Indian Property News on 'December, 2008'

Nothing lasts forever: AG Krishnamurth

To quote John Maynard Keynes in The Economic Consequences of the Peace, “All classes alike thus build their plans, the rich to spend more and save less, the poor to spend more and work less.”

To counter the world-wide economic meltdown , I am sure that a co-ordinated global economic stimulus package, linked with sustainable development measures, will be undertaken by all the developed and developing nations. While the global situation is quite alarming and could get even worse, I, as a common Indian, neither an economist nor a financial analyst, feel strongly that the present panic in the country is overkill and possibly a gross over-reaction.

I say this because our saving rate continues to be high and healthy — it grew from 10% in 1950s to 24% in 2000, to around 34% now. It is second only to China’s , where it is about 50% of GDP. Besides , 65% of Indian GDP stems from private consumption , unlike the Chinese model. In these challenging times, India is among the only two countries to grow between 6.5% – 8%, the other being China. We have high investments in gold and stocks and a fairly well-regulated banking sector and stock exchanges.

While there is some impact on us due to the global meltdown, most of the problems are actually of our own making. The Sensex is going through a long overdue correction after its euphoric rise in 2007. It’s just a hiccup. Not a disaster. This may evaporate some of the paper wealth created over the last three years, when we believed that we were unstoppable. The feel-good was so overpowering that it almost made us believe that there is no tomorrow. We all just lived for the day. Those of us living in the cities bought every thing in sight flats , cars and gadgets, even if they were well beyond our means. Loans were easily available, and real estate and stocks values were rising every day. We were getting richer by the day, at least on paper . So we splurged, as individuals and as corporations.

IPOs were coming by the dozens. Money was raised in the capital market at will. Market cap was the new mantra. Every one was talking of an IPO and unbelievable valuations. Like the good old dotcom bubble of 2000. So many Indians were on the Forbes list of billionaires. The party was on. India was on a roll.

But nothing lasts forever. Particularly when the reforms and the boom in stock markets and real estate were confined to a few in metro cities, and the vast majority of Indians particularly in rural India remained unaffected, and continued to live in poverty and deprivation. The gap between the haves and have-nots deepened alarmingly.

The party had to stop and undergo some self correction. The real estate and stock markets are undergoing the much needed corrections. Otherwise the India growth story is strong. As a head of a service organisation I had gone through a couple of severe economy slowdowns. As expected, we looked at man-power as a first step. We cleaned up the man-power mess at the top in the organisation . Somehow organisations tend to get topheavy over a period of time. In difficult times, we should clean up the top, as opposed to the usual 15-20 % layoff of lower staff. Closely study the top and you will find a huge expense on some unproductive politicking top brass. Right size this.

Overheads were invariably the next in our firing line. I wouldn’t normally touch this. By cutting food and beverages and conveyance, we save little and invite staff wrath. I know of an organisation which used to have a 24×7 five-star food spread for its staff. When the first signs of the present slow-down hit, the spread got alarmingly thinned to idly-vada-sambar & sandwich. This would have not only demoralised its staff, but also signalled that the company was on the verge of closure. Petty cost-cutting measures are totally unproductive and some times dangerous. Staff morale is an area that calls for urgent attention during tough times. Rumours fly fast and wide. The boss man has to be a lot more accessible to his staff and has the task of dispelling all notions of doom.

After people, we would look at our product portfolio. We would shut all ‘misadventures’ launched during great times. Mudra invested in a textile design centre. It was a great indulgence . Our core competence and the textile design studio had nothing in common. Not surprisingly, it bombed. What also bombed was a high-profile scooter launched by a giant fertiliser company. Steel and cement brands launched by a high-end fashion fabric manufacturer also bombed. A range of skin care products from a pharma company were nonstarters . This list is endless, and that’s the reason why it is best to stick to the knitting, strengthen your core product and become No.1 or 2 quickly. In any downturn, leaders survive and the peripheral players perish.

