Indian Property News on 'March, 2009'

Unitech Repays Rs 600-700-cr debt

Real estate company Unitech Ltd has rescheduled and repaid about Rs 600-700 crore of debt, which was due by March 2009. The stock price of the company gained 33 per cent this week. It closed at Rs 35.90 on Friday. However, there is no clarity on how much of the debt has been restructured and the proportion that has been repaid. While a questionnaire sent to the company spokesperson remained unanswered, a person in the know said the liquidity position of Unitech has improved on several counts — namely the sale of hotel property, funds received from Telenor deal, and an “encouraging” response for new affordable housing projects.

Unitech recently sold its hotel in Gurgaon for Rs 235 crore, of which it has received 45 per cent of the payment; the balance 55 per cent will come in April. Besides this, with Telenor’s infusion of the first tranche of investment (of Rs 1,250 crore) into Unitech Wireless, nearly Rs 380 crore has come to Unitech Ltd’s coffers. This is in lieu of advances Unitech Ltd extended to Unitech Wireless in the past. In addition, about Rs 2,000 crore telecom debt is now off Unitech; it got transferred from the erstwhile consolidated balance sheet of the Unitech Group to Unitech Wireless’ new balance sheet.

The balance debt on Unitech’s books now stands at Rs 8,000 crore, sources said. Unitech’s Managing Director, Mr Sanjay Chandra, had told reporters in January this year, that the company was able to repay or reschedule nearly three-fourths of Rs 2,500 crore loans then due by March 2009; at that point it needed to retire the balance (Rs 600-700 crore) debt. Sources said this Rs 600-700 crore debt has now been settled. Sources said that in the first phase of the new affordable housing project in Gurgaon (priced at Rs 30-Rs 40 lakh) where the company had offered 150 apartments, the entire stock was sold-out within first 15 days. “The company then launched phase-II of the project and by now has sold 300 apartments (from phase-I and Phase-II). The project in Dadar, Mumbai has also been getting very good response,” sources said.

When contacted, a Mumbai-based analyst said the rally in share price may be in line with the broader markets. “I do not see any company-specific or sector-specific improvement. Even if they have been able to restructure their debt due by March 2009, that is on the expected lines post the completion of the Telenor deal,” the analyst said. Another real estate analyst from a Mumbai-based brokerage firm pointed out that stock was “oversold and has got corrected now. No one expected the company to default on the loans, anyway.”

12% Decline in Hotel Tariffs

Staying in hotels has become a tad cheaper. Room rates or tariffs have fallen by 12% globally in the fourth quarter in 2008 compared with the same period last year, according to a report. The Mumbai terror attacks weighed heavily on hotels apart from the global recession. But it is not all gloomy because it would seem to be the best time for the traveller. “There are many bargains to be had for travellers. This year really will be the ‘year of the deal’,” David Roche, president, Hotels.com Worldwide said. “The Asia-Pacific region recorded its first year-on-year drop in hotel room prices since 2004. This drop in prices was small, falling by 2%, however, there were substantial drops in large Asian cities including Hong Kong, Singapore, Beijing and Mumbai,” according to the latest Hotel Price Index (HPI) from Hotels.com.

Most hotels in Chennai have reduced room tariffs. “We have has seen a 10% fall in average room rates due to the slowdown and there has been a drop in international travel, but the domestic market remains strong,” said V V Giri, general manager, The Park Chennai. Sources in the Sheraton Park also said that room rates have fallen close to 25% in Q4 2008 compared with the same period last year. “With occupancy down, hotels want to fill rooms. So, offering the best possible rates is the only option,” said R Srinivasan, CEO of Radha Regent, a budget hotel in the city. Radha Regent recently opened a hotel in Bangalore.

But not all hotels are part of this trend. Courtyard Marriott is one which has maintained its tariff. “As a general phenomenon, the tourism industry has seen a decrease and we have also felt the effects. However, since the hotel is celebrating its 10th anniversary in India, we have our ’10 Reasons to stay with Marriott’ campaign that will help us maintain our competitive edge along with occupancy,” said Karan Berry, general manager of Courtyard Marriott. The business hotel has seen an upward growth in occupancy, Berry said. The chain has 25 properties in the pipeline (six in India alone).

