Indian Property News on 'February, 2009'

DLF raises Fund from Bond sale

DLF, the nation’s biggest real estate developer, has raised Rs 720 crore from selling bonds to insurance companies as part of its plan to raise Rs 5,000 crore from such sales.

DLF on February 24 raised the funds through issue of non-convertible debentures maturing in five years which offered as much as 14 per cent interest, sources in the company said. The bonds were sold to Life Insurance Corporation (LIC) of India and a few others. DLF officials were not available for comments.

DLF in March disclosed plans to raise Rs 5000 crore from selling bonds to investors. It received a ‘AA stable’ rating for the issue from Crisil. However, the rating company in January downgraded the real estate developer’s pass through certificates to ‘A+’ from ‘AA-’ because of “slowdown in the company’s real estate sales”.

The developer, while announcing its quarterly results, admitted that it had put a quarter of its projects on hold.

The rating company believed that the sales would continue to adversely affect DLF’s operating cash flows. The realtor has been forced to increasingly rely on refinancing of its debt, Crisil said.

DLF, which has to repay as much as Rs 4,300 crore of loan by June this year, has already refinanced about half of the amount. The developer has been able to refinance Rs 2,000 crore at 12-13 per cent interest rate, company sources said. The company doesn’t have loan repayments for next two years after June, the officials said.

The company plans to raise the remaining Rs 2,300 crore from selling bonds, discounting lease rentals and selling stake to private equity investors officials said.

While assigning the revised rating in January, Crisil believed that DLF had comfortable liquidity, backed by cash and bank balances of nearly Rs 800 crore. The realtor planned to raise loans of about Rs 4,900 crore against its portfolio of leased assets, CRISIL said.

DLF’s consolidated profit in the fiscal third quarter dropped 69 per cent to Rs 670.79 crore. Sales of the Kushal Pal Singh-owned company fell 62 per cent to Rs 1366.67 crore in the three months ended December 3.

Real Estate Sector- potential for more sophisticated Infrastructure

Anecdotal reports are that activity in the property market has been slowing – but that does come after an especially frenetic couple of years.

The real estate sector in India has grown by 30% to 35% during the past five years, reflecting the rapidly increasing demand for office, commercial and industrial space, as well as for bigger homes, that coincided with the economic boom.

To some extent, property development may have failed to keep pace with demand because of an underdeveloped investment market.

Owing to oversupply, downward pressure on rents seems a likely outcome in the coming months, making occupier demand look vulnerable in the Indian property market.

On the retail front, the likely effect of an economic slowdown will be to depress discretionary spending and that may subdue retail rental growth, at least over the next year or so.

However, once the current global downturn is through, the Indian economy should rebound, supported by a large, young workforce; gradual but consistent liberalisation reforms; and a high rate of consumer and private-sector savings.

The growing population and economic expansion will mean that India needs not just homes but offices, schools, hospitals, and entertainment centres.

Addressing infrastructure needs is also an important priority to support this property market development. Special Economic Zones can play an important role. On the investment side, the expected development of real estate investment trusts (REITs) in the future could expand the property investment opportunities in India.

In the longer term, there is a great potential for more sophisticated infrastructure and a greener future.

Real Estate Developers Face Risk of Cancellations

DLF Ltd. and other Indian developers are cutting prices on increasing risks that buyers will back out of purchases made at the market’s “peak,” forcing developers to write off earlier profits, Credit Suisse Group said.

DLF, along with Parsvnath Developers Ltd. and Orbit Corp., have more than 20 percent of their revenue booked since 2006 as outstanding, Mumbai-based analyst Anand Agarwal wrote in a report today. The company, India’s largest real-estate company, has lowered prices for a project in Chennai by as much as 14 percent, the report said.

“Wherever possible, customers are looking to walk out of transactions entered at the peak of the real-estate market,” Agarwal wrote. “Many real-estate companies have recognized revenue on percentage completion against future cash inflows on contracted sales. Some of these transactions could be canceled, leading to write-offs.”

The Bombay Stock Exchange Realty Index has dropped 36 percent this year, compared with an 8.6 percent slump on the benchmark Sensitive Index. Home sales in India have tapered as the global financial crisis and slowing economic growth reduced the availability of home loans and hurt spending.

