Indian Property News on 'July, 2009'

Price Correction Encourages Gurgaon Real Estate market

Encouraged by price correction and lowering of interest rates, the real estate market, after a period of relative inactivity lasting the first few months of the year, witnessed improved levels of activity on the part of retail investors in the residential sector, especially in the low to mid-end housing segment, said experts as well as market analysis reports of the second quarter in 2009. CBRE Market View, India Office, published for the second quarter, said: “Level of enquiries went up and, more significantly, transaction velocity also increased marginally as compared to Q1 (first quarter) of 2009… However with most of the activity confined to smaller format offices, vacancy levels remain high. Most developers deferred plans for launching any new projects, the focus being on deploying the scarce resources on completing projects in hand.”

“The downward trend in rental values seen till now has actually been arrested. We expect them to stay put at the present levels over the next quarter. Depending on location, project and sub-market dynamics, the decline over the past 12 months has been anywhere between 25 to 40 per cent. However, values have remained steady over the last quarter,” Pawan Swamy, Managing Director (Western India) Jones Lang LaSalle Meghraj, said.

“In the current context, however, we are now looking at a significant increase in demand, with multinational occupiers beginning to look more favourably at investments” he added. Increased space availability and comparatively reduced cost of occupation in prime Grade A projects in the Central Business District (CBD) has led to a revival of interest in this location, a situation practically non-existent over the past year. As a result, vacancy levels have come down to the range of 7 to 8 per cent. Meanwhile, rentals in the Secondary Business District (SBD) category have come down by approximately 11 per cent over the last quarter, the CBRE report states. “There has been no significant growth in the IT segment — most of the activity we are witnessing is in the corporate sector, predominantly among multinational companies with multiple offices in the same city. Meanwhile, demand in the residential sector has already made a remarkably fast comeback, and capital markets are opening up,” Swamy said.

Meanwhile, Gurgaon witnessed an increase in transactions assisted by attractive leasing packages offered by most developers. “Companies that had postponed their expansion/relocation decisions are now ready to take advantage of the market and the options available for phased take-up…office leasing volume increased by approximately 3 to 4 per cent in the NCR during the second quarter. Increasing levels of corporate confidence should maintain the momentum in the second half of the year,” reads the CBRE report.

Govt Sops can Revive Real Estate Sector

Eyeing fresh signs of a revival in the economy, which should nudge growth back to 9% level by end-2010, finance minister Pranab Mukherjee announced fresh tax giveaways for housing and renewed the government’s commitment to more economic reforms and introduction of a single goods and services tax (GST) by 1 April. The move, expected to further boost housing demand in the economy especially in tier II cities, also seeks to quell growing criticism that the Congress-led United Progressive Alliance (UPA) is averse to second-generation reforms. Replying to the debate on the Finance Bill, which was approved by a voice vote by the Lok Sabha, Mukherjee renewed his efforts to strike political consensus on key areas of tax reform, including the introduction of a direct tax code.

The reply also calibrated a few of his 6 July Budget tax proposals, which are not expected to result in big revenue giveaways, thereby precluding the possibility of a marked increase in the Rs4 trillion fiscal deficit forecast for 2009-10. The stand out feature of Mukherjee’s calibration of tax proposals in the Finance Bill was the emphasis on boosting real estate through both budgetary support and tax changes. The budgetary support in the form of a 1% subsidy on the interest rates paid by people with a home loan of up to Rs10 lakh would cost the exchequer Rs1,000 crore in the current fiscal year, Mukherjee said.

Under Section 80 IB (10), income-tax deduction was given to real estate developers for housing projects approved before 31 March 2007. This has now been extended to projects approved between 1 April 2007 and 31 March 2008, provided these projects are completed on or before 31 March 2012. “We have been asking for an extension for a long time and I am happy that this step has been taken,” said Kumar Gera, chairman of the Confederation of Real Estate Developers’ Association of India. “The extension will benefit only those projects that were approved during this period, so it may not have an impact on all housing projects in all markets. It could have an impact on certain micromarkets.”

Among other key tax changes was the removal of service tax charged by contractors repairing and maintaining roads, and extending tax benefits given in the Budget to firms producing natural gas under the new exploration licensing policy to those producing natural gas from coal-bed methane blocks. The finance minister admitted he had to ignore many other post-Budget representations, which came his way, as the tax proposals had to mesh with the broad strategy of providing fiscal stimulus. “We must generate internal demand,” he said. The spillover of the fiscal stimulus provided last fiscal year and proposals introduced in the 6 July Budget have cost the exchequer Rs2.4 trillion, Mukherjee said. The fiscal deficit (extent of borrowings needed to bridge the gap between expenditure and revenue) is estimated to touch 6.8% of the gross domestic product in 2009-10.