Prices in Chennai have dipped less compared with cities like Mumbai and Delhi that have seen a 41% and 4% drop in room prices. In Mumbai the prices fell to Rs 9,300 ($186) from Rs 15,900 ($318) and in Delhi prices fell by Rs 350 per room per night. With the slowdown, hotels have shifted their focus from occupancies to the food and beverage segment. The Courtyard Marriott has started several new plans. The Sheraton Park has introduced a new ‘locavore’ menu (sourcing ingredients from local markets). Now destinations that were considered too expensive for budget-conscious travellers are now offering considerable savings. For example, hotel prices are down in many popular cities such as London, down by 24%, New York 22% and Barcelona (21%), making it an ideal time to visit these destinations, said Roche of Hotels.com.

Developers Target the Bottom Segment to Generate Liquidity

Unitech, Omaxe, Raheja, Tata Housing and Ansal API are planning new projects in the suburbs of satellite towns or smaller cities to target the bottom segment, to generate more cash. New Delhi-based Unitech and the Raheja group are planning to build single-bedroom homes in and around Gurgaon. While Unitech is busy conceptualising the project, Raheja has announced plans to construct 10,000 flats in the Rs 5 lakh range at Gurgaon, the satellite town bordering New Delhi. Tata Housing Development, too, is working out the feasibility of a sub-Rs 5 lakh housing project. Unitech plans to launch mid-segment residential projects in the Rs 5-10 lakh range in metros like Chennai and Kolkata, and suburban cities like Gurgaon, over the next few months.

Another developer, Omaxe, is planning a sub-Rs 4-10 lakh project at Peetampur and the Dewas industrial area near Indore to target workers. In the first phase, to be launched in the next 10 days, Omaxe would launch 5,000 flats and in the second phase, 5,000 more flats, the company said. “The inspiration to develop smaller and cheaper apartments comes from the Nano, which is eliciting a tremendous response. I am sure our project will see a similar response, given the fact that we will come up with such low-cost apartments near metros,” said Nagaraju. “Many industries around Udyog Vihar and Manesar are looking for houses for their workers. Our demand survey has shown tremendous interest among such firms to provide houses for their employees in the vicinity of the workplace. The new project will take care of their interest,” said Navin M Raheja, managing director, Raheja Developers.

“Nothing is selling today, as people do not have money. When both large and mid-income projects are not selling, developers have to come up with smaller projects, though they cannot earn the 30-50 per cent margins that they used to make earlier,” said Akshaya Kumar, chief executive of Park Lane Property Advisors. Developers are battling slowing sales since the beginning of 2008. Higher property prices, which more than doubled in metro cities during 2004-07, and high interest rates have made property buyers stay away from new purchases. Despite a nearly 30 per cent fall in property prices and a cut in loan rates from 11 per cent to 8.5 per cent in recent months, property sales have fallen 70 per cent from their peak last year.

DLF, Unitech, Parsvnath and all other major developers have entered the Rs 20-40 lakh segment to generate liquidity, even as their top line fell as much as 80 per cent in the last quarter. But property experts believe sub-Rs 5 lakh projects have few takers, even in smaller cities like Indore. “Even a good wage earner wants to stay in a comfortable home, which costs between Rs 8 lakh and Rs 10 lakh in smaller cities and Rs 18 lakh and Rs 20 lakh in the metros,” said a top executive of a New Delhi-based realty firm who did not wish to be quoted.

“At such as a price (sub Rs 5 lakh), either the houses have to be small or not in a good location. Prices should at least be in the range of Rs 10-15 lakh (per flat) for a project to make profit,” said Kumar of Park Lane Advisors. But developers are still launching projects to generate cash. Ansal API has launched 4,000 apartments in Jaipur, Jodhpur, Agra and Meerut. “We have priced these apartments in the range of Rs 5-10 lakh per unit, keeping in mind customers who are ready to buy small apartments. The size of a one-bedroom apartment is 500-550 sq ft, while a two-bedroom apartment has an area of 850-900 sq ft,” said a company spokesperson. The company will launch another 6,000 apartments in the coming months.