DLF will cut prices in new projects over the next three months to revive a slump in home sales, Vice Chairman Rajiv Singh told reporters on Feb. 2. The developer reduced prices at a project in Bangalore and Hyderabad, according to reports in the Business Standard this month.

Outstanding debts at DLF amount to about 38 percent of its total revenues between the 2006 and 2009 fiscal years, while Parsvnath and Orbit have ratios of 29 percent and 20 percent, respectively, Credit Suisse estimated.

Corrupt’ projects upset Goa’s peace

Simmering resentment against major developments in rural Goa – famous for its exotic beaches and idyllic rural countryside – has exploded in protests against allegedly corrupt local administrators.

The former Portuguese enclave, which merged with the Indian Union in 1961, has a rich heritage, and its people have a term susegaad (take it easy) that typifies their laid-back culture.

Attracted by the ambience, millions of visitors, mainly foreigners, come to Goa each year. That is helping to attract real-estate developers seeking huge profits in large projects in the area’s villages, permission for which is given by the panchayats, or local administrative offices, each of which encompasses several villages.

Several large projects in South Goa, one of Goa’s two districts, are said to be obtaining permission given by the panchayats without adequate attention to garbage management, water or electricity, while the developments destroy coconut and cashew orchards and other resources, leading local communities to fear already tight supplies will be strained further.

Many projects also encroach on water bodies, agricultural land or violate construction laws. Villagers say corruption at all levels is responsible for the situation, but blame their panchayats for giving the ultimate sanction for these projects.

At least 28 out of the 30 panchayats in the coastal area of Salcete, a subdivision of South Goa, have seen angry protests by villagers over construction in ecologically sensitive areas in the past year, notably involving large developments in Colva, Raia, Nuvem, Fatrade-Varca, Courtalim, Betalbatim and Orlim.

“Goa is turning into an infrastructure hub,” said Geraldine Fernandes, chairperson of the Benaulim Villagers Action Committee (BVAC). “Roads and highways are being built through our agriculture fields and rivers, and blasting our mountains and forests apart without forethought.”

Fernandes, previously a housewife running home stays for European tourists, is protesting against three housing projects in her fishing village of Comlatolem, in the beach town of Benaulim, South Goa.

One of the projects has illegally filled up part of the village’s ancient pond with a lotus species that is killing the pond, which had served as a source of water for nearby paddy fields. Ironically, the word from which the village derives is name, comla, means lotus.

Last March, the BVAC began a series of protests against the local administrative offices, demanding that licenses issued to the three housing projects be revoked.

Their action included demonstrations in Goa’s capital of Panjim (also known as Panaji), an appeal to the state’s director of panchayats, a hunger strike and a vigil at the panchayat office to stop further licenses.

But initial success in securing revocation of licenses and the resignation of the village panchayat leader, have floundered, with the real estate companies obtaining legal stay orders that override the license revocation.

In nearby Pateapura village, at Nuvem, a 140-apartment housing complex being built in the absence of proper infrastructure on elevated land threatens to contaminate the village’s water. The complex, which is nearing completion, features a club house, massage parlour, spa and swimming pool.

“This is a village,” said 25-year-old Anthony Sequeira. “How can they conduct such a lifestyle in this area.” The village, with a population of 500, mostly low-income daily workers, is now frightened by the concrete expansion taking place.

“We are poor, we do not have any support from anywhere”, said 35-year-old Marian Correa, a small shopkeeper at the village. “The builder has filed seven cases of trespassing against us and we are now running from pillar to post for these false cases.”

Pateapura villagers say their panchayat members have been complicit with the builder in the irregularities that have occurred.

Soter D’Souza, director of the Center for Panchayati Raj (or local administration process), an organization training villagers about their rights under the panchayat system blames Goa’s department of rural development for the growing unrest and violence against panchayats in the villages.

“The government has been denying this decentralized system to function by refusing to give powers to the panchayats, resulting in widespread malpractice, corruption and illegality,” said D’Souza.

