Indian Property News on 'February, 2009'

Geojit Financial Services launches Property Services Division in Kochi

Geojit Financial Services on Wednesday launched its property services division, which will offer investors and builders a single transparent platform to buy/sell office and commercial spaces and residential apartments/flats.

The new division will start operations in Kochi, and will gradually cover the other major locations in the state. In the next phase, the other states in South India will be covered followed by the rest of India. The company also aims to tap the large NRI populations in the Gulf to meet their property investment needs by leveraging its presence through joint ventures in UAE and Saudi Arabia.

Said C J George, managing director, Geojit, “Real estate has emerged as an important asset class for retail investors. Through this initiative, Geojit plans to move up the service-value ladder to include new asset classes that require advice and service.”

For the service the company has tied up with some realtors like Abad Builders, and RDS Project. Further, Geojit inked an agreement with HDFC Bank for selling home loans and in the process of signing the same with ICICI Bank shortly. Joseph Nivin will head the new division.

No sops for Realtors in Budget

Revival in the realty sector is likely to be delayed by at least six months as the interim budget did not announce any sops to the housing sector as anticipated by many companies.

Sentiments of home buyers have not completely improved yet. The government should have taken some steps to improve sentiments for Aam Admi, which has not happened. Now we have to wait for the new government to assume charge in June,’’ said Pradeep Jain, chairman of Parsvnath Developers.

Realty players, who are battling slowing sales, were expecting a two percentage points cut in home loan rates to 6-6.5 per cent, priority lending status for loans up to Rs 35 lakh from Rs 20 lakh earlier, increase in rebate on home loan interest from the current Rs 1.5 lakh to Rs 3 lakh, abolition of service tax on sale of units and rentals, reduction in excise duty on steel and cement among others.

Though most of the banks have cut home loan rates, realty experts said the home buyers were still deferring new purchases in anticipation of a drop in the prices and also due to stagnant income, which have led to slower sales. In the December quarter, sales of property companies have fallen by 70-80 per cent, putting pressure on their finances and execution skills.

“Though this was an interim budget, the government could have made an exception and announced some sops for reviving the market, given the adverse conditions in the market. Benefits for housing would have created a ripple effect and helped in giving a positive push to the economy,’’ said Rohtas Goel, chairman of Delhi-based Omaxe.

Both the government and the Reserve Bank of India (RBI) had already announced a slew of measures, including a refinance facility of Rs 4,000 crore available against the National Housing Bank’s loans and advances to the housing finance companies (HFC) at eight per cent for loans up to Rs 20 lakh, and capped interest rates for home loans.

But experts said the earlier stimulus packages have not helped much. “Though the government has come out with a stimulus packages in the past, they were not enough to revive the sector. A lot many things were expected, now the industry has to pass through 5-6 months in the absence of any new incentive in place. Falling interest rates and inflation are only the comforting factor for developers now,’’ said an analyst from Religare Securities. Though the BSE Realty Index, which tracks realty stocks, touched a high of 1,650 points in the anticipation of sops to the sector, ended the day at 1,519 points, over 4.5 per cent lower, than its Friday close.

Indiabulls Real Estate (IBREL) fell 9.62 per cent, Ansal Infrastructure slipped 6.28 per cent, Orbit Corp was down 6.73 per cent were the major losers in the category.

“Though some government measures should have helped developers, in the long term, property companies should build houses that can be afforded by home buyers. Buyers should buy houses or private equity funds should invest keeping long term perspectives,’’ Subhash Bedi, partner of Red Fort Capital, which runs private equity funds, said.

Real Estate stocks rise on Budget expectations

Most of the real estate stocks were trading firm Monday on expectations of another government stimulus package for the economy and amid hopes of rate cuts amidst fall in inflation.

BSE Realty index was the key gainer amongst other indices, followed by auto. It was trading up at 2.8%. Meanwhile, the Sensex was marginally down 80 points or 0.84% at 10.30 a.m.