Properties in Mumbai Remain Unsold Despite Low Price and Discount

Property prices across Mumbai have dropped by 30-40 per cent from its peak rates. Realty research figures indicate that the average property prices in Mumbai, Thane and Navi Mumbai (Mumbai Metropolitan Region) have come down from its peak of Rs 8,136 a sq ft in June 2008 to Rs 4,607 a sq ft in March 2009. With 420 ready and 1,349 under-construction projects in the MMR, the mounting inventory has led to a more pronounced price cut in the latter category.

Eager to tide over the absolute slack, several developers are advertising limited time discounts. HDIL has done the same at its Kurla and Andheri projects, Nirmal Lifestyle at its Mulund project, Lodha at its Dombivli project as well as a slew of others with big-sized projects in Thane and Navi Mumbai. They urge buyers to go in for a panic buying till the offer lasts, claiming that there will only be an upward movement in prices hereafter. This is a far cry from the initial days of the slump, when developers dangled sweeteners like stamp duty waivers or a free car and electronic goods, ruling out any reduction in rates.

However, realty players say that with banks tightening the noose around developers, the fate of many under-construction projects is unsure. Real estate rating agency Liases Foras estimates that about 50 per cent of the ongoing projects are doomed to either get stalled or get deferred. “All these projects that claim to offer flats at discounted rates for limited time only, are nothing but attempts to scare the buyers into buying their projects. Property rates are bound to fall up to 60 per cent. Not only are the developers starved for money, the buyers also have no money to spare. Also no buyer wants to put his money or risk taking a loan for buying an under-construction flat,” said Yashwant Dalal, president of Estate Agents Association of India.

He said the rates of even plush flats in prime areas such as Peddar Road have come down from a staggering Rs 1 lakh a sq ft to a range of Rs 60,000-35,000 a sq ft. In Bandra, it has dropped from Rs 25,000 a sq ft to Rs 14,000 a sq ft.” The prices in the area have fallen by 35 per cent from the peak rates of Rs 35,000-40,000 a sq ft.

Crisis Hits Kolkata Retail Sector

About 100 small and large retail and real estate projects in Kolkata are being delayed or defered due to the financial credit crunch. According to analysts and industry insiders, increased retail development in Kolkata and in its suburbs had nearly doubled real estate prices over the last few years. However, although 40-50 projects are lined up in the city currently, around 100 projects are delayed or defered due to credit crunch as well as because of uncertainty over projects’ viability and sustainance. Projects like City Centre II, Lake Mall, Terminus Mall, Axis Mall and Avani Riverside mall in Howrah, are already running behind schedule.

As retail sales are down by 50 per cent, depending on discount or lifestyle retail categories, and consumers’ discretionary spends are also down 15-20 per cent, developers are now cautious about new projects. Real estate prices in Kolkata are also down 15 per cent, and a further correction of 10 per cent is expected, on the back of slowed retail activities and consumers going into savings mode. According to Mayank Saksena, head of transactions in Kokata, Jones Lang LaSalle Meghraj, around 40-50 projects are lined up for Kolkata while around 100 have been delayed.

On an average, each of these projects is of approximately 2 lakh square feet, priced at an average of Rs 3,000 per sq ft. “The best performing local developer is currently Bengal Ambuja. Local developers deliver very satisfactory products at lower prices. For instance, Bengal Unitech is charging Rs 3,200 per sq ft in Rajarhat, while other local developers charge Rs 2,500 per sq ft for comparable projects”, Saksena added. Due to increased retail development, real estate prices had increased till the better part of 2008, and this includes the suburbs. Right now, the situation is doubtlessly in stagnation, but the downward movement is minimal.