All over Salcete subdivision, villagers find themselves in direct conflict with panchayat members who have lived their entire life in the same villages.

“They [panchayat officials] are robbers,” say Mario Fernandes, a retired chauffeur.

Communities are splitting apart by taking different views on the issue. The BVAC condemns fellow villagers, “lawyers, doctors and professionals” who have chosen not to join their protest.

Datta Naik, of the Confederation of Real Estate Developers’ Association, Goa, says the real estate sector is being made the scapegoat for the government’s neglect of infrastructure in the villages. Goa’s regional plan covering the period to 2021 declares that several fields and people’s homes are non-inhabited, causing widespread complaints.

Panchayats have now been given until April 15 to produce their grievances.

“There is no concurrent population and tourism management along with this development,” says Kim Miranda, convener of Gaon Ghor Rakhon Manch (GGRM), another movement to save villagers’ houses. “Where on earth are we to live?” she said.

Miranda, a tourism official, said an exodus of Goa’s landowning elite 30 years ago to foreign countries exacerbated the issue because their lands, though mired in litigation, had attracted the real estate developers.

“Tell Goans abroad to set up trusts for their lands and cultivate them,” Miranda told Inter Press Service. “This will give opportunities for livelihoods and adding value for both cultivators and landowners. We will be glad to help.”

Banks seek up to 150% collateral against Loans

In spite of ample liquidity, banks are treading cautiously as far as lending to the real estate sector is concerned, and are seeking collateral as high as 150 per cent of the loan amount as security deposit from them.

This apart, banks are cushioning themselves by seeking more equity participation from the developers, ranging between 40 and 50 per cent of the project cost, and providing loan not more than 50 per cent of the cost in commercial real estate projects.

The high collateral was in the wake of a fall in property prices and subsequent revaluation of the projects, said some bankers.

“We ensure that genuine developers are not denied credit. While banks have not stopped lending to any sector, they are being selective and more cautious. As a measure against default, the security deposit is about 150 per cent of the loan amount at present. This is in accordance with the government advice,” said an executive director of a public sector bank.

While banks generally seek land and the asset to be created as mortgage, which generally account for the total loan amount, they are now seeking some of the finished projects of the developers as collateral as well, to tide over the fall in property prices.

“Banks are very cautious in lending to the real estate sector, especially to commercial projects. The problem arises when the interest burden accumulates and there is no cashflow due to the inability of the developers to lease out the property. Thus, banks are seeking at least 40 per cent as promoter’s own contribution and rent agreements prior to lending,” said an executive of another public sector bank.

However, the rate of interest has fallen over the last three months, and banks are charging 12-15 per cent interest for lending to real estate developers, depending upon their credit rating.

Banks are cautious in lending, despite the fact that liquidity has eased over the last one month. Also, even though the interest rate on deposits coming down, banks are able to maintain growth in deposits.

For example, on a year-on-year basis, deposits have seen a growth of three per cent at United Bank of India (UBI). The bank had not seen any impact in deposit mobilisation due to falling interest rate, and the rate of growth of deposits in January was almost the same as it was during October-December, when interest rates were high at about 11 per cent, against 8-9 per cent now.

“We have to ensure commercial viability and saleability of the project. Thus, we have to see if the developer has agreement with good companies for leasing out the finished project,” said T M Bhasin, executive director, UBI.

Real estate developers are also seeking restructuring of the loans, as demand has been staggering at low levels, according to bankers.

The Reserve Bank of India (RBI) recently allowed banks to restructure loans for commercial real estate projects, so that they do not turn into non-performing assets (NPAs).

SBI’s interest subvention scheme to trigger sales in the Realty market

Home loan borrowers in the eastern metropolis may have a reason to smile: the country’s largest lender, the State Bank of India, has introduced an interest subvention scheme that hopes to trigger sales, (and not prices) in the badly-bruised real estate sector.

The scheme is a special arrangement between SBI and a few builders, wherein the interest component of a home-loan would be borne by the builder, until the project is complete. In effect, it would mean that buyers of under-construction homes would not have to shell out the interest on their EMI until they get physical possession of the home.