Market analysts are hoping that there might be some tax sops in the forthcoming interim budget to be presented today along with sector-specific stimulus package.

Real estate stocks like Mahindra Life, Ansal Infra, HDIL and DLF were trading higher 12%, 4.5%, 4.4% and 3.5% respectively while Orbit Corporation, Unitech, Sobha, Parsvnath were up between 2% and 4%.

Most of the analysts continue to maintain a bearish stance on the Indian real estate sector. “Given the liquidity crunch plaguing the industry, fears on corporate governance and weak underlying fundamentals, we continue to maintain our near term bearish outlook on Indian realty. Strapped for cash but unwilling to drop prices to generate cash flows, developers are now hoping that the banks will help bail them out of their near term liquidity crisis. We believe realty stocks shall continue to remain under pressure until the liquidity issues get resolved,” said Chirag Negandhi, real estate analyst at Enam Securities.

The brokerage, however, continues to remain bullish in the long run wherein falling interest rates and capital values shall re-ignite industry volumes, propel revenue growth and increase liquidity. It believes that for those willing to act contrarian, with a long term view, DLF, with its superior & flexible business model, relatively low gearing and large execution bandwidth, remains best placed to lead the next sector rally.

At CMP of Rs 140, the stock trades at a 34% discount to its NAV of Rs 212. Enam has maintained sector Outperformer rating with a revised price target of Rs 212 on the stock.

Increased FDI share in insurance will hit economy

The government’s decision to allow the percentage of Foreign Direct Investment (FDI) in the insurance sector from 49 per cent to 76 per cent, will hit the economy very badly, according to Communist Party of India Member of Parliament Gurudas Dasgupta.

The move, he said, would lead to takeover of the Indian insurance business by foreign players and there would be no guarantee for the security and safety of the hard earned money of the Indian customers. The increased FDI share would facilitate more profits to the foreign investors. Their profits would be Indian customers’ losses and their opportunities would mean the country’s increased exposure to the kind of risks they had brought in, in their financial sector.

The effect of the U.S. economic meltdown was not felt in the banking and insurance sectors in India because a majority of them were with the government, that too because of the public pressure, particularly from the Left parties. If the government did not reverse the move there was every possibility of the Indian economy facing the risk.

Even in the retail sector, the FDI was allowed to be increased to 76 per cent, said Mr.Dasgupta, who is also the general secretary of the AITUC.

He attributed the continuous pressure from the World Bank and the American establishment, to which India had moved closer thanks to the nuclear deal, as the reasons for the decision.

Mr. Dasgupta wanted to know about the fate of a Bill, approved by the Cabinet, for extending the “gratuity coverage” to various sections of employees, including teachers of private schools.

Banks await clarity on FDI formula

Two of the country’s largest financial institutions, ICICI Bank and HDFC, are hoping that the government will clarify on Monday whether they will be reckoned as Indian entities for FDI purpose.

The foreign stake in the two institutions is currently higher than the foreign shareholding in some listed multinationals.

The view within ICICI Bank is that it can only be regarded as an Indian bank. Their argument is that 27% shares are held by a custodian on behalf of American depository receipt (ADR) holders. The custodian votes in accordance with the wishes of the board, which is controlled by Indian residents.

Secondly, the voting rights in a bank are limited to 10% irrespective of how much shares an individual holds. Besides, prior approval from RBI is required for transfer of shares of over 5% of the paid-up capital.

According to Majmudar & Co managing partner Akil Hirani, “The extent of foreign shareholding in the companies will determine whether they will be reckoned as foreign or Indian.” He adds that their investment in subsidiary companies could, therefore, be seen as foreign investment.

As of December-end, foreign investment in ICICI Bank was 64% which included 36% held by foreign institutional investors and 27% held by overseas investors through ADRs.

In the case of HDFC, the foreign shareholding is higher at close to 74%. Of this, 58.8% is held by foreign institutional investors and 15.3% through foreign direct investment. As against these, Hindustan Unilever has 52% held by its foreign promoters and close to 15% held by foreign institutional investors.