In the suburbs of Durgapur, Asansol, Bardhhaman, Siliguri, Guwahati and Bhubaneshwar, demand movement was upward because of an increasing retail presence and all the associated boosts to these markets. Retail rentals started at Rs 50 per cent sq ft in these areas and are even now at approximately Rs 100 per sq ft, Saksena informed. Kolkata’s real estate prices are generally lower than in the other metros. It is an emerging market that took off only 2000 in terms of residential. Retail development followed in 2003 when the first mall was launched. “It is still a young market, but is nevertheless all about appreciation,” Saksena added.

Rates started with Rs 1,000 per sq ft and are now at 5,000 sq ft. Also, the average real estate price drop in Kolkata is the lowest in India at 15 per cent, pointed out Jones Lang LaSalle Meghraj. “Right now consumers are deferring real estate purchase decisions and the upper budget limit has sunk to Rs 20-40 lakh in the last six months from the earlier budget of upto Rs 60 lakhs,” Saksena said. Prices are likely to come down by another 15 per cent, mainly in developing areas such as Rajarhat, Salt Lake, Howrah and the CBD zones of Park Street, Camac Street and Elgin Road.

Rates have appreciated unreasonably in these areas and there is now a deadlock in transaction in these locations. The deadlock has resulted in several store closures in these developing areas. For instance, the 3,500-sq ft flagship Adidas lifestyle store on Camac Street that had opened less than two years ago, has been closed, on grounds of ‘irrationally high’ rentals. Bangalore-based Primus, the franchisee of the Adidas lifestyle store on Camac Street, had reportedly sought a 25 per cent reduction in rent but the landlord did not agree. High rentals, coupled with ‘hardly any’ sales, had made Adidas on Camac Street ‘non-viable’. Primus has also closed its Adidas, Nike, Levi’s and Reebok factory outlets on VIP Road. The Adidas store in Mani Square has been temporarily shut and negotiations with the mall management on rentals is ongoing.

RPG Group’s Spencer’s Retail has also taken a hit, especially at its large-format store in Mani Square. Another large-format retail address — Khadim’s 28,000-sq ft departmental store Egaro — is on the brink of closure. It has been running a 75 per cent ‘clearance sale’ for over two months now. Other bleeding retailers in the city include British retailer Marks & Spencer, The Body Shop, Guess, Next and Accessorise, both at Avani Heights near the Exide crossing and in South City Mall. E-mall, the electronics market on CR Avenue, has seen Future Group’s Depot, the stationery and gifts store, shutting shop, as has the Kodak outlet.

Indian Retail Sector

“A couple of things have gone wrong with respect to modern retailing in India. We have gone wrong in estimating the market size, we have gone wrong in understanding the consumer mindset and preferences, and specially the curve on which consumer will grow,” commented Rajneesh Mahajan, executive director, retail services, Cushman & Wakefield. “It resulted in creating infrastructure which is not right. It resulted in creating stores which are not right. This has ultimately affected the expansion and development strategy.” When asked whether there was any other way to do it right, Mahajan said, “Might not be. Unless you do a store, open it for consumers and they come in, you can never say where you are going wrong or what is it that is going wrong. So, yes, all we know today is that we have gone wrong. But was there any other way to get it right, is a million dollar question for almost all of us.”

“Retail is not going wrong. Retail is going on its own right path. But it’s more a problem of speed. I do believe that we were on an overdrive. The speed did not give us flexibility to do things in a right manner. Had we retarded the speed at the right time, we could have easily escaped surgical correction which is happening today,” he further said. “Retailing has two parts – buying and selling. Retailing in an organised way is a channel of selling. Retailers will have to understand the preference of a consumer for five years, because their buying behaviour changes in every 2-3 years. The journey itself will teach many things to developers and retailers. Indian retail and modern retail is going to grow only. But the channels will have to improvise themselves” disclosed Mahajan. Commenting further on the retailers and developers blaming consultancy firms for (wrong) advices Mahajan said, “What matters is not the advice, but the execution that makes the real difference.”

