Indian Property News on 'April, 2009'

Fresh Rate Cuts by RBI can Boost Housing Demands

The fresh round of rate cuts by the RBI has once again raised hopes that buying a house might become easier now. While some of the banks have followed the Central bank and brought down their home loan rates, the developers are yet to play their part — cut prices as much as needed for sales to pick up. There can be two reasons for the housing market failing to revive despite lower home loan rates: one, because of a sluggish economy, buyers are not sure about their cash flows, and therefore don’t want to take on the burden of a home loan; two, property prices have not fallen enough to boost demand.

While the government and the RBI have ensured that loan rates are reduced and more credit flows to the sector, developers are expected to respond with reducing prices so that consumers can buy the inventories that have stacked up. Until developers make a correction in prices, the demand will not pick up. Express Estate conducts a debate on whether property prices have seen sufficient correction after several rounds of rate cuts by the RBI. How much more correction is required for the market to revive? Sanjay Verma, executive managing director, South Asia at Cushman & Wakefield, a property advisory firm, says we are yet to see sufficient correction. His company, besides helping clients to turn fixed assets into dynamic ones, also provides real-estate recovery solutions to help them find the best way to deal with distressed assets, portfolios or loans. Speaking against the motion is Rohtas Goel, CMD of Omaxe Ltd, and president of National Real Estate Development Council. Listed on the BSE, his company is one of the largest real-estate development companies in the country.

Downfall of Bengaluru Real Estate

Real estate activity contributes significantly to the overall economic output in India, as it does in most economies across the globe. The sub prime crisis in the US, triggered by the high default rate of sub prime home loan borrowers, has snowballed into an economic crisis that has pulled most of the world into its grip. The co-relation and co-existence of a flourishing real estate sector with a healthy economy has never been more obvious than it is now. Here’s a reality check on the situation in Namma Bengaluru. The ascent of the real estate industry in Bengaluru started much before the city became the focus for all things IT. If you speak to local real estate czars who have traced Bengaluru’s real time growth history, they will vouch that there was a bullish sentiment about the city’s prospects from as early as 1993. After the Indian economy was liberalized, Bengaluru – like other metros in India – witnessed a hitherto unseen appreciation of real estate prices. Also, with Hong Kong being handed over to China, a large number of expat Indians headed home, especially towards Bangalore, thus causing a demand spurt. This, coupled with the then state government’s policies to encourage IT growth in the state and city, brought Bengaluru under the real estate spotlight.

Seasoned businessman Prakash Gurbaxani, MD and CEO of QVC Realty, India’s first venture capital funded realty company, says, “During 1994-96 the Karnataka government gave a major boost to the IT industry with its policies and announced development of ITPL and the Whitefield area for the purpose.” Though the IT industry was in its infancy, Bengaluru held out a certain economic promise. There was huge investor interest and the optimism led to the city seeing property prices increase at an incredible rate. Of course this unnatural growth, had to tone down. “The appreciation in property values was driven by speculation without too many serious transactions that resulted in projects. In 1997, when the markets crashed, the areas to suffer the most were the suburban regions in Bangalore which had seen speculative growth,” states Gurbaxani.

In the first half of this decade, India became a crucial and lucrative global economic destination and Bengaluru was at the centre of attention from the global business world. Analysts from multinational real estate services firm, Jones Lang LaSalle Meghraj (JLLM) say that “the investments pouring into Bangalore resulted in creating a solid demand for quality office space, thus re-defining the real estate market in Bangalore.” Bengaluru’s real estate demand has been, and continues to be, driven by IT / ITES and the banking and financial services sectors. Symbiotically, the economic changes in the nation shaped the real estate industry in Bengaluru, as it did in other key metros of the country. “The industry moved from being an unorganized business to getting organized and professional. For the most part of its history, real estate raised funds from unorganized sources. However, in the last five years, major players in the market have begun tapping organized sources like capital markets and private equity funds. Liberalization of foreign direct investment norms for real estate has made foreign funds available to developers,” says Gurbaxani.