Right now, there is no immediate concern for either institution. The only subsidiary with sectoral limit on FDI are their respective insurance arms, ICICI Prudential Life and HDFC Standard Life. However, here, the government has said there is no confusion as the Insurance Regulatory & Development Authority has clearly defined what is a foreign company.

On Wednesday, the Cabinet committee on economic affairs (CCEA) endorsed new guidelines for computing foreign equity holding in an Indian company. On Friday, a Press note issued by the government said that investments by an Indian-owned company would count as Indian equity.

An Indian-owned company is one where the beneficial foreign ownership is less than 50% and where the right to appoint the board is with resident Indians. The new norms have generated an enormous controversy because the implication of this for sectors such as multi-brand retail, where FDI is prohibited, or where sectoral caps exist as in telecom, insurance and media, are still not entirely clear.

According to bankers, the object of the guidelines is to relax FDI norms to encourage investment and it is unlikely the government would take a stance that would require companies to reduce their holdings. However, besides the issue of entities being Indian or foreign, there are other problem as well. For instance, the stance of investment in hitherto-prohibited sectors.

“There is a lack of clarity in terms of the latest changes in the FDI policy and we are waiting for the final notification to be issued by the government,” Amarchand Mangaldas partner Akila Agrawal said. “It is not clear if downstream investment by investing companies with foreign holding in sectors that do not have sectoral caps has been liberalised,” she said.

Overall, corporate lawyers feel the guidelines encourage investment. “There are a lot of positives in a way that sectors such as multi-brand retailing and telecom where there are restrictions in FDI can now avail FDI through investment companies. Having said that, the negative is that the proposed changes in the policy may result in circumventing the restrictions or the sectoral caps that exist under the FDI policy,” Premnath Rai Associates partner Premnath Rai said.

According to Fox Mandal Little’s Som Mandal and Hammurabi & Solomon’s Manoj Kumar, the recent changes will be helpful for foreign investors as they would not require FIPB approval for downstream projects. Moreover, the changes shall bring about a lot of clarity that was missing earlier.

Bailout for Realty Firm

Cash-strapped realty major Emaar MGF may turn out to be the first major beneficiary of a government package in the real estate sector, thanks to its partnership with Delhi Development Authority (DDA) for the 2010 Commonwealth Games village project in east Delhi. The government had already facilitated a nine-month deferment of its Rs 50-crore instalment to State Bank of India (SBI), and has now further asked DDA to prepare a report on buying out flats at a negotiated price.

In fact, Emaar MGF could turn out to be the lone beneficiary in a downturn where all major real estate companies, including DLF and Unitech, are affected and witnessing a sharp erosion of their bottom lines. The government has so far refused to give any concession to the real estate sector and is asking for a price correction.

Urban development secretary M Ramanchandran said he had asked DDA to prepare a report on the issue and suggest possible solutions. “Emaar MGF has already got nine months extra to repay its Rs 50-crore instalment to SBI. We are assessing the situation. If the need arises DDA would either give them a loan or buy flats at a negotiated price. Also, PSUs may buy in bulk,” he said. Apartments at Commonwealth Games Village were originally priced at Rs 12,500 per sq ft and today they range between Rs 12,750 and Rs 15,000 per sq ft. This means, prices of flats in the project, close to the Akshardham Temple in east Delhi, start at Rs 1.7 crore. Mr Ramachandran, however, said the government would not be able to pay the market price.

“Till January 31, the progress of the village is 40% against the targeted 41%. So, things are very much under control so far. But work can’t wait because of liquidity issues. So, flats have to be purchased, but it will have to be a justified price in case DDA buys those,” he added. When contacted, the Emaar spokesperson confirmed the rescheduling of the SBI loan repayment without furnishing any details. “We had availed ourselves of a loan from SBI in 2007. We will begin servicing this loan from September 2009,” the company spokesperson said.

The developer also confirmed that DDA, as a project partner, was discussing the appropriate funding options.

