Indian Property News on 'October, 2009'

Ahmedabad Tops the List of Maximum Home Buyers

A recent survey conducted in Indian metros and tier-II cities has revealed that buyers in Ahmedabad will purchase the most property in the country, out of the maximum home-seekers across India, in the coming year. According to the survey, 80% of those who responded will be buying homes by the end of 2009, against the national average of 72% for property seekers. The corresponding figures for the other cities in the study were between 62% and 76%.

The survey was conducted by makaan.com, an online portal, in October and saw participation from more than 3,800 property seekers and 312 leading developers from seven metros and tier-II cities – Ahmedabad, Bangalore, Chennai, Delhi, Hyderabad, Mumbai and Pune. A majority of the respondents were between 26 and 35 years of age. According to officials of makaan.com, the real estate market in India traditionally sees a surge in property buying and selling at the beginning of Diwali. Real estate developers introduce the most attractive offers at this time, and property seekers keep a lookout for these. But considering that the last one year saw property prices undergoing various levels of correction, would developers continue to have these offers this season is the question.

Called ‘Festive Reality’, the study analysed and highlighted the expectations of property seekers and what developers have to offer this year. “Ahmedabad is one such city, rather the only one that has the advantage of safety and peace compared to other cities of India. Also, with the kind of industries and educational institutions coming up in and around the city, the prospects for home buyers are very bright,” said Kishor Dedhia, MD, Space Management Ltd. Many corporate firms are also entering or planning to establish their presence in Gujarat, with Ahmedabad being the preferred city. This will drastically increase the requirement of homes, Dedhia said.

The survey said that developers in Ahmedabad and Pune expect a greater rise in property transactions. Good infrastructure and strong governance are the two main factors luring outsiders to settle in Ahmedabad. Also, the property prices in Ahmedabad are lower that those in other big cities and metros, which is an advantage for both developers and prospective buyers, said Mukesh Seth, chairman, Gujarat chapter, Confederation of Real Estate Developers’ Associations of India.

DLF Records 77% Drop in Net Profit

The country’s top real estate player, DLF Ltd, registered a 77 per cent drop in its net profit during the quarter ended September, as demand for real estate continued to be sluggish compared to last year. The company registered a profit of Rs 439.7 crore during the quarter, compared with Rs 1,934.1 crore during the comparable quarter last year, shows the consolidated results announced by the company today. Sales (and other receipts) during the quarter also dipped 53 per cent to Rs 1,751 crore.

Other real estate companies also saw similar dips in sales and profits. Housing Development & Infrastructure Ltd (HDIL) posted a 44 per cent dip in net profit to Rs 148.6 crore, while Sobha Developers’ net profit was down 38.2 per cent to Rs 27.5 crore during the quarter. Analysts said they were expecting such dips in the numbers, given the fact that the September quarter of last year was considered good for many real estate companies. “The first half of FY2009 was good for many real estate firms. Only from next quarter onwards does it make sense to compare on y-o-y perspective,’’ said Sastha Gudalore, analyst with Alchemy Shares & Stock Brokers.

Companies, though, are seeing a revival in demand. Rajiv Singh, vice chairman, DLF Ltd, said: “As the demand has recovered, sales in homes have picked up considerably. Keeping in line with this pickup in demand, we will continue to launch a mix of attractive products across locations.” The company also intends to sell noncore assets. “We remain committed to deleveraging the balance sheet and actions on sale of non-core assets are currently underway,” Singh said. “Sales started picking up from June and we are seeing a 20-25 per cent rise in demand for our upcoming projects,” said a official from Sobha. The company will also start withdrawing the discounts it was offering for its residential projects, he said.

82% Growth in Orbit Corporation’s Profit

City-based real estate firm Orbit Corporation has posted an 82% growth in consolidated quarterly profit on 91% rise in sales. The company’s net profit in the September quarter went up to Rs 25 crore from Rs 14 crore in the year-ago period while total income rose to Rs 141.9 crore. Orbit Corporation said it sold 62,650 sq ft in the July-September period as against only 9,599 sq ft in the same period last year, a whopping 550% increase.

The company in a statement to BSE also said that the real estate prices have moved up by around 10-15% in the quarter. The company, which has a major presence in redevelopment activities in Mumbai, said it is looking to increase its footprint in the city.