In Ahmedabad and Hyderabad, where I live, I see at least 10 to 15 modern retail format stores in a radius of one km from my residence. How on earth can all of them survive ? They are pretty much standard offerings with no product differentiation. Mere commodities . Same products. Same prices. Same store ambience. Same offers and deals. Same bored, couldn’t-care-less staff. Same fate. Except the handful of staff members, I barely see any customer activity.

Funds were easily available in the last three years. Every organisation, no matter what its core competence, saw a pot of gold at the end of a never-ending rainbow. So they invested heavily in retail and real estate and the like. I don’t think any serious, meaningful planning went into these diversifications . Otherwise how would you explain the scores of multiplexes and top-end malls in Ahmedabad, a price sensitive city? The multiplexes and high-end malls should have happened in Hyderabad, a movie-mad and image conscious lifestyle city. Again, in such a city, and that too in upmarket Jubilee Hills, what do I find? A series of mid-end apparel stores, naturally empty most of the time. No compatible merchandise. No parking space. Little surprise that most of the malls and stores in the country have failed. In these difficult times, I would bring planning back to centrestage . No indiscriminate investments . Planned expansions of my core businesses will take precedence . No more indulgence in my flights-of-fantasy projects.

In short, I would beef up my core product range, would strive to be No.1 or 2 in my own business spheres, prune my top brass, would avoid unproductive costcutting , pull out of businesses which are not my cup of tea; would focus less and less on creation of paper wealth, more and more on sustainable, real wealth for my organisation and my country. I continue to be optimistic because I believe that the Indian growth story is intact and strong, and that we will be among the first countries to recover from the present world-wide economic meltdown.

India’s Stimulus Plan-II will aid IT sector

The government is set to extend the blanket tax exemption provided to software companies in order to boost the IT industry, which has become one of the biggest casualties of the global financial crisis. The Software Technology Parks of India (STPI) scheme that grants a ten-year income-tax holiday under Section 10A of the Income-Tax Act is expected to continue beyond its March 2010 deadline in a move that should help smaller players.

India’s top IT companies do not need this support as they have already invested in special economic zones, which offer liberal tax breaks. Extending the STPI scheme will help second-rung companies stay afloat as they cannot afford the fresh capital investment required to migrate to SEZs.

With the economic downturn expected to last well into 2009-10, the proposal to give the sector sops was discussed by the apex committee set up by the government in the aftermath of the global financial crisis. The panel met on Wednesday evening to finalise the modalities of a second stimulus package, expected to be announced next week.

“Extension of the STPI scheme will be a welcome move as next year is expected to be even worse, especially for the BPO sector and small & medium players,” said Ganesh Natarajan, Nasscom chairman and deputy CMD of Zensar Technology Ltd.

While 70% the of the country’s IT exports consist of non-discretionary expenditure such as maintenance contracts, the remaining 30% includes research & development activities, or discretionary spends, in which mainly smaller companies are involved.

“During a slowdown, discretionary expenses are the first to be struck off the list by international clients. Extending the sunset clause of the STPI scheme will give smaller companies a chance to build long-term business,” Natarajan said.

Abhisek Goenka, partner, BMR Advisors agrees. “This will reduce costs for IT companies that were planning to shift to SEZs after March 2010 to continue enjoying the tax exemptions.” Benefits under the STPI and Export-Oriented Unit schemes were to expire in March 2009. Both were extended by a year by former finance minister P Chidambaram in April after intense lobbying by software companies and exporters.

Industry body Nasscom expects the Indian IT sector to grow at around 21% in 2008-09, compared with 29% last fiscal. While it is yet to arrive at any projections for 2009-10, growth is expected to slow further in line with the world economy.

The spectre of job cuts is looming across the IT sector world over. While Silicon Valley in the US has already laid off 38,000 workers since September, companies in India have already reportedly axed around 10,000 jobs in the current quarter. By all indications, the situation is expected to get much worse.