The Budget estimates of the Centre’s net tax revenue in 2009-10 is Rs4.74 trillion, an increase of 0.19% over the previous year’s revised estimate. Economic growth, which received top priority in the Budget’s overall strategy, is showing signs of recovery, Mukherjee said, though he remained cautious about signals provided by an improvement in economic indicators such as May’s factory output. “I would not say we are out of it. Situation is still difficult.” Mukherjee assured the House that the government would continue putting in place reforms, including tax reforms, to facilitate growth. In the area of tax reforms, Mukherjee said he was confident India’s indirect tax system could stick to the 1 April deadline for transition to GST, even though some states such as Madhya Pradesh and Tamil Nadu have said the deadline might be premature.

“On broad national interest, there is no discordant view,” Mukherjee said, explaining why he remained upbeat about meeting the deadline. GST is India’s most ambitious indirect tax reform, which seeks to dismantle tax barriers that fragment India’s market according to state boundaries. The transition requires cooperation between Centre and individual states. The country’s tax reforms could, however, be negatively affected by the Opposition’s displeasure with the way the UPA has directed policy in areas such as international affairs. “A mere call for consensus is not enough. To have consensus on issues, the government should pre-consult the Opposition on issues of national importance. Unfortunately, the (government’s) conduct in the last two months does not reflect this,” said Prakash Javadekar, spokesperson of the Bharatiya Janata Party.

Making a Smart Property Deal

Is it a good time to buy or sell in the real estate market right now? Chances are that as a prospective buyer or a property owner, you may be facing a serious dilemma. Industry players feel that while it may be a good decision to buy in certain locations, a sell off needs to be given a few more months till the market picks up completely. So which are the best places to buy in right now? According to global real estate consultancy Cushman & Wakefield (C&W), in Delhi NCR, it is Noida, Greater Noida Expressway and areas in Gurgaon along the Golf Course Extension Road. In Mumbai, central Mumbai and western suburbs such as Bandra, Kalina and JVLR are good bets. New emerging destinations in Bangalore such as Sarjapur Road, North and central Bangalore, apart from a few projects within the city can be considered.

Aditi Vijayakar, executive director, residential services India, C&W, says that this is a good time to buy a property for self use as prices have corrected considerably over their peak in 2007-08. “Buyers at this time can take advantage of lucrative interest rates on home loans. However, for investors entering the market, this time should be evaluated keeping the various arbitrage options that they can take advantage of in the current scenario. As far as selling is concerned, this is not a sellers market. The decision should be taken when the owner is confident of achieving the expected appreciation of the capital value of that property.”

While developers such as Vipul, Realtech, Raheja Developers and SVP Group say the market is picking up and one should look at buying, they don’t sound equally enthusiastic about selling off one’s property at this time. The fact that prices have corrected to far more realistic levels today makes buying a much better bet in these times, feel many developers. Says Punit Beriwala, MD, Vipul, “Whatever correction was possible has already happened and the properties are available at best prices today. From the investment view point, buying a property and holding it for few years is a good option. The demand for housing in mid and affordable segment is on the rise and definitely is an appropriate buying option in these times.”

However, on selling the property at this juncture, many are of the view that it’s better to hold on for some time. Harinder Dhillon, GM, marketing, Raheja Developers, says one should refrain from selling right now as the market is bouncing back. “A lot of projects recently launched have generated a fantastic response in the market. Rates have already started climbing up in select areas, and the rest are poised for growth in the next few weeks. One should wait, as in a few months’ time, a seller will get a much better rate for the property.” Agrees Vijay Jindal, CMD, SVP Group. He says that to reap the benefits in the seller’s market, one should wait as the market is really down. “It is better to wait. The reason is that property in the primary market is much cheaper than property in the secondary market. People are preferring to invest in new projects rather than going for the secondary market.”

However, keeping a few basics in mind will work well in this scenario. Rohit Malhotra, CEO, Realtech, feels that in both the cases one should consider key factors. “For those buying, it is prudent to look for better prices (as liquidity is still an issue) and they can drive better bargains. For sellers, depending upon the need to liquidate the assets, it is better to hold on for another six months and take it from there.” Be sure not to overlook the primary do’s and don’ts whether you are buying or selling off in this market. In the case of buying activity, analyse your requirement before going in for any transaction in the market, adds Mr Dhillon of Raheja Developers. According to him, if the requirement is for a ready-to-move-in property at a prime location, prices have already started firming up so it is better not to delay any further.