DLF Plans to Hire People to Sustain Growth

Buoyed by the recovery in the real estate sector, realty giant DLF today said it will hire people to sustain growth of the company. The country’s largest realty company had trimmed staff count last fiscal due to the slowdown. “We are a growing company, we will be hiring people. Nothing very unusual about it,” DLF Chairman K P Singh told reporters here on the sidelines of Assocham function. He, however, declined to give details such as the number of people DLF planned to add and the timeline for it.

“Hiring is a process, which always keeps on happening. Some people go and some people come,” he added. In the 2008-09 fiscal, DLF’s headcount was down by 818 people to 2,882 as on March 31, 2009, from 3,700 exactly a year ago, a drop of 22.1 per cent. Singh, last November, courted controversy when he admitted to laying off of staff only to make a U-turn later. Asked if the recovery in the real estate sector has picked up speed, Singh sounded a cautious note. “This is gradual and is happening (but) it is too early to say anything. The recent Reserve Bank policies will have certain effect on this issue but the fact is, this real estate demand growth will commensurate with GDP growth,” he said.

Singh said RBI should not tighten norms further after raising the requirement for banks to keep the money aside while lending to commercial real estate from 0.40 per cent to one per cent on Tuesday. “I hope they don’t tighten up more. Let the growth be stabilised, so far it is not stabilised,” he said. Commenting on sales situation in the sector, Singh said: “It is a slow growth. It is a gradual growth. I don’t think it is going to jump very suddenly.” He also said prices are expected to rise. “When market grows, the prices also tend to grow. But generally we don’t do for the heck of doing it.”

DLF, Unitech and HDIL are expecting Quick buck

DLF, Unitech and HDIL are the latest darlings of foreign funds expecting a quick buck, even as they slash holdings in companies such as Infosys Technologies and infrastructure builders due to concerns about order flows and high valuations, a study of latest filings shows. The sudden fancy for real estate among those overseas funds were probably due to the surge in fund raisings by those debt-ridden companies in the recent bull run when most of them sold shares at less than a third of their peak 2007-08 valuations which overseas investors found attractive.

“With interest rates expected to remain benign and stable, some dedicated funds might have bought on hopes of a significant upswing in high-beta sectors like realty,” said Tata Asset Management CEO Ved Prakash Chaturvedi. High beta stocks are those which rise or fall more than the benchmark indexes. As of September 30, 2009, FIIs owned 25% of the aggregate equity capital of 36 realty companies, including industry leaders like DLF, Unitech, Indiabulls Real Estate and HDIL. That is higher than the previous year’s 9.6% and the year before 10.3%.

Indian companies, including Unitech and DLF, have so far raised $12.3 billion through share sale this year and another $17.4 billion may be raised by fiscal year-end exploiting a record stock market rally which saw the benchmark indices more than double from their troughs earlier this year. It was not just one sector that foreign funds who have invested $14.4 billion in the current calendar year so far have favoured, but also raised stakes in sectors such as agrochemical, a key beneficiary in an agrarian economy like India, breweries which benefit from rising incomes in urban centres, and mining. Last year they pulled out $12 billion.

Overseas funds own 25.6%, 18.6% and 17.9%, respectively, in agrochemical, breweries and mining sectors. Companies such as United Phosphorus, United Spirits, Gujarat NRE Coke and Sesa Goa have large foreign holdings. But the ones that were favoured in the last bull rally — technology, capital goods, cement and retail aren’t lucky this time. Combined FII holdings in all the listed IT companies fell to 12.1% as on September 30, 2009, compared to 15.6% as on September 30, 2008. Their exposure in capital good sector fell to 9.9% from 12.1% and to 15.1% from 18.5% in retail space.

“FIIs have been underweight on IT companies due to outsourcing concerns,” said Centrum Broking MD Devesh Kumar. “Cement companies are adding new capacities and investors would wait for demand to pick up, which would also depend on the pace of infrastructure development in the country.” International companies stung by the economic slowdown have been cutting their spending on technology which the Indian companies depend upon. SAP, Europe’s biggest business software producer, on Wednesday cut revenue forecast for the year as companies held on to purse strings. Indian infrastructure companies are also showing delays in executing orders and their valuations at more than 25 times in some cases such as Larsen & Toubro, seem to have run ahead of themselves.