Replying on a question about the possibilities of repeating the same mistake in terms of speed and formats in tier II and III cities by developers and retailers, Mahajan appeared optimistic enough in his words. “Retailing in tier II and III cities is much simpler and complex altogether. They are going to get more disposable income, thanks to 6th pay commission. And despite being considerable amount of development in terms of inflow of foreign banks, educational institutes, restaurants, flats and all, you will not see their ethnic values and shopping habits changed drastically in last decade. And as a retailer and developer, you must thank to FMCG companies who have been present there from decades to support you in terms of brand recognition and availability.” “A consultant’s job is to consult based on certain data. When you open a store, you analyse what consumers are buying. But when you don’t open a store, you don’t know what consumers are not buying. So I can’t say that retailers went wrong or developers went wrong or consultants went wrong. I think, we all went wrong in analysing the data which we had. Our role is restricted. We are a real estate consultancy firm and our experience has been till recently that we are required for very specific data on a specific area. We have never been involved in overall emergence of a shopping centre,” concluded Mahajan.

Sobha Developer Cuts Workforce by 30%

Sobha Developers Ltd, a leading realty firm in south India, has witnessed its monthly revenue reduce by more than half, from Rs120 crore to Rs 50 crore. With sales down, Sobha has been forced to cut its 3,000-strong workforce by about 30%, to 2,170. However, with revenue from the real estate sector going down, the company’s other source of income, its contractual business, has been the saving grace. “Unlike the real estate sector, the income from our contractual business has been steady and we don’t really have to look out for customers,” said J.C. Sharma, managing director of the Bangalore-based company, which is expecting a Rs400 crore turnover from the contractual business by 2010 and has completed over 120 contractual projects for various corporate customers such as Infosys

Sobha’s net profit fell by 88% to Rs7.5 crore and revenue by 49% to Rs181 crore in the December quarter against the same period a year ago. The developer is also in the last leg of restructuring its debt of Rs1900 crore. “We are restructuring over Rs1,000 crore and are in the final stage of getting approvals from various financial institutions,” said Sharma. The company is also looking at various funding options ranging from equity dilution, private equity funding at project level as well as land sales. Mint had earlier reported that the developer would try to sell parts of its 3,000-acre land bank—the process seems to have started. It has managed to sell land worth Rs100 crore over the last few months. Sales have not picked up even after developers such as Sobha are trying out various out-of-the-box marketing techniques such as its recent Home Mela. The two-day property exhibition that showcased 18 different properties of the company concluded with only six apartments being sold.

Sobha, which till now, focussed on high-end and luxury apartments and villas is finally joining the affordable housing bandwagon. It is launching its first budget housing project in the next three-four months in Bangalore, though officials didn’t divulge pricing details. “Contractual work in real estate has also been hit as most corporates have stalled expansion plans. Which is why, we find lot of contractual business coming in for developers from industrial or education sectors. Like Sobha, we will find more developers going in for debt restructuring to pull down high interest rates on short term loans and converting them to long-term loans,” said Abhinav Bhandari, research analyst (construction and infrastructure) with Pioneer Invest Corp Ltd.

Chennai to have 6 More Malls Despite the Slump

The slowdown may have stalled construction projects across the country, but Chennai is set to get six to eight new malls in the next couple of years, replete with food courts, cinema theatres, gaming arcades and shops. “In another two to three years, about six to eight malls are expected to become operational. Two will be functional by this year: Ampa mall in Aminjikarai will be ready by the first half of 2009 and Express Avenue on Whites Road by the end of the year,” said Sanjay Chugh, national head of business development, retail of Jones Lang LaSalle Meghraj (JLLM), a leading real estate services firm.

According to a report by Cushman and Wakefield, another well-known real estate solutions firm, 14 malls covering 6.2 million sq ft were to come up in 2010 and 2011, mostly in the southern and western parts of Chennai, but many are now on hold. “Though there are quite a few projects listed on paper, only three or four malls will probably become operational in two years,” said Rajneesh Mahajan, executive director, retail services at Cushman and Wakefield. “There is limited spending on the ground and construction activity has slowed down. It is hard to tell exactly how many projects will stick to schedule,” he said.