The SBI move is seen as an effort to prop up sales in the real estate sector, where builders are grappling with low sales volumes. Industry veterans say it could provide a much needed fillip to the ailing sector. A highly placed official of SBI’s Bengal circle (comprising of West Bengal, Sikkim and the Andaman & Nicobar islands), says that so far, the bank has roped in three reputed builders — Ambuja Realty, Calcutta Riverside and Eden City.

“We are sure that more builders will join us soon. We are getting a lot of queries but for the time being we have decided that this arrangement will be extended to those builders who will complete their project in the next 18 months,” the SBI official said.

Will the scheme trigger a price hike? The Confederation of Real Estate Developers Association of India (Credai) claims it will not. Credai Bengal president Pradip Chopra says the association is happy as the scheme would prop up sales and more builders would sign up. “We are happy as long sales will happen,” Chopra, who also runs Sherwood Estates, says.

New home seekers, however, prefer caution. Deb Ghosh, a prospective home loan seeker from north Kolkata, says: “The only worry is whether builders will charge me more on the rack rate since they will certainly not pay the interest from their own pocket…”

Industry experts point out other downsides. For instance, builders who bear interest burden would not be likely to offer any cash discounts to customers, which they might have otherwise done.

“For banks, there is zero hassle since they are already flush with funds and they are getting the interest no matter who pays it,” says a builder, who did not wish to be quoted.

Aditya Birla expands into Real Estate

Aditya Birla Management, the Mumbai based conglomerate best known for its metals and materials businesses, is to set up a real estate and private equity arm for its wealth management units.

According to a report by the Asian Investor, chief executive of Aditya Birla Management’s financial unit in Mumbai, Ajay Srinivasan said the poor performance of Indian equities prompted the group to offer its clients alternative products for investment.

The report said that real estate investments would be managed through its asset management business, Birla Sun Life Asset Management.

To lead the operation, Birla has appointed Shashi Kumar as head of real estate. Kumar was a founding member and CIO at IndiaReit and is said to be one of few professionals to have completed an investment cycle of fund raising, deployment and exit in India’s relatively immature real estate arena.

RBI expects lending rates to fall further

The Reserve Bank of India (RBI) expects the banks to slash the lending rates further over a period of time but non-performing loans could rise in a slowing economy.

Anand Sinha, an executive director at the RBI, said the RBI would continue to maintain ample liquidity in the banking system using conventional and unconventional tools. He said lending rates have come down in recent weeks. “Over a period of time we expect the lending rates to come down,” Sinha added. At its quarterly monetary policy review, the RBI kept its key rates steady and said banks had significant room for cutting lending and deposit rates.

Haryana plans floor-wise registrationThe real estate sector in the state of Haryana gets a boost following the state government’s decision to allow floor-wise registration of the houses falling under municipal limits, Huda sectors and Town and Country Planning licensed areas.

The move is going to help the state government earn additional revenue of around Rs 200 crore annually, as well making people in Gurgaon, Faridabad and Panchkula the legal owners of their part of the house. Property owners and those in real estate business say that the move would give a new push to property prices as rates peaked in Chandigarh after the government allowed floor-wise registration.

NRI builder eyes incomplete projectsA US-based real estate developer of Indian origin, Mint Homes, is planning to take over stuck up realty projects in Chennai and Mumbai to expand his footstep in India. Raj Natarajan, director of the company said, “We have invested Rs 40 crore in Coimbatore project, 25 per cent of which has been completed and the entire 136-apartment project would be completed by March 2010. At present, we are also looking at taking over projects that have been stalled for various reasons.” Meanwhile, the two cities that have drawn his current attention are Chennai and Mumbai.

Rs 800 crore for 8 new hotels: Radisson AB Hotels-promoted The Radisson Delhi is investing around Rs 800 crore over the next four years for opening eight more hotels in the country under the brands of Radisson, Park Plaza and Country Inn.

According to R Kapur, MD, Radisson Hotel Delhi, the company, at present operates two of the Radisson hotels in India in New Delhi and Varanasi and plans for eight new hotels under Carlson Group’s Radisson, Park Plaza and Country Inn brands at an investment of Rs 800 crore.