People from the industry attest that the economic growth resulted in growth of high disposable income groups, which in turn fuelled the scaling up of residential projects in Bengaluru. Villas and premium category apartments became the fad. Attractive tax rebates on home loans and reasonable home loan rates took the real estate market to the next level. Infrastructure wise, Bengaluru grew in this period and the city became home to many campus styled IT parks, Special Economic Zones (SEZ’s) and Software Technology Parks of India(STPI’s) in the IT belt of Whitefield, Hosur and Electronic City. Outer Ring Roads (ORRs) in the city have since become a hotbed for IT campuses. Seasoned economists argue that it’s easy to spot the signs of a looming downfall after a boom. This unprecedented boom too had its signals, only nobody wanted to stop and take notice. Land prices climbed to ridiculous heights, everybody who were anybody began venturing into the real estate business greedily eyeing the high returns as prices assumed dizzying proportions. And then the inevitable happened.

The fall in the US financial sector had a domino effect on global economies including Indian economy. Realty companies that had raised funds through the capital markets and private equity funds suddenly started finding themselves in a soup. Funding options began to dry up. Asset values fell. Stock markets took on a bear run. Stock valuations of realty companies plunged and inflation reached alarming proportions. The RBI raised key rates to curtail money inflow in the system. Banks hiked consumer loan rates as also home loan rates. Corporates waking up to pressure on expenditure began to announce lay offs, salary cuts and many such cost cutting measures. Cautious consumers battling multiple whammies began to put off home buying decisions. Demand has since stagnated and fallen drastically.

Unitech Likely to Pull Out its Rs 211 crore Project From Orissa

Real estate major Unitech is likely to pull out of its proposed Rs 211 crore residential cum commercial complex which was to be developed over an area of 11 acres in one of the prime locations of the city. Sources familiar with the development said, “Unitech had sought an extension of about two years from the Bhubaneswar Development Authority (BDA) for its proposed residential cum commercial complex in the city as its cash position was not comfortable. However, BDA turned down Unitech’s proposal as a result of which the real estate player was mulling to pull out of the project.”

It may be noted that DLF, India’s biggest real estate developer was also contemplating a pull-out of its proposed Rs 1,000 crore Infopark project. Asked on the status of Unitech’s project, a senior BDA official said, the BDA is yet to take any decision on Unitech’s proposal for extension and a decision is expected to be taken after the elections. “Unitech which had paid Rs 52.7 crore in March 2008 for the plot had sought a period of three months for paying the balance amount as a lump sum. However, the company had defaulted in paying the requisite amount as its cash position was not favourable”, added sources.

As such no deadline has been imposed on Unitech by BDA for paying the pending amount for the plot but if Unitech chose to pull out of the project, then the company would forfeit Rs 52.7 crore which it had paid initially. As per the terms of agreement between Unitech and BDA, the real estate player was to develop the 11-acre plot by the end of 2010. In April 2007, Unitech had emerged as the highest bidder for the 11-acre plot auctioned by the BDA. Unitech had agreed for a price of Rs 20 crore per acre and DLF which had offered a bidding price of Rs 11 per acre was the second highest bidder.

Nafed Plans Retail Outlets

Cooperative major National Agricultural and Cooperative Marketing Federation (Nafed) has drawn up plans to set up retail grocery outlets under a franchisee model. The company currently operates ten retail outlets under the name of Nafed Bazaar — eight in Delhi and two in Shimla. All of these are owned by the company. Nafed is also into institutional sales of grocery products to hospitals, hotels and government departments. “The board, in its meeting last week, has approved guidelines for appointment of Nafed franchisees. Certain individuals and companies have approached us with an inclination to become franchisees,” said U K S Chauhan, managing director of the board. Outlets under the franchisee model will also be named Nafed Bazaar. One of the important guidelines is that the franchisee will source all products only from Nafed.

Mumbai-based Omega Investment and Properties, which is a real estate player, and some businessmen have already expressed interest in becoming franchisees of the cooperative for Delhi and the National Capital Region (NCR). Nafed initially wants to focus on Delhi and adjoining towns, where it already has a developed supply chain, and later move to other cities. It eventually aims to expand across the country. Nafed is a central government agency engaged in procurement, processing, distribution, export and import of various agricultural commodities.

