crunch and requested the Noida authority to grant a two-month extension to cough up Rs.12.5 billion. The crisis deepened after investment bank Lehman Brothers filed for bankruptcy mid-September, blocking even the private equity route for developers.

Big developers like DLF, Unitech, Ansals API and HDIL were particularly hit as Lehman Brothers, along with Merrill Lynch, another cash-strapped investment bank that had to be sold, had direct investments in these companies. “What hurt the overall housing sentiment was the increasing borrowing rate. The current cost of borrowing for the company has risen to between 15.5 percent and 16.5 percent, compared with 12.1 percent for the year ended March 31,” said Unitech managing director Sanjay Chandra. “The liquidity risk was accentuated by the slowdown in the overall real estate market and the increasing reluctance of financial institutions and banks to fund real estate developers,” added Verma.

According to real estate service provider Jones Lang LaSalle Meghraj (JLLM), a steep rise in the interest rates brought down demand of residential properties, which went down by 40 percent. The slowdown faced by the realty developers was also reflected in their second-quarter results that showed profits dropping, ranging from four percent in the case of DLF to around 80 percent for Omaxe.Worse, sales failed to pick up during Diwali, the best time for the industry, and even freebies like Mercedes and BMW cars and gold medallions failed to lure buyers. Sales, in fact, dipped up to 50 percent in both premium and middle segments. Even rental prices for offices and malls fell by as much as 20 percent across India, and are set for further correction.

The impact of slowdown was also reflected in developers downsizing their manpower or whittling down pay packets. Unitech laid off 10 percent of its employees and DLF retrenched 12 percent. Similarly Parsvnath cut salaries of its employees in the top and middle level management by up to 20 percent, while Omaxe, which fired 70 employees, also cut the remuneration of those who were retained by 10 percent. Looking ahead, the industry does not foresee any upswing in fortunes in the immediate future, though the government and the central bank have been taking steps to infuse additional liquidity into the system, especially for sectors such as housing.

“This situation seems likely to persist for another 8-10 months at least. Most of the projects are getting delayed and buyers are not showing interest,” said Cushman and Wakefield’s Verma. “Due to higher risks of investing in real estate, the real estate sector will witness lower private equity deals in the next 12 months,” warned a report by the Federation of Indian Chambers of Commerce and Industry (FICCI).

“As funds will not be easily accessible, valuations are expected to go down further and the costs are going to be very high for developers,” said FICCI, adding that existing projects were witnessing time and cost overrun, while new projects were being deferred. “This would eventually lead to a reduction in price in the coming four quarters and the market is expected to turn in favour of the end users. Focus will shift to mid range and affordable housing with a considerable correction in prices of the existing residential projects up to 15 percent.”

REBI Launches Property Magazine

Real Estate Bank India (REBI), a network of property outlets with a pan-India presence, has launched a property magazine titled Property Guru. The monthly magazine, priced at Rs 60, will offer a comprehensive approach to residential and commercial property and real estate in India. Lakshmi Narayan, president and CEO, REBI, said, “We are currently witnessing an interesting state of affairs in the Indian real estate industry.

At REBI, we are fully geared to effectively address the property needs of customers, and thereby set an upward swing in the real estate market. We have the expertise to offer all property-related services on a single platter.” “We believe this is the most opportune time to launch ‘Property Guru’ as there is an inherent, fundamental necessity for a credible, comprehensive source of real estate information. We are also happy to launch our unique geo reference modeling services to further enable realty information seekers to enjoy enhanced convenience and service.” Narayan added.

Property Guru, through the print and online versions, will reach a large number of professionals from India and beyond, whose profiles include end-user occupiers, developers, building owners, asset managers, real estate investors, architects, designers, facility and property managers, service providers and product suppliers. Property Guru aims to provide informative, objective, timely and relevant content on issues concerning residential, corporate real estate, facility management, architecture and design. REBI is a professionally managed company promoted by individuals who have pioneered several innovations in the real estate arena – both locally as well as globally.

Property Market turns Buyer friendly

The year 2009 will lift the gloom in the real estate market as the property market turns buyer friendly with the cuts in property rates and home loan rates. Developers for their part would benefit as they will focus on creating volumes at affordable price points.

The government move to boost home loans will definitely rejuvenate the low-segment borrowers borrowing loans upto Rs 20 lakh. Public sector banks have made their loans cheaper and private banks and HFCs are expected to follow suit. “The important thing now is for the supply side to catch up with the increasing demand in this segment,” say experts.

According to Sanjay Dutt, CEO Business, India, Jones Lang LaSalle Meghraj, the thrust given by the Central Government to bring the economy to its full momentum is encouraging. The correction in real estate prices supported by lower interest is a trigger that would lead to many positive things.