Though many projects are stalling due to the slump in business, those already underway will continue according to plan. For instance, Ampa Mall, under construction for more than two years, is now nearing completion. “None of us expected a slowdown to hit us,” said Ampa Palaniappan, owner and developer of Ampa mall. “But since we’ve already weathered the storm, we can only expect growth now.” He said Ampa mall will be the first hyper market (a hyper market covers roughly about 60,000 sq ft and has both supermarket and departmental stores) in the city. “We have retained most of our clients due to reasonable rentals,” added Palaniappan, through whose mall PVR Cinemas will also be entering the city.

Many maintain that the recession has not made a dent in the retail market except for high streets like Khader Nawaz Khan Road, Nungambakkam High Road and Cathedral Road-RK Salai. Unlike other cities, Chennai has only two big malls and faces a huge demand-supply mismatch when it comes to organised retail, and retailers too need more space which is why the new malls are expected to be a hit.

According to JLLM, the share of organised retail space in Chennai is under 5% as compared to 35% in Delhi NCR and 17% in Mumbai, respectively. But what the slump has brought about are revised business strategies and models, and more practical rental rates. “According to the earlier model, rent-revenue ratio would be as high as 40%, which was unrealistic. But now the rates have been revised, say for a smaller store (1,000-2,000 sq ft) it would be about 18% of the gross sales,” said Chugh. “The upcoming malls are in different corridors, so even if there is some delay, there is a definite demand,” he said.

30% Correction Expected in Real Estate

With investors shying away from real estate sector, Property Investment Advisors ASK expects there could be an up to 30 per cent price correction across most realty markets in the country. “We believe that there is scope for another 25-30 per cent correction in prices in most (property) markets of the country,” ASK Property Investment Advisors said in a report based on a review of the sector.

Stating that demand was overwhelmingly gravitating towards “affordable housing”, ASK said that end-users and investors were shying away from real estate resulting in a demand-supply mismatch with the creation of substantial inventory of premium/affordable properties. Demand would be increasingly price and product sensitive with completed properties commanding a 15-30 per cent premium over under construction properties due to a perceived increase in project execution task, it said.

“The top seven cities continue to have considerable latent demand for housing and at the right price, buyers are rushing to the market,” it said, adding demand in the seven top cities had been impacted more than tier-III and emerging cities.

Omaxe Concentrates on Construction Business Post Real Estate Crisis

Bucking the downtrend in real estate, Delhi-based developer Omaxe is revisiting its construction business to keep the cash flows going. Recently the company bagged Rs 39.95 crore contracts from Haryana State Roads & Bridges Development Corporation. “In the past six months we have received construction orders worth Rs 650 crores and we are expected to receive another Rs 650 crore turnover in the next six months,” said Rohtas Goel, CMD, Omaxe.

“We were a construction company by origin. We see this as good way to buck the slowdown in real estate business so we have restarted construction activity after we stopped it in the year 2000 to concentrate on real estate,” added Mr. Goel. Omaxe is working on small gestation real estate projects to keep its working capital requirements low. In yet another move, it launched an integrated township in Vrindavan. This will entail 1 Room (Studio) and 2 Room apartments ranging between Rs 7.25 lakhs and Rs 14.25 lakhs targeting frequent visitors. At Rs 1700 per sq ft selling price and about Rs 1100 per sq ft cost of development, the project is targeting at 12-15% net margins.

Valued at Rs 250 crore, the company has received close to 20% of its cost of construction of the project. Thus, the project is a self-financing one. Such smaller projects will cumulatively help real estate companies to generate cash for their under construction projects. This will further help them to realise sales and reduce inventory. The stock was up 10% on Tuesday after the company made this announcement on BSE. Delivery volumes were also high. It was trading 1% below its previous close in the early trade on Wednesday.