The federation is also the central nodal agency for undertaking price support operations in pulses and oilseeds and market intervention operations for other agricultural commodities such as jute, cotton and copra. While the federation has the experience in procuring commodities such as oilseeds, pulses, onion etc from the domestic market, it has also been importing commodities such as pulses and edible oils, commodities where the country has been witnessing shortages, for marketing them in the country. With all these activities, the company can boast of a strong backward linkage in various products.

Affordable Housing- The New Political Mantra

A recent state government lottery for about 4,000 low-cost apartments in Mumbai drew more than 430,000 applications, underlining the need for affordable housing in a country where housing is also a top election issue. Political parties of all hues have seized on affordable homes as a vote getter in India’s ongoing general election, plugging in to the frustration of millions priced out of a real estate boom fuelled by a robust economy and a six-year bull market.

Developers too, stung by the credit crunch and sagging demand for offices and premium residences, have turned to a middle class segment that may be more immune to the economic slowdown. “For the government it makes sense from a vote bank perspective,” said Anuj Puri, managing director of real estate consultancy Jones Lang LaSalle Meghraj. “For builders, this slump may last two to three years. How do they pay salaries, keep their lenders happy? This is the option.” Parties have been quick to seize the opportunity in a country where home ownership tops every wishlist, and is part of the trio of basic amenities alongside electricity and roads promised by every politician to mostly rural voters.

The Congress party-led government has recently encouraged states to release land for affordable homes, invited private partnerships and stepped up funding of rural housing. The Congress government in Maharashtra state — home to Mumbai — has declared 2009 as the year of “Housing for the Common Man”, with a plan to build 1 million affordable homes, while the Congress government in Delhi held a lottery for 5,000 flats that got 500,000 applications. The Hindu-nationalist opposition Bharatiya Janata Party has vowed to build 1 million homes every year in its manifesto.

But it is not just politicians taking an interest in votes. Investors stung by a slump in the wealthy real estate sectors are increasingly looking at investment in affordable housing. This kind of housing is “seriously undersupplied” in India, according to a Goldman Sachs report. More than 30 million units are needed because of growing urbanisation. Mumbai, long a magnet for migrants from poor states, is home to one of the 10 most pricey residential neighbourhoods in the world, yet more than half its 17 million residents are homeless.

Demand has also stayed robust because these buyers do not depend on bonuses or stock-market gains said Puri, who defines an “affordable” home as costing no more than five times the buyer’s cumulative salary, or 2.2-3.5 million rupees ($44,000-$70,000) for an average middle-class family in India. This segment of buyers appears relatively insulated from the credit crunch, as is evident from robust motorbike sales and the record number of new mobile phone users being added every month.

“Ironically, the sector which was one of the principal causes of the financial market meltdown in the U.S. may just offer downside protection in India — the fortune at the bottom of the pyramid,” said the Goldman Sachs report. Since India eased rules on property investment in early 2005, foreign investors such as Citigroup (C.N) and Morgan Stanley (MS.N) have piled in, causing land prices to double in major cities.

But as the credit crisis spread, it put the brakes on several big projects; affordable housing on the other hand, is relatively insulated as there is little foreign funding. Top developers such as DLF (DLF.BO), Unitech (UNTE.BO), Omaxe (OMAX.BO) and Parsvnath (PARV.BO) are targeting the segment now, with about two dozen projects in Mumbai’s suburbs alone, even as high-ticket commercial and residential projects have stalled.

Better Return on Savings for NRIs

Non-resident Indians, who keep their surplus cash in rupee-denominated non-resident external (NRE) and non-resident ordinary (NRO) savings accounts with Indian banks, will receive higher returns. This follows a decision by the Reserve Bank of India (RBI) to calculate the interest on a daily basis from April 2010. Interest is currently calculated on a monthly basis. Indian bankers in the UAE said the move would be a boon for NRI customers but would increase the cost of raising funds from deposits for Indian banks.

And they said the decision would make short-term deposits of 15 to 60 days less attractive because customers would receive almost the same interest rates from NRE and NRO schemes while enjoying the benefits of a savings bank account. The RBI said in its credit policy notification: “We advise that on a review, and in view of the present satisfactory level of computerisation in commercial bank branches, it is proposed that payment of interest on savings bank accounts (NRE and NRO) by scheduled commercial banks would be calculated on a daily product basis with effect from April 1, 2010.”