RBI’s Credit policy may not affect home loans

The credit policy announced by Reserve Bank of India (RBI) governor Subba Rao on Tuesday may have hints of a tighter credit regime, but it may not have an impact on the interest rate structure for home loans, say experts. Experts say that their opinion is based on two facts. First, the demand for homes and home loans, in turn has gone up in the wake of the soft rate regime put in place by the finance minister early this year as part of his anti-recession measures. Second, the Centre has already expressed concerns about the bankers’ unwillingness to pass on the benefits of the revival package announced by the finance minister.

Shobhit Agarwal, joint managing director for capital markets at real estate research and advisory firm Jones Lang LaSalle Meghraj, tells TOI that the banks will now be a little more cautious while lending to real estate players, however, interest rates are at their lowest in recent times, and even a marginal hike due to this tightening in provisioning, will not affect the overall sector seriously. “The current credit policy has made only two changes that could conceivably affect the real estate sector. For one, the statutory liquidity ratio (SLR) has been increased by one per cent. Secondly, the provisioning for real estate loans has been increased to one per cent from the earlier 0.4 per cent. The impact on the sector is not significant as we see it. Rather, it might help, as the Central Bank is trying to curb the formation of an asset bubble – in other words, trying to control the asset prices for end users,” Agarwal says.

If well-implemented, this policy will benefit property buyers in the long run, Agarwal observes, adding that as the projected increase in inflation is in line with India’s long-term inflation history, and is automatically factored into the markets and overall market sentiments, this would not hamper the green shoots of recovery, which are currently being witnessed after a protracted slowdown period over the previous year. “The realty sector, especially in the home segment, has already witnessed some price rise and an interest rate revision, which in any case will be small, may actually help slowdown the spiralling price rise,” says a senior banker requesting anonymity. “As the home loan interests are between 8.75 per cent to 12 per cent for most banks there is actually some scope to revise the rates upwards, he feels.

Rohit Gera, vice president of Credai Pune and joint managing director of Gera Developments, said increasing the lending rate for realty developers would ultimately have an impact on the end-buyer. That could have avoided even the mild’ rate rise expected in home loan rates, he says. “The policy could have spared the affordable home projects as there is no question of hotting up of this segment as only genuine buyers are buying affordable homes,” Gera says. On the commercial side, Gera says, the sales are down thanks to the sluggish mood globally, and increase in the interest rates for commercial projects will further dampen the spirit of developers. Navneet Munot, chief investment officer of State Bank of India Mutual Fund, says the priority for the central bank is shifting to anchoring inflationary expectations and supporting the growth process. The central bank would surely keep a vigil on any signs of building of an asset bubble due to excess liquidity.

Developers React on RBI’s Move to Tighten Banks Provisioning For Real Estate Loans

There were mixed reactions to the likely fallout of the RBI’s move to tighten banks’ provisioning for real estate loans. As a result, for every Rs 100 crore advances made, banks need to provision Rs 1 crore. The central bank said in view of the large increase in credit to the commercial real estate sector over the last year and the extent of restructured advances in this sector, it was prudent to build a cushion against likely non-performing assets. A senior banker said it was also applicable to loans given to individuals who purchased more than one apartment.

Mr Kumar Gera, Chairman, Confederation of Real Estate Developers’ Association of India, said it was a detrimental step and would tell upon the cost of funds being made available to builders. While it was difficult to gauge the impact immediately, it was obvious that any cost increase, part of whole, in all likelihood would be passed on to the end-user.

Mr Priyankar Bhikshu, Head of Consulting and Research (India), DTZ International Property Advisers, said that as a precursor to the tightening of the easy money policy, the central bank has turned its attention on asset prices again. As a result, developers would find the cost of loans go up, which could adversely impact their liquidity position and might force them to pass on the prices to the end-users. This, combined with the sluggish sales of last few months, indicated that the sector’s recovery path could see some hurdles in the near future.

“On the retail (home) loan front, the distinct hawkishness in RBI’s policy points to a reversal in the benign interest rate regime. It is expected that by the end of this financial year, the mortgage rates would inch upwards and would thereby result in higher cost of home ownership. This could negate the impact of reduced home prices, which anyway has started exhibiting positive bias in last quarter,” he said.