The new hotels would come up at Bhubaneshwar, Chilka Lake, Hyderabad, Konark, Puri, Paradip, Vishakhapatnam, and Kakinada.

Correction in Realty Market is bound to come

Expecting correction in real estate prices, country’s largest housing finance company HDFC Ltd today said it would cut interest rates in case costs of fund comes down.

“Where flats are more expensive, the drop will be sharper than where the flats are cheaper… correction is bound to come,” HDFC Chairman Deepak Parekh told reporters here.

Asked whether HDFC would cut interest rates, he said, “if the availability of money…if our cost of fund comes down, we will certainly reduce rates.”

HDFC last relaxed its housing loan rates in December 2008, cutting down rates for home loans above Rs 20 lakh by 50 basis points.

The rate for loans above the said category was reduced to 11.25 per cent from 11.75 per cent earlier.

It also introduced a new slab of housing loan below Rs 20 lakh with interest rate of 10.25 per cent.

Following the easing of benchmark rates, the Equated Monthly Installment (EMI) for the existing and new borrowers would come down.

On the policy rate cut, Parekh said, since inflation numbers are down RBI may take some measures after few weeks. “RBI would take some steps, may not be immediately but may be after a few weeks,” he said.

Realtors likely to divert surplus FDI to Realty Projects

Commerce and industry ministry is likely to waive end-use restrictions and allow realty developers to divert surplus foreign direct investment to real estate projects where it was not allowed so far. According to the norms, FDI is allowed only in projects with a minimum investment of $10 mn (in wholly-owned subsidiaries) or $5 million in joint ventures, and which has a minimum area of 10 hectares.

As per the proposal, which will require a Cabinet approval before being implemented, a real estate company which has brought in FDI in a project meeting the mandated conditions can now use the surplus funds in another project which may not meet the prescribed conditions.

For example, a realty company that has raised FDI for a township in Faridabad which meets the minimum capitalisation and minimum area norms may now use a part of the surplus funds for a project in Gurgaon which may not have got a clearance from Foreign Investment Promotion Board (FIPB). Put simply, while the new norm does away with the end-use restrictions, it also nullifies the mandatory meeting of conditions for using FDI.

In the last FIPB meeting, the board deliberated that in view of the difficulties being faced by the real estate sector, some leeway is required, even if for a temporary period.

“We will soon issue the guidelines to be followed in case of requests for receiving FDI by realty companies engaged in various projects, not all of which are FDI-compliant as per Press Note 2 of 2005,” a senior official directly dealing with the new policy told ET. He asked not to be identified. The official added that the relief would be extended to the realty sector for a temporary period with an in-built sunset clause.

Interestingly, this comes even as the government had recently stepped up vigilance against companies channelling FDI money to projects that had not received FIPB clearance. While examining real estate company Keystone’s proposal in a meeting held in January, the board had asked the department of industrial policy and promotion (Dipp) to set up a monitoring cell to track FDI inflows into non-FDI compliant projects under the veil of FDI.

The board was apprehensive that in such cases, there could be a possibility of funds getting diverted to projects that had not been cleared by FIPB.

In fact, Dipp has prepared a draft Press Note on guidelines on induction of FDI into Indian real estate companies with both FDI-compliant and non-FDI-compliant projects, where FDI is required to flow into FDI compliant projects only. Officials say this would be the fourth PN to be issued by the present government before the polls.

So far, the government was wary of tweaking the FDI guidelines laid down under PN2 of 2005. It was of the view that if real estate companies are allowed to retain non-FDI-compliant projects while bringing in FDI, it would actually mean they are being exempted from Press Note 2 of 2005 guidelines which lay down the minimum capitalisation and minimum size norms for projects for being eligible for accepting FDI. The government has also specified a three-year lock-in period for such ventures.

In January, FIPB had rejected Delhi-based real estate company Vatika’s proposal to retain projects that do not comply with FDI guidelines for the real estate sector on the ground that such an exemption would defeat the purpose of PN2 of 2005. However, officials now say that with repeated pleas from the industry seeking relaxation of the policy in view the current economic downturn, tweaking norms would be a prudent step.