Legal issues together with well drafted documents relating to broker agreements must be thorough. Varied financing options must also be explored completely before finalising a property deal. Apart from the location, an important aspect to look into is the project, adds Vijayakar of C&W. “Factors such as credentials of the developer, construction time line and actual location vis-a-vis surrounding infrastructure should be taken into consideration before finalising any purchase. This is especially true in the case of purchase for investment purposes.” Make your decision after careful consideration of all the factors in play. As long as your judgement to buy or sell is a well thought out one, it is bound to give you a profitable edge.

5% to15% Mall Vacancies in Major Retail Destinations

Mall vacancies in major retail destinations such as Delhi, Mumbai, Pune and Hyderabad climbed between 5% and 15% in June 2009, even as developers rewire their strategies to sustain cash flows. During the past six months, developers juggling with various revenue models have discovered to their relief that certain “flexible” formats like ‘minimum guarantee’ and ‘revenue sharing’ have picked up steam.

“Riding on a 30-40% annual rental growth in 2006 & 2007, and strengthening consumerism, developers in India planned and began constructing malls in dozens. A rental correction of 30-35% from the peak in 2008 was not able to entice retailers, leading to several malls becoming operational in the first six months of 2009 at high vacancies,” says Abhishek Kiran Gupta, head — research of global real estate consultancy firm Jones Lang LaSalle Meghraj (JLLM). According to Mr Gupta, the mall vacancies have continued to increase between 5% and 15% in retail hotspots like Delhi, Mumbai, Pune, Bangalore and Hyderabad.

“Select malls like Inorbit and Forum Value Mall in Bangalore, along with Select City Walk in Delhi, have shifted to a combination of minimum guarantee and revenue sharing models, accompanied by a performance clause in the agreement. Depending on the format of the store and the tenant, the revenue-sharing terms are decided,” Mr Gupta says, adding, “Such flexible revenue models are highly acceptable to the retailers as the risk is shared between the real estate owner and the retailer. Also, it makes the developer more accountable for generating footfalls and conversion rates in the mall. For the developer, it reduces the risk of high vacancy in the mall while counting on the probability of better revenues in future.”

Similarly, developers like the Entertainment World Developers Pvt (EWDPL) are in the process of constructing 20 such malls based on the revenue-share model across India. Gaurav Marya, the president of franchise solution company, Franchise India Holdings, says, “The revenue sharing model, where developers don’t charge rent and accommodate more local retailers into the malls, including local brands, can encourage a seamless model benefiting all the stakeholders.”

Retail consultant, Mr Wahid Ravji chips in: “The revenue-sharing model existed on the international retail scene, but has come very late to India. Most of the big deals finalised between retailers and mall developers are now on the revenue-sharing model. This model works well for both. Retailers now do not wish to shell out more than 4-5% of sales as rent, compared to the 10-11% they used to pay till a year ago.” According to Mr Ravji, the model will ensure that the mall developer continues to remain “interested” in the property and there are enough retailers in the mall to attract significant footfalls.

Real Estate Downfall Hits NHAI, REC Bonds

With real estate valuations falling, the rush at the few remaining counters selling capital gains tax-exempt bonds is tapering off. The National Highways Authority of India (NHAI) and Rural Electrification Corporation Limited (REC), the two remaining issuers of such bonds, have mopped Rs 820 crore so far in the current financial year. NHAI has raised Rs 150 crore against the Rs 4,000-crore target for this fiscal, while REC, which opened the issue in April, has raised Rs 670 crore against a target of Rs 2,500 crore.

In 2008-09, NHAI had raised Rs 1,630 crore against a target of Rs 3,000 crore, while in 2007-08 and 2006-07, it had collected Rs 305 crore and Rs 1,500 crore, respectively. “As the real estate (market) is witnessing a slowdown, the response to our bonds is poorer than previous year,” said a senior NHAI official. An REC executive also said the response was not overwhelming. “The response has been poor compared with the previous year, as the real estate market is witnessing a downturn,” said Anil Chopra, CEO and director, Bajaj Capital, an investment advisory firm.

Under the income tax law, one can save on payment of capital gains tax if the amount is used for repurchase of property within a 12-month period. Alternatively, capital gains tax can be avoided by investing in bonds issued by NHAI and REC. The bonds are popularly known as 54 EC bonds (after Section 54EC of the Income Tax Act, 1961). Earlier, entities such as the National Housing Bank were also allowed to issue these bonds. But a few years ago, the government reduced the number of isuuers. In addition, it capped the maximum amount that could be invested in these bonds in order to limit the benefit to individuals. Further, the amount of bond issuance was lowered to allow the government to raise revenue during the real estate boom. With real estate valuations falling, the volume of transactions has come down. Analysts estimate the decline to be in the range of 20-30 per cent.