Mr Kapil Wadhawan, Chairman and Managing Director, Dewan Housing Finance Corporation, felt it had come in too early as the commercial segment was yet to pick up. The General Secretary of the Builders Association of India, Mr Anand J. Gupta, said the move was negative to both developers and home-buyers as the industry was just about hitting the recovery path. It would neither help the economy nor the realty segment, which as such was bogged down for want of funds. Mr Kamal Khetan, Managing Director of Sunteck Realty, said, “We think that the effect on borrowing cost would not be much. Firstly the 60 bps increase in provisioning requirement, even if passed fully to borrowers, is only that much increase in borrowing cost.”

Secondly, on account of higher liquidity in the system, banks might not fully pass it on. Also, banks vary their rates for commercial real estate lending based on borrower profile and hence the impact would differ from borrower to borrower. Borrowers with better credit profile will see least impact, he said. The impact would not be significant, said Mr Shobhit Agarwal, Joint Managing Director (Capital Markets), Jones Lang LaSalle Meghraj. On the contrary, banks would now be a little more cautious while lending to real estate players. Interest rates are at their lowest in recent times, and even a marginal hike due to this tightening in provisioning would not affect the overall sector seriously. It might help, as the central bank is trying to curb the formation of an asset bubble.

RBI Hikes Risk Weightage to Commercial Real Estate Loans

The Reserve Bank of India (RBI) on Tuesday cautioned against some sectors, especially the country’s real estate sector, which was just about starting to see a gain in asset prices. The central bank has hiked the risk weightage given to commercial real estate loans. The tools are hammering away once again, the high rises are mushrooming, but so are concerns over asset prices. Just as the commercial real estate industry started to enjoy the benefits of easy money, the RBI has decided to tighten the screws.

In its mid-year review the RBI has hiked the risk weight on commercial real estate loans to one per cent from the current 0.4 per cent. Explaining its decision, the RBI cites a more than 40 per cent increase in loans to commercial real estate and also adds a note of caution on the fact that nearly 14 per cent of commercial realty assets have been restructured by banks. The interest rate impact of RBI’s measures may be minimal for now, but the message from the central bank is clear that asset prices are being watched closely, one reason why most real estate stocks took a beating.

However, RBI had an equally strong message for banks, advising them to increase their provisioning coverage to at least 70 per cent by September 2010, a move that left bankers worried since it would mean an impact on profitability specially for some of the large PSU banks. O P Bhatt, chairman of SBI, said, “We have spoken to the RBI. They may give us time.” Meanwhile, the bankers were also disappointed that the RBI ruled out any possibility of hike in the held to maturity limit on bond portfolio, as it sees no justification of HTM cap being higher than the SLR requirement. The central bank’s message to banks was a mixed one. Even as the RBI governor reiterated the need to spur credit offtake, he cautioned banks to keep a close watch on asset quality and maintain enough buffers to absorb any future shocks.

Commercial Property Prices Expected to Go Up Post RBI Provision

Developers said property prices were likely to go up after the Reserve Bank of India (RBI) increased the provisioning for commercial real estate. This, they said, would increase the cost of funds. Developers expect up to 75 basis points rise in cost of funds after the central bank increased banks’ provisioning requirement for commercial real estate from 0.40 per cent to 1 per cent. “I think affordable housing will become more expensive as banks will raise rates and credit offtake will slow. Availability of bank funds will become a big issue for developers now. We will bank more on our sales and instead of raising additional funds. We will focus more on internal accruals,” said Sarang Wadhawan, managing director of HDIL, a Mumbai-based developer. “Execution of projects will suffer due to lack of bank funds,” said Wadhawan.

A number of property developers such as DLF, Unitech, HDIL and Lodha, among others, have ventured into affordable housing since the third quarter of the previous financial year to beat the slowdown in property sales. The projects are 25-40 per cent cheaper than market prices and carry margins of 15-20 per cent as against the luxury projects’ margins of over 50 per cent. “It will certainly increase our cost of borrowing. We will consider this increase like any other increase in input cost,” said Bharat Mody, chief financial officer of Akruti City. RBI increased provisioning as it felt that credit flow to commercial real estate had risen sharply and there had been large increases in restructuring of loans by developers. Some top developers of the country such as DLF, Unitech and HDIL have restructured loans worth Rs 10,000 crore after RBI allowed banks to do so.