The apex committee, at its meeting on Wednesday, also discussed other measures such as a further easing of monetary policy with a possible 100-basis point cut in key rates, along with further duty cuts and concessions for the real estate and export sectors. The package is expected before New Year.

Banks Allure NRIS into Real Estate with New Schemes

The booming real estate market in the country has prompted industry players to introduce a slew of innovative products to people willing to pay. From real estate developers to real estate fund managers, from banks to housing finance companies, it’s a party time for all. But behind those euphoric times, some banks, with operations in India and outside, are offering innovative products to non-resident Indians (NRIs), which could turn tricky in case Indian real estate market falls into a trough, sources said.

It involves the foreign and Indian operations of the same bank, the NRI and his friends, relatives and associates based in India. To start with, NRI, with the help of his friends and others, establishes an Indian company that could do business in the real estate sector. Now the bank in India gives some loan to the company to buy land in India.

On the other hand, the NRI keeps a fixed deposit with the wealth management division or private banking arm of the same bank’s overseas operation. Unofficially, the foreign branch of the bank, with FD in its books, stands guarantee to the loan given by the bank’s Indian operation to the company set up by the associates of the NRI. But the same is not officially shown as a guarantee in the books of the two branches involved. As per current FDI rules in real estate, any residential project in which foreign money in invested, should be on a land measuring 25 acres or more. For commercial properties, the minimum stipulated area should be 50,000 square metres.

However, market players said with the realty boom, NRIs find it tough to get land at market rate. Whenever the seller gets to know foreign money is involved, they demand prices higher than the market rates. The rates go up further when sellers get to know that the buyer wants adjoining plots which should aggregate at least 25 acres.

In such a situation, the company established by the associates of NRI buys smaller plots of adjoining land without raising the rates much or even raising suspicion of the sellers that an aggregation is on play or even foreign money is involved. Once enough number of plots are bought, those are aggregated (to at least 25 acres) and the company then transfers the same to the NRI to comply with FDI rule. While the NRI pays back the bank in India, his FD kept in the bank overseas is also released at the same time.

More Help Expected for Indian Real Estate Market in 2009

The Indian government may intervene again in 2009 to help the real estate market, finance officials have said. Last week the country’s Planning Commission met to discuss ongoing financial uncertainty, with interest rates and home loan availability on the agenda. Government officials have already introduced measures designed to drive down interest on property loans and set aside $4 billion in spending for the rest of the financial year.

But more may be needed, the deputy head of the Planning Commission said, starting from April 2009. Montek Singh Ahluwalia told last week’s meeting: “The fiscal stance we adopt needs to be considered not just for this year, but also for the next year. “We are working on what the plan position should be for the next year. The decision will have to be taken by whatever government is in place after the election.”

Voters are set to take to the polls in May2009, in a decision which many see as key to India’s performance during the ongoing global slowdown. The Congress Party is currently in the hotseat, with Pratibha Patil as president and Manmohan Singh prime minister. The main opposition group, Bharatiya Janata Party, recently gained extra support when accusing the government of failings before the Mumbai terror attacks.

20 Percent Job Cut Expected in Real Estate Sector

Real estate sector in India is currently facing a hard time. If the trend continues for another six to eight months, 20 percent of the professional architects may lose their job, reported Business Standard. The affect may be more intensive as more than 90 percent of professional architects depends the real estate projects as per Indian Institute of Architecture (IIA) estimates. The slump in this sector is likely to affect the architect professionals post June 2009. IIA currently has more than 15,000 practicing architects registered with it.

These architects jointly employ more than five to seven lakh professionals. “Although there is a feeling of insecurity within the community, there have been no cases of heavy job cuts so far. However, a large number of projects have come to a halt, which is an alarming signal for our fraternity,” said Vinay Parulekar, the newly-elected National President, IIA.

Presently, major architecture firms on an average demand 10 percent of the total project costs as fees from developers. But, developers are now asking the architects to lower the fees due to heavy cost escalation and project delays. Parulekar further added that it is purely a business aspect and the percent of fees charged are different by different architects. However, he also noted that the slowdown might help Indian architects as large developers are not keen on paying foreign architects henceforth.