NRE deposits contain repatriated money while NRO accounts contain money received within India from investments and other sources. N Selvarajan, Chief Manager of City Exchange (Ajman), an affiliate of the State Bank of India, said: “Now banks calculate monthly interest on the minimum balance maintained on the tenth and last working days of the month. “A customer who keeps Rs500,000 in an account until a day before the last working day and withdraw Rs450,000 will get interest only on the Rs50,000 balance on the last day. Once the new interest system becomes effective the banks will calculate interest on a daily basis.” He said the move would help NRI depositors and adversely affect the cost of borrowing from banks. NRIs with flexible housing loans or other loans will see interest rates go up.

At present even if the interest rate on a saving account is 3.5 per cent customers receive less than three per cent because of the method used to calculate interest payments. Joseph Thomas, Chief Representative of IndusInd Bank, an Indian private bank in Dubai, said the new system would make life easier for NRI depositors. “The new system will benefit customers who keep their surplus funds to use for trading or investment purposes at a suitable time. They won’t have to monitor their balance at the end of every month. Instead they will rely on savings bank accounts. Banks already calculate interest on an overdraft on a daily basis. With minor modifications to the software the daily savings interest payment can be calculated easily.” He said the competitive advantage enjoyed by banks with the highest percentage of current account and saving account (Casa) deposits would disappear and the banks’ average cost of raising funds would go up.

“Banks will have to pay 30 to 40 per cent more than their current outlay for Casa. Calculating interest on daily basis will make short-term deposits – 15 days, 30 days, 45 days and 60 days – less attractive for depositors who are careful about the return from their deposits. “When customers get about 3.5 per cent on their savings not many will park their funds in short-term deposits.”

Citi Promotes India Head to Lead Pan-Asian Real Estate Platform

Citi Property Investors (CPI) has promoted its India head, Ravi Hansoty as the head of its pan-Asian real estate platform. Hansoty replaces the former Asia head, David Schaefer, who moved out of CPI early this month. Hansoty had been originally appointed by Schaefer and is reportedly learnt to have been promoted on a temporary basis and expected to be permanently appointed at the position by the end of the year.

Hansoty has been with CPI since 2005 and had been initially hired to manage the firm’s investments in India. He has an experience of over 14 years in real estate. He has previously worked with Morgan Stanley Properties in Seoul and The John Buck Company, a Chicago based developer. CPI currently manages the CPI Capital Partners Asia Pacific fund, which closed on $1.29 billion in equity in February 2007. The reports suggest that the fund has committed nearly all of its capital. The Asia platform is a part of the global business run by president and CEO Roger Orf. The firm currently has assets worth $14.3 billion under management across Europe, US and Asia.

Global Property Market at a Glance

Everywhere you go in Madrid, For Sale signs on half-built apartment blocks dominate the Spanish capital. No surprise: The global recession has hit the country’s once-booming real estate market harder than most. Property prices from Barcelona to the Balearic Islands fell 6.5% in the first quarter of 2009 alone. They are expected to drop 35% or more from their 2007 peak by the end of this year.

The economic downturn—in Spain and dozens of other countries—has left many homeowners struggling to keep up with their mortgage payments. But for well-funded property buyers, the recession is opening up a bonanza of cut-price deals. When times were good, cheap credit fueled almost insatiable demand for second homes and investment properties. Now, financing is harder to come by, and developers are slashing prices to offload stock built for a dwindling number of buyers.

The power shift in property sales is gradually enticing investors back into the market. From European hot spots in Croatia and Montenegro to less exotic investments in Florida and the Southwest U.S., now may be the right time to buy. Double-digit price declines since 2007 and the renewed strength of the dollar against foreign currencies make buying overseas more affordable for Americans. And emerging countries, especially Brazil and India, carry the prospect of continued economic growth despite the downturn while offering properties costing as little as one-eighth the price of the average U.S. home.

ICICI struggling to get rid of its ‘foreign’ tag

The new guidelines on computing foreign investment in a company incorporated in India has opened a Pandora’s box in the banking sector, with the nationality of ownership of India’s largest private sector banks coming into question.

Seeking to clear the air on its ownership, ICICI Bank has written to the Department of Industrial Policy and Promotion (DIPP) saying that it is not a foreign-owned bank and it will not be covered by the new guideline, a person privy to the development said.