FDI rules open all Sectors to Foreign Investment

With foreign direct investment in the country trickling to $1.36 billion in December, the government has amended rules for foreign direct investment, thereby opening up almost all sectors of the Indian economy, including defence, to foreign investment.

Under the revised norms for foreign direct investment issued by the government on Friday, foreign investor can invest up to 49 per cent in almost all industrial sectors of the economy.

”An Indian company may be taken as being owned by non-residents entities, if more than 50 per cent of the equity interest in it is beneficially owned by non-residents,” according to a press note issued by the department of industrial policy and promotion (DIPP) on Thursday.

For companies involved in defence and information and broadcasting, the largest Indian shareholder will have to own 51 per cent equity, CNBC TV 18 quoted commerce minister Kamal Nath as saying.

The definition of ownership is in line with that in the Companies Act and, for calculation of indirect FDI, all categories of foreign investment would be considered, the report added.

Organised multi-brand retail, hitherto forbidden territory for foreign investors, also now stands open, he pointed out. This has been made possible by the latest amendments to the FDI rules, which classifies any company with less than 50 per cent foreign ownership in a company as Indian.

Addressing a press conference on Friday, commerce and industry minister Kamal Nath, however, sought to explain that the revised norms bring transparency and uniformity to assessment of foreign investment, based on control and ownership.

He said all forms of foreign investment, including FDI, FII holding, NRI investments, American Depository Receipts, Global Depository Receipts, Foreign Currency Convertible Bonds, and convertible preference shares, would be taken into account.

He also said, for assessing foreign stake in any company, the only exception made was in the case of a joint venture company setting up a wholly-owned subsidiary in India. In that situation, the foreign stake in the subsidiary company will be considered as equal to the stake in the holding company, he said.

An Indian company, according to the press note, would be deemed controlled by non-resident, if foreign entities have the power to appoint majority directors on board.

India received foreign investment of $21.20 billion during April-December period, against a target of $30 billion for the whole fiscal. It will be a daunting task to mop up the remaining $8.2 billion in the remaining period of the last quarter of fiscal 2008-08, in the face of global credit crunch.

The country received foreign investment of around $24.5 billion in the previous financial year 2007-08.

Capital flows into the economy, which averaged $2.5-3,0 billion a month till September 2008, fell in October to $1.4 billion and further to $1.08 in November.

Kolkata Govt Rejects DLF’s Township Proposal

The West Bengal government has rejected DLF Ltd’s proposal to build a 500-acre township at Dankuni in the suburbs of Kolkata, according to the state’s principal secretary Subesh Das.

Though in July 2006, the state government had chosen DLF through competitive bidding to build a 4,840-acre township in the same area, it couldn’t acquire land for the project . The proposed township was estimated to cost Rs40,000 crore and was to be DLF’s biggest project in eastern India. Mint had reported in its 2 February edition that DLF had proposed to scale down the project to a 500-acre township in view of the difficulty in acquiring land.

On Thursday, the state cabinet decided to ”ask DLF to withdraw from the project” and that it would consider Indonesia’s Salim Group-promoted New Kolkata International Development Pvt. Ltd’s proposal to develop the township. Das said the government would refund the Rs270 crore advance that DLF had paid it two years ago for the project.

No Deduction in stamp Duty on Real Estate

After dithering for over a month, the revenue department, led by senior Congress minister Patangrao Kadam, has dropped the proposal to revise the stamp duty on real estate transactions. “We had received a series of proposals from a section of builders and the Maharashtra Chamber of Housing Industry (MCHI), asking us to reconsider the existing stamp duty rates in view of the fall in real estate prices. Kadam had even heard the builders’ view. But now, it appears that the government is no mood to reduce the stamp duty,” a senior revenue department official said.