Small architect firms are the most suffered during the tough time as they get fewer projects and there is delay in getting payments from developers also. “When projects suddenly get postponed or new ones are not launched, smaller companies find it difficult to make money and pay salaries to its employees. Hence, a large number of small firms appoint professionals and avoid ‘employee’status so as to minimize the responsibilities of the firm,” pointed out Hemant Gandhe, Chairman, IIA Maharastra chapter. A prominent architect in Mumbai believes that there have been a large number of job cuts in this industry. But since many architects do not have the ‘employee’ status, the job cuts remained unnoticed.

Gain for DLF and Unitech

DLF Ltd. and Unitech Ltd. led gains in Indian developers after Housing Development Finance Corp., the nation’s biggest home mortgage lender, and State Bank of India lowered interest rates on loans. DLF Ltd., the nation’s biggest real estate developer, rose to the highest in two months, gaining 3.9 percent to 319.75 rupees as of 11:15 a.m. in Mumbai trading. Unitech, the second- biggest developer, gained 8.6 percent to 48.05 rupees, the highest in more than a month. The Realty Index of the Bombay Stock Exchange added 4.3 percent to its highest level since Oct. 21. The index has climbed 60 percent over the past four weeks, the biggest monthly rise since it was set up in July last year.

Mumbai-based Housing Development Finance said it is cutting its prime lending rate by 50 basis points to 10.25 percent for loans of up to 2 million rupees ($42,323) from today. The rate on loans of more than 2 million rupees was reduced to 11.25 percent. The central bank cut its key rate three times since October, to 6.5 percent from 9 percent, to increase borrowing by companies and individuals as the global financial crisis slows India’s economic growth.

“Interest rates and property prices have fallen and could decline more, lifting sales volumes and addressing liquidity concerns of developers,” said Rupesh Sankhe, an analyst with Centrum Broking Pvt. in Mumbai. State Bank of India, the nation’s biggest lender, on Dec. 20 said it will lower lending rates by 75 basis points for its top- rated borrowers from Jan. 1. State-run banks had on Dec. 15 decided to offer home loans of up to 500,000 rupees at 8.5 percent. The rate will be limited to 9.25 percent for borrowers seeking loans of 500,000 rupees to 2 million rupees for a five-year term from these banks.

Time for State Govt to Get into Act- Developers

Home loan interest rates are coming down but that is not enough. There is another major contributor to high costs of built-up space — the State governments, say developers. They have to do their bit — expedite clearances of project, bring down stamp duty and other levies, and so on — to ensure that prices come down to affordable levels. State governments should also look at rental options to ensure citizens have adequate affordable shelter in the urban areas. Also, it is up to the State governments to ensure affordable housing by setting clear targets and involving the private sector through public-private partnerships.

These views were expressed at a seminar on affordable housing organised by the Confederation of Indian Industry and the Confederation of Real Estate Developers Association of India, in Chennai. As for the definition of affordable housing, the seminar covered residential units ranging from a few lakhs to up to Rs 35 lakh. Industry representatives pointed out that State government taxes account for 35-40 per cent of the cost of built-up space. Project approvals could take up to two years that is a big addition to the cost of land as interest mounts. On the average, selling price of about Rs 3,500 a sq.ft, the government’s share of taxes and utility charges can go up to Rs 900 a sq.ft, they said.