“The amount of non-food bank credit going to commercial real estate is very small, I believe around 3.7 per cent. However, our decision was prompted by two considerations. First, the rate of growth of credit through CRE has been accelerating at one of the fast rates. Second, we looked at the restructuring done by banks. While the restructured portion at the aggregate level was 4 per cent, it was 14 per cent for the real estate sector. This prompted us to raise the provision requirement for the real estate sector,” RBI Governor D Subbarao said at a press conference in Mumbai today.

Loans to the real estate sector grew 41.5 per cent in the 12 months up to August 28, 2009, to Rs 96,701 crore. On the other hand, total non-bank food credit grew 13.3 per cent in the 12 months up to August 28, 2009, to a total outstanding of Rs 26,23,551 crore. In November last year, RBI had reduced the risk weight on loans for the commercial real estate industry to 100 per cent from 150 per cent and reduced standard asset provisioning requirements to 0.40 per cent. This was after the developers met the finance minister to express concerns over liquidity. Apart from drastic fall in property sales, developers were facing severe liquidity crunch as bank debt and foreign borrowings dried up and domestic stock markets fell sharply.

Analysts said developers would now find it difficult to raise funds. “It will be challenge for developers to get bank debt. Financial closure will become difficult for real estate projects,” said Ambar Maheshwari, director of investments at DTZ, an international property consultant. However, developers say since many of them have restructured debt or reduced their debt levels, the RBI move will have less impact on their existing loan portfolio. “If we go for additional funding, the cost will be higher. It will not have much impact on our existing debt,” said Sunil Malhotra, vice-president, finance, at Omaxe, a New Delhi-based developer.

Bankers also say the RBI move will not lead to any drastic rise in rates. “This (increase in provisioning) may not translate into a sharp rise in lending rates. The interest rates are already low and any small increase can be absorbed,” said a head of treasury with a private bank. A senior State Bank of India official said there could up to 40 basis point rise in interest rate on loans disbursed to builders. This would be done to offset the additional amount that banks would have to set aside for standard real estate assets.

Govt may not Consider FDI in Multi-Brand Retail

The government plans to expressly clarify that foreign direct investment (FDI) in multi-brand retail is no-go territory, dashing the hopes of Indian retailers expecting that the new rules announced earlier this year would allow them to bring in overseas partners and capital. The commerce and industry ministry wants to ensure that the liberalised FDI policy does not lead to the unintended opening up of multi-product retail, a sector closed to foreign investment now, an official privy to the ministry’s plan said.

The move is likely to stymie the plans of those such as Pantaloon Retail, which is owned by the Future Group and operates the Big Bazaar, Food Bazaar, Pantaloon and Home Town chains of stores. Pantaloon Retail had initiated steps to restructure itself to take advantage of the new norms for counting FDI in the hope that it would be able to attract foreign investment. It was to have converted the listed Pantaloon Retail into a holding company and distributed assets and operations of the group among two subsidiaries.

Under the revised FDI policy announced in February, a joint venture company in which the Indian entity has more than 50% stake and the right to nominate majority of its directors will be deemed to be an Indian company. If such a joint venture makes investment in another company, the entire investment in that company will be counted as Indian investment. Under the earlier policy, downstream investment by such a joint venture was counted as indirect foreign investment.

The new rules, it was argued, allow indirect entry into forbidden sectors such as multi-brand retail through layered corporate arrangements where initial foreign investment is kept below 50%. “It will get clarified that the intent of the revised policy is not to allow FDI into multi-brand retail where it has been prohibited,” the official said. The ministry will also try and clarify how the revised FDI policy will apply to the banking sector. A sticking point with the guidelines is that investments by companies that are majority foreign-owned are counted as foreign investment.

This has put banks such as the majority foreign-owned ICICI Bank in a fix. India’s largest private sector lender finds that the investments it has made in areas such as insurance — the foreign investment limit here is 26% — have been classified as foreign investment. One of the solutions being considered is to exempt banks from the new way of computing foreign investment based on who owns and controls the investing company. The government, however, is unlikely to exempt defence production, where 26% FDI is allowed, from the purview of the liberalised FDI policy, considering the safeguards already in place.