The revenue department decides the amount of stamp duty on real estate transactions for a particular year on the basis of the ones carried out in the previous year. Accordingly, the registrar of stamp duty issues a statement of ready reckoner for charging stamp duty on real estate transactions on January 1 every year. “In the current year, we will levy a stamp duty according to the ready reckoner rates promulgated on January 1, 2008,” the official said. Chavan and Kadam had asked the revenue department to study the memorandum and submit a report. “We studied the pros and cons of the proposal and concluded that there was no need to reduce the existing stamp duty rates. However, the issue was still open for Chavan and Kadam,” the official said.

The official said the ready reckoner rates prescribed by the revenue department were lower than the real estate rates of private builders. “In some areas, the ready reckoner rate was Rs 10,000 per sq ft, and the one prescribed by private builders was Rs 30,000 per sq ft. After the slump, it has come down to Rs 18,000 to Rs 22,000 per sq ft. Despite the slowdown, the rates prescribed by builders are still higher than the ready reckoner rates,” he said. The official added that since the government was facing resource crunch following the implementation of the Sixth Pay Commission report, it was unlikely to slash stamp duty.

Organised Retail- Losing its Path

Organised retailers remain unsure as to which format works best and, given their loss levels, cannot even invest in the kind of supply chains they need to be competitive. Each square foot of retail needs Rs 2,000 of capital, organised retail makes a profit of just Rs 300! So who’s going to fund it?

With more than $300 billion of retail sales annually, an economy growing at seven per cent, 500 million people below the age of 24 who don’t have any guilt about consumption, I’m a big fan of organised Indian retail. But in the near future, organised retail’s story is a poor one. Superimposing a new channel in a non-differentiated business is always a long haul — even after being in the market for more than 15 years, some of India’s largest consumer companies like ITC, HUL, Nestle and the Tatas have got less than three per cent of the branded staples market. The same applies to all the attempts to digitalise the cable industry.

India is one of the most over-populated retail destinations in the world with one outlet for every 100 persons. Around 95 per cent of shopping is from the neighbourhood retailer who offers convenience, credit and personalised service — so why would consumers switch to modern formats which offer little differentiation in pricing (in the absence of scale or superior logistics) or location (convenience store formats like Subhiksha or Reliance Fresh are proving unviable)?

When there’s no major differentiation on offer, a ‘push’ strategy could help, of the sort DTH did with big subsidies — in 2008, the industry did 1.5 times what was achieved in five years. But the supply-side dynamics don’t quite favour organised retail. While inadequate investments on retail-ancillary and retail-logistics businesses curtail the ability to compete on pricing or product, poor economics of the existing operations and lack of investments in retail infrastructure will put the brakes on future growth plans. While the industry leader (Pantaloon Retail) is not adequately funded for growth, funded players like Reliance Retail/Tata and Birla have still to establish adequate scale to be competitive.

Since retail is all about logistics, the supply chain is critical as this is what allows retailers to extract that extra two to three rupees in low unit-price categories, especially agri-commodities. But investments in retail-ancillary and retail-logistics have been limited (barring Future Group and Reliance Retail). And the current scale of operations has not permitted players to scale up their private label portfolio (for higher margins).

All this has meant the economics of the industry have deteriorated. Every square foot of retail space calls for Rs 2,000-2,500 of capital, while the most profitable retailer generates Rs1,000-1,200 of cash profits at the store level, and Rs 300 at the net level. So, at best, internal accruals can support just 15 per cent of space addition. Given this, the fact that the books of rapidly-growing retailers are highly leveraged, and that the current environment is making access to external capital difficult, retail growth has hit a roadblock. Though there are capitalised players like Reliance, Tatas and Bharti operating in the space, retailing cannot exist in the absence of a retail environment — the competition also has to be funded.

The industry was anticipating over $20 billion of investments over the next five years. For the industry to sustain a 30 per cent growth would call for an addition of around 20 million square feet of retail space annually — that’s Rs 6,000 crore of annual investment on retail real estate development alone. With the real estate industry in a major cash crunch, this isn’t going to happen soon. The industry is scalable in the long run, but it will be a long haul. And the current turmoil puts a question mark on the survival of many of today’s industry leaders.