Real Estate and Other Sectors Woo Govt Employees

All eyes are now on the government sector. Government employees are being wooed like never before be it real estate, consumer durables and auto. In fact, banks are also introducing special schemes to woo the sarkari brigade. Maruti Suzuki India, for example, claims that 11% of their sales contribution came from government sector employees this financial year as compared to negligible contribution a year back. Similarly, housing finance company, Dewan Housing Finance, saw a sizeable rise in loan offtake from this sector. According to them, almost 40% of their total book size came from this category. And mid-scale developers such as Delhibased Piyush Group will be coming up with some special schemes in the affordable segment for government sector employees in a month. According to Anil Goyal, CMD of Piyush Group, they will we will be bringing some special incentives.

Banks are not lagging behind in these initiatives as well. UCO Bank launched a special scheme for government employees a few days back. “About 15 days ago, we have launched a special scheme to provide housing and auto loans to civil servants. We provide housing loan at 8% and auto loan at 9%. Since the launch, these schemes have been received quite well,” said S K Goel, CMD of UCO Bank. For other banks it is also a case of relatively lesser risk in lending. This largely due to the nature of their job profile. “Since there is uncertainty in the job market, a greater amount of due diligence takes place while sanctioning loans to private sector employees as compared to government employees ,” says Sujan Sinha, senior vice president and head of retail liabilities, Axis Bank.

In fact, government employees have even contributed to the turnaround of the auto industry. Maruti Suzuki India registered its Essex 4 recently with the Directorate General of Supplies and Disposal (DGS&D ), an arm of the Ministry of Commerce . According to a senior official of the company, a bulk of the government’s own buying is done through them. Their latest addition is the Essex 4 which they have included in DGS&D after the Maruti Desire was registered 3-4 months back. Focus models for them, however, are the compact cars such as Alto, Wagon R and Estillo which are in the range of Rs 3 lakh to Rs 4.5 lakh. These are the most popular buys for this sector. Other auto majors have a similar view. In fact, they believe that the industry managed to grow by a single digit growth in 2008 after witnessing a decline in the previous year only due to increasing demand from this segment. “Factors such as Sixth Pay Commission and attractive stimulus packages have helped a turnaround in the industry,” says Anil Dua, senior vice president, marketing and sales, Hero Honda Motors.”

And when it comes to the real estate sector, biggies such as DLF confirm the activity from this sector. “We do not discriminate between our clients. However, there is an increase in the number of government employees as their cash flows have not been affected due to slowdown,” said Rajeev Talwar, group executive director, DLF. Agrees Gaurav Bhalla, executive director of the Vatika Group. “We are seeing more people from the government sector buying as compared to earlier.” You could call this ironic for private sector employees or plain good luck for the public ones, but the fact remains that government employees have been the least impacted by the slowdown blues. They even got a huge jump in salaries after the implementation of the Sixth Pay Commission last year, and a part of their arrears are due this year.

In fact, leading consumer durable companies such as LG also contend to the fact that a significant part of the business has come from first time buyers which include rural sector and government sector employees. “The large part of the demand in the current calendar year has come from first time buyers and upgradation to LCD categories. A significant growth has also come from the rural and the government sector. They are holding the growth rate of the consumer durables industry, which may not have been the case otherwise,” says V Ramachandran , director, sales and marketing, LG Electronics India . Sarkari may well be the buzzword for the industry now. After all, with good business coming in from this segment, it’s no surprise why everyone is going ga ga over them.

3-Yr Lock-In On FDI in Real Estate- Govt

The government is weighing the impact of a possible three-year ban on stake sale by foreign investors in real estate projects, a decision that could affect future capital inflows into the sector. Real estate developers had recently urged the government to reinterpret a provision in the foreign direct investment guidelines, so as to stop overseas investors from withdrawing their funds, beyond the minimum capital of $5 million, before three years of the initial investment.

This, they said, will help them tide over the current liquidity crisis. However, the commerce ministry is concerned that such a measure could be counter-productive. The government wants to keep the foreign investment policy as flexible as possible since the country now needs foreign capital to sustain the growth momentum. For any foreign investor, the exit strategy is as important as the entry strategy. If it is difficult to withdraw capital and redeploy it in another sector, then foreign investors could become reluctant to invest in real estate.