Ravi Iyer, looking to buy a home, says he is enthusiastic about the home loan incentives given but is waiting for property prices to correct further to come in line with his expectations. “There is money in the market but people are waiting till January-February as they expect prices to correct further and more conducive policy announcements,” say experts. Gulam Zia, Director, National Advisory Services, Knight Frank expects the market will correct itself further by another 15 % and almost 30- 40 % from its peak. There will still be a wait and watch until all of that evens out, he says.

Developers point out that it would be a good bargain for buyers as most players would bring down their prices. Boman Irani, Chairman and MD, Rustomjee Group, says there will be more of smaller, value for money homes without compromising on the quality. “For instance , we are developing Rustomjee Urbania in Thane, a walk-to-work township with residences, schools, hospitals and convenience shopping.”

Ram Yadav from Orbit Corporation explains that home loan rates are expected to see a further 150 to 200 basis point cut, which will further boost demand. Once inflation comes down, home loan rates for all segments will come down. 2009 will also be the toughest year for developers as they will have to work on lower margins and not increase prices. If stock markets can fall from 20,000 to 10,000, developers too have to take a hit in their margins. It would be a phase of consolidation for developers and 2010 for most part will see prices remain stable and appreciate by maximum 10%, he says.

Pravin Doshi, Chairman, Acme Group and President, Maharashtra Chamber of Housing Industry (MCHI) says prices have already come down and become realistic. “The movement has started in the market and there are good enquiries. The government must come out aggressively to increase the incentives for loans up to Rs 40 lakh which would make it more meaningful in places like Mumbai besides further reduction in interest rates.”

Dutt emphasises that the success of real estate projects or sales in 2009 would depend on how quickly developers align prices to the market, offer attractive financial packages, differentiate themselves in quality, demonstrate delivery or keep time lines. The next tipping point would come when job confidence is restored along with all other factors and forces, says Dutt, and adds that he is hopeful sales would start by quarter 3 (calendar year) with 15% to 20% growth over 2008.

Balaji Rao, MD, Starwood Capital, observes that since it is a free market there is no formula that a 30% or 20% cut would help. If a developer does not sell at a particular price he will automatically come down. There is also scope for buyers to insist on more transparency, be it in area calculations, provision of amenities within the time line or insisting on escrow accounts for under construction projects, says Rao.

R V Verma, executive director, National Housing Bank says the June 2009 deadline set for availing these concessional rates for home loans is meant to quickly revive the sector. “Only if the supply side is available will it add comfort. There should be a powerful message from the developers that there is such supply available for responding to these demands. This would help stimulate the economy. “

Fund Allocation to Asian real estate sector can benefit India

India may benefit from the increased fund allocation to Asian real estate sector by global investors. Even as total amount raised by Real Estate private equity real estate funds between January and November 2008 fell by a third to $57 billion from a year ago, the allocation towards Asian markets increased to 28% from 19%. As a result, the funds available for investment in Asia has increased marginally from $15.9 billion last year to $16.2 billion.

But dealmakers say this need not necessarily mean immediate deployment of such funds in India as the property prices have still not corrected enough and demand remains weak.

As per the data collected by New York-based Private Equity Real Estate magazine, Asia and rest of the world (28%) edged ahead of Americas (25%), Global (24%) and Europe (23%) in terms of geographical allocation by investors for all new real estate funds closed in 2008.

India and China are top two contenders for Asia-focused funds, says Cushman & Wakefield director (capital markets) Sandeep Singh. “Funds with short-term horizon may not come to India as downside risks remain. Property prices have fallen, but not enough. Besides, demand is still weak,” he said.

After having seen a five year bull run ending in 2007, the Indian real estate sector is now faced with a tough market with sales flagging and debt unavailable. Several developers have been seeking private equity funds, but deals have been few and far between over the last six months. “There are a number of foreign and domestic funds sitting on cash, but no one is willing to invest immediately. All funds have slipped into wait and watch mode as global economic situation worsens,” says DTZ investment advisory director Ambar Maheshwari.

PE players are seeking higher returns and are willing to wait for valuations to come down. Some of them are even exploring distressed assets.

Lately, fund raising has become a big challenge for private equity players as limited partners or actual investors seek more time following the global economic turmoil which has eroded their wealth and made them cautious of investing. This has delayed the final closure of some major funds, including $12 billion Morgan Stanley Real Estate.

Much of the funds this year were closed by August, after which the global economic scenario deteriorated sharply. Only two funds totalling $533 million were closed in September, while just one $2.7 billion Merrill Lynch Asia fund was closed in October.