The Reserve Bank of India (RBI) had recently written to DIPP pointing out that, under the revised norms, seven banks would cease to be counted as Indian-owned banks. These banks include — apart from ICICI — HDFC Bank, Development Credit Bank and ING Vysya.

The central bank has sought a review of the new guidelines. The finance ministry, which had earlier opposed tooth and nail DIPP’s move to revise foreign ownership norms, has again raised these issues with it. Interestingly, DIPP has now sought the finance ministry’s opinion on ICICI’s submission. The bank has claimed that it is owned and controlled by resident Indians.

The DIPP verdict on the issue will have serious implications for the banks in which the majority stake is held by foreign investors, including portfolio investors. If classified as foreign-owned, the banks’ downstream investments will also be counted as foreign direct investment, restricting their ability to invest in sectors that have limits on foreign investments, such as the banking sector itself. Classification as a foreign-owned bank could bring in new regulatory restrictions that apply to foreign banks, but do not apply to Indian ones, on activities such as opening new branches.

While ICICI Bank remained silent on a query whether it had written to the DIPP, a spokesperson said, “The material investment that we have in a sector with sector cap is in insurance, where Press Note 2 is not applicable”.

Press Note 2 of 2009, issued on February 13, redefined foreign ownership of Indian companies (an Indian company means, in the context of Press Note 2, a company incorporated in India). As per the new policy, foreign investments include all type of foreign investments — direct investment (FDI), portfolio or foreign institutional investments (FII), non-resident Indian, depository receipts (global [GDRs] and American [ADRs]), foreign currency convertible bonds and preference shares.

Under Press Note 2 of 2009, a company incorporated in India has to satisfy two conditions to be classified as an Indian-owned company: beneficial foreign ownership by all forms of investment must be less than 50% and Indian shareholders must have the right to appoint a majority of its board members.

Accordingly, a company that has more than 50% of such foreign investment would be considered foreign-owned, even if Indians have the right to nominate a majority of board members and thus have control.

Mangalore-based Private Sector Lender, to restructure Rs 350 cr Loans

Karnataka Bank, the Mangalore-based private sector lender, is restructuring its loans worth Rs 300-350 crore that is under stress.

The bank has already started receiving proposals from borrowers across sectors and a final decision will be taken by the asset liability committee which is meeting on May 2.

Ananthakrishna, Chairman, Karnataka Bank said, “We have identified certain sectors like real estate and textiles that are under stress and decided to restrict our exposure to borrowers in these sectors. We are studying the cash flow position and repayment capacity of borrowers in these sectors and rework repayment schedule for them.”

As per the guidelines of Reserve Bank of India, the bank will restructure loans under stress and the board will take a final call in this regard, Ananthakrishna said.

He said the bank intends to take sector-specific measures and may offer extension of repayment period by two more years for a 5-7 year loan account depending on the interest burden of each borrower and his repayment capacity.

Currently, 7 per cent of the bank’s total lending is towards real estate and another 15 per cent is towards textiles sectors and the bank has decided not to extend any fresh loans to them. As on March 31, 2009, the Karnataka Bank’s total advances stood at Rs 11,800 crore. Of this, 14 per cent is towards SME sector, 7 per cent real estate, 15 per cent textiles, 40 per cent priority sector and the balance towards corporate sectors.

In 2008-09, the bank reported a total business of Rs 32,000 crore, a growth of 14 per cent over the previous year. While the advances grew by 9 per cent to Rs 11,800 crore, the deposits grew by 17 per cent to Rs 20,200 crore over the previous year. Its net profit for the year ended March 2009 is likely to be up by 16 per cent to Rs 280 crore compared to the previous year. Ananthakrishna said the bank is looking at a growth of 20 per cent in its business to touch Rs 39,000 crore during 2009-10. The main focus areas for the bank this year will be retail credit, SMEs, infrastructure and capital goods sectors. The projected growth will be through internal accruals this year. However, to maintain the capital adequacy ratio above 11 per cent, the bank needs to raise around Rs 200 crore during the second half of this year, he added. During the current year, the bank is also looking at increasing its branch network to 475 branches from the current 447 and add another 30 ATMs to reach a level of 200.