“We examined the proposal, but have not taken any decision and status quo continues. However, we cannot rule out any change in the future,” said an official, who asked not to be named, considering the sensitivity of the subject. The law says that in a cross-border JV in real estate, the foreign partner should bring in a minimum capital of $5 million. The funds would have to be brought in within six months of commencement of business. It also says the “original investment” cannot be repatriated before a period of three years from the completion of “minimum capitalization.”

This has been interpreted in such a way that funds above the minimum capital requirement could be repatriated within the three-year lock in period. Real estate developers now want to restrict this as the sector got badly hit by the economic slowdown and drying up of sources of foreign capital. Besides, players in this sector have very few alternative sources of funding locally.

Tax Break for Developers

The government will extend tax breaks for industrial park schemes and developers of real estate and road projects to stimulate the economy and lift growth to 8-9 percent by the end of 2010, the finance minister said on Monday. Pranab Mukherjee also told lawmakers in parliament the government would provide a 1 percent interest subsidy on home loans up to one million rupees ($20,747) for one year. Earlier this month, the government ramped up spending for 2009/10 (April/March) to support a fragile economic recovery, spooking financial markets with plans for record borrowing and its biggest budget deficit in 16 years.

But MPs and industry lobbies have sought additional tax relief to help beat a slowdown that saw the economy grow 6.7 percent in the year through March after 3 years of expansion of at least 9 percent. “With a view to providing stimulus to infrastructure sector to generate incomes in the wake of economic slowdown, I propose to extend the sunset clause for industrial park scheme by a further period of two years,” Mukherjee said. Monday’s proposals will be added to the fiscal year budget put forth by Mukherjee earlier this month.

“In India, the economic recovery has begun and I am confident that we will be able to reach the high growth rate of 8-9 percent by the end of 2010,” he said. Firms engaged in repair and maintenance of roads would be exempted from service tax, while developers would get tax breaks if they complete real estate projects by March 2012, he said. Producers of natural gas from coal-bed methane blocks would also be extended tax breaks. A tax holiday for firms engaged in food processing has also been extended. The agriculture sector needs to grow by 4 percent annually for the economy to expand by 9 percent, Mukherjee said.

Property developer Prestige Group Plans Houses in Rs 12-25 lakh range

Property developer Prestige Group is evaluating building houses in the Rs 12-25 lakh range as it believes this segment will bring in volumes. On whether this will be a viable option for the builder, Irfan Razack, Chairman and Managing Director, Prestige Group, said, “This depends on where we get land at reasonable prices. We will have to see where else to cut costs.

“Obviously, the size of the unit will reduce. We can’t go high rise – the houses will be spread horizontally and they will be in the outskirts of Bangalore, at least 30 km from the city. But we will provide the same ambience as in other residential projects.” This comes at a time when many real estate players have been making an entry into affordable housing of late. Razack also said that the industry is pitching for the formation of a Special Residential Zone in the country. “The Confederation of Real Estate Developers Association of India is in talks with the government for quality urban development.” The houses in the SRZ could be in the 400-1,500 sq ft range. They will cost 30-40 per cent lesser than the market rates today, he said.

Razack was addressing the media to announce the completion of two of its residential projects – Prestige Kensington Gardens and Prestige Wellington Park, which together house around 900 apartments, in Jalahalli in north Bangalore. Last month, the company opened the Forum Value Mall in Bangalore. Prestige’s most touted residential townscape project ‘Shantiniketan’ in Whitefield is “on the verge of delivery”, said Razack. Houses will be handed over in phases starting next month.

India Goes Down to Third Spot in FDI Ranking

India has dropped to third place in global foreign direct investments (FDI) this year following the economic meltdown, but will continue to remain among the top five attractive destinations for international investors during the next two years, says Unctad (United Nations Conference on Trade and Development) in a new report on world investment prospects. Last year, India was ranked second in global FDI flows after China. While China continues in the top place, the US climbed up to second place this year, thanks to a surge in investments by Chinese and Indian companies, who acquired several sick American firms.

However, overall FDI prospects for India remain buoyant, says James Zhan, a senior Unctad official and one of the authors of the latest report. “India will remain among the top five destinations,” said Zhan, suggesting that the Bric countries will hog most of the investment flows once FDI growth starts picking up after 2010. The report titled, ‘World Investment Prospects Survey 2009-2011’ has listed FDI prospects by industry, particularly the “business-cycle-sensitive” industries such as automotives and other transport materials, metal and non-metal products and chemicals. It also spells out FDI prospects by host region.

Expressing sharp concern over rising “investment protectionism”, with economic stimulus packages contributing to “smart” protectionism, it has underscored the need to keep markets open to attract FDI in the coming years. With the global economic and financial crisis having wreaked havoc on FDI plans of multinational companies, Unctad expects gradual recovery from next year.