Hotel Industry Suffers Major Slump Post Attacks

The Mumbai attacks targeted two of India’s iconic hotels, the Taj and the Oberoi, where terrorists shot and killed guests indiscriminately and held hundreds hostage for nearly 60 hours. This has proved a deadly blow to an industry already wounded by the worldwide economic downturn. Big hotels across the country have had to invest in beefed-up security, including metal detectors and baggage scanners, and Ratan Tata, chairperson of Tata Sons which owns the Taj group of hotels, has announced that the group will undertake its own anti-terror and security arrangements. But, as P.R.S. Oberoi, chairperson of The Oberoi Group, pointed out at a press conference in Mumbai days after the terrorists’ siege was over, “Unfortunately, hospitality and security don’t go well together.” Anxious guests are choosing to stay away, and industry associations say room occupancy in the large cities is down to 60% occupancy, even as room rates are being pared down by as much as 25%. According to event managers in Mumbai and New Delhi, many Christmas and New Year’s bashes at leading hotels have either been cancelled or scaled down. “We’ve seen 30% to 40% cancellations for New Year’s eve in our Goa property,” says Anjali M. Chatterjee of Bharat Hotels, who run the Lalit Goa Resort, “Usually there’s a spike in bookings for December 23 onwards, but at the moment, things are pretty flat.”

India has been trying to build toward 10 million foreign tourist visits in 2010, the year New Delhi hosts the Commonwealth Games. It is an ambitious goal: this year’s statistic is just about half that. The ‘Incredible India’ campaign, launched in 2002, has spent millions of dollar advertising India as a land of great diversity, offering beaches and ski slopes, teeming with man-made and natural wonders. Last year foreign tourists spent over $10 billion in the country. But since last month’s attacks, in which foreigners were among the more than 180 people killed, about a dozen countries have issued negative travel advisories on India. Bookings by foreign travelers, particularly from Europe and the U.S., are down by 40% to 60%, according to the Federation of Hotels and Restaurants Association of India. “The entire tourist season of 2008-09 is totally ruined,” says FHRAI secretary-general Harish Sud, “We’re expecting a 25% fall in the number of tourists. Large-scale layoffs loom on the horizon.”

This is dire news for the tourism industry which employs 53 million people directly or indirectly. It is also a complete about-face for the hotels sector which was enjoying positive forecasts until just months back. In the last few years, while the economy was projected to grow at 8% to 9%, top names in hospitality like Four Seasons and Aman were making forays into India to fill the huge supply gap in the top-end executive and leisure travel segments. Five-star room rates in key cities had grown by 40% year-on-year in 2007, and a report by Jones Lang LaSalle Hotels, the hotel investment and advisory service provider, had predicted India would need to add 150,000 new rooms in the next four years to keep up with demand. Now, much like other formerly glowing sectors like retail and real estate, things are rapidly rolling downhill. “Things will slow down primarily due to three reasons,” says Sudeep Jain of Jones Lang LaSalle Meghraj, “Due to the economic slowdown, demand has already dipped. The terror attacks led to bookings being cancelled. And due to the credit crunch, fewer deals will be struck so fewer people will be traveling.” Effects of the slowdown have led to less extravagance and a more severe emphasis on economy. “Earlier, the sky was the limit, but now people are holding smaller events with fewer guests,” says Sneha Tejwani, who runs the event-planning firm Occasionz Unlimited in Mumbai. “No Bollywood stars performing at over-the-top bashes this time. Business is down to a third of what it was.” Even flower suppliers in Bangalore, India’s floriculture center, are reportedly withering due to decreased demand for flowers for decorating weddings and other events.

Business as Usual in Bihar

The global economic meltdown might have had its adverse impact on many of the world’s richest countries, but in Bihar, considered to be one of the poorest states in India, it is business as usual here. While automobile sales have shot up by 45 per cent, the real estate sector has been booming in the last few months as the world began feeling the heat of the economic recession. According to an official report, a total of 1.33 lakh new vehicles were sold in the last 11 months in Bihar against the sale of 92,147 in the corresponding period of 2007, which is 40,853 more than those sold last year. In November alone, altogether 19,729 vehicles in different categories were sold ~ 4,403 more than those sold in the same period last year. Officials said the automobile sector registered a growth of about 45 per cent in sales this year. Notably, Bihar has recorded growth in this sector at a time when its sales have dipped by 20 to 25 per cent in many states.

No less rosy seems to be the picture of the real estate sector in the state, which figures among the most backward states of the country. As per a report received from the state registration department, Bihar earned Rs 37 crore in revenue from flat registrations in the last two months. Altogether 3,139 flats were registered which indicates there is good cash flow in Bihar. The real estate sector has been badly hit by the global recession in the country, which have compelled the builders to slash rates and offer attractive packages to push through their sales. One main reason why the economic recession has not impacted Bihar, economic experts explain, is that here the source of income is not based on industry. There is no stock market here, bank loans have gone to very few and the state has second-tier cities. Rather, the state mainly has a salaried class who works with the government, semi-government offices or companies.

“Bihar has no industry, no stock market. So, there is no question of staff retrenchment here or slashing salaries. Instead, several companies have opened branch offices here where it has deputed officials who are getting a hefty salary on time. This is why the global recession has not impacted Bihar, but one cannot say for sure that this will continue in the future,” explained Bihar’s deputy chief minister, Mr Sushil Kumar Modi, who also holds the finance portfolio. He added that Bihar had mainly the second-class cities and the rate of real estate properties had increased tremendously since it was the middle-class population who dominated the state.

“Further, there are few cash crops in Bihar and the main crops of the people here are rice and wheat, which don’t require much investment. Hence, few people have approached banks for loans,” Mr Modi, who is a senior BJP leader told The Statesman. Moreover, a huge number of development projects had been launched in Bihar since the NDA government came to power, which had drawn many construction companies, builders and suppliers, he said. This year, Mr Modi said, the state government was investing Rs 13,500 crore on development projects.

Real Estate Bust- Hard to Tackle

Real estate is one boom-gone-bust that’s proving hard to tackle. At the government’s prodding, public sector banks recently offered concessional interest rates on new home loans up to Rs 5 lakh and between Rs 5 lakh and Rs 20 lakh. This was welcome, save that discretionary lending could still thwart loan aspirants. Also, the rates weren’t retrospective, giving existing borrowers cause to grumble. As a palliative, the government appealed for lower floating interest rates. Its efforts paid off. State Bank of India, the country’s largest bank, is to offer cheaper loans. Earlier, HDFC, India’s largest private mortgage player, announced cuts in home loan rates for both new and existing borrowers. ICICI also hinted at reductions. So the soft rate trend is emerging in major private loan disbursing institutions as well. Reportedly, other realty-boosters under the government’s consideration are an external commercial borrowing window, a service tax cut and rationalisation of stamp duty on property deals.

Realtors must accept that their big margin-driven boom-time is over for now. Much of their woes are their own doing. They overbuilt assets, riding on a bubble. With depressed demand, they continued to expect unrealistic profit margins. And now they’re resisting top-end price corrections. Inflated asset prices are such that even the moneyed are sweating over purchases in tier-I and tier-II cities. Shifting gear from luxury and high-end to mid-level and affordable housing is required. Demand for low-cost housing is massively unmet; the potential for investment here goes beyond the context of today’s economic downturn. India’s young demographic profile, rapid urbanisation and high savings rate can keep propping up the property market. But housing prices in some segments need to fall by as much as 30 per cent to match affordability.

However, difficult bank financing can hobble low-cost housing projects. Banks need to ease lending, for which they may have to lower deposit rates. Further rate cuts from the RBI would help. Also, apart from builders’ pricing, the issue of artificial land shortage keeping prices up needs addressing. Some of realty’s demands converting short-term bank loans to long term and rate cuts on home loans of all categories have grounds. Others are mad-hatter expectations, such as wanting a government buyout of unsold assets at current market rates. Realtors have sensibly refrained from formally soliciting any such morally hazardous bailout. The health of real estate has strong macroeconomic multiplier effects, both in terms of contribution to GDP and employment generation. The more the sector is stimulated, the faster India’s economic turnaround will be. The real estate sector has to get real about the changed market environment, doing itself, consumers and the economy a favour.