Indian Property News on 'October, 2009'

NCR Hotels Increase Tariff as Business Recovers

It’s proving to be a cracker of a Diwali for Delhi’s hotel industry that had been reeling under the impact of global recession and had seen a sharp erosion in occupancies and tariffs since last year. With the economy gradually recovering and industry expecting a significant increase in inbound travel this winter, hotels have hiked tariffs by 15% to 25% for this peak travel season. As a result, five star tariffs — that had fallen to an unprecedented low of Rs 6,000-8,000 this summer — are now upwards of Rs 12,000 as hotels try to make up for the business lost since early last year.

The newly opened Leela Kempinski, Gurgaon, — which since opening this summer has emerged as the luxury hotel with the highest tariff in the NCR — has raised room rates by Rs 2,000 and suites are dearer by Rs 5,000-10,000. According to the online published tariff, room rates have gone up from the summer range of Rs 19,000-26,500 to Rs 21,000-28,500 now. Federation of Hotel and Restaurant Association of India (FHRAI) vice-president Rajendra Kumar said on an average, tariffs have gone up by 25%.

Imperial’s spokesperson Ajanta Chatterji said: “Two years prior to recession setting in were a dream run for the industry. This summer, we had to lower tariffs quite a bit as the demand was weak. Now for this winter, we have hiked tariffs by 15-20%. So the summer average room rate of Rs 10,000 is about 20% more now.” However as expected, the post-recession recovery is throwing up its own surprises. “The travel trend has changed. Last winter we had international leisure and business travellers in 70:30 ratio. Now the ratio has inversed,” she added.

The Oberoi, Taj Mansingh and Imperial have almost similar tariffs being in the same upper luxury business segment. The move to hike tariffs has sharply divided the industry as the recovery is still shaky. Rajendra Kumar said filling rooms was more important than hiking tariffs. “Everyone is marking up but the important thing is to see whether we can sell or not. The economy is still recovering and it’s important to get travellers back first. Raising tariff just because it needs to be done from October 1 or September 1 after they touched new lows in summer should not be the priority,” he said.

He added, “Hotels are raising tariffs to cut the losses incurred earlier. The bookings look good even at the raised tariff levels.” Sarovar Hotels and Resorts MD Anil Madhok says there is a distinct upward trend and hotels are keen on filing up rooms. “We may even see more aggressiveness in rack rates from November 1 but as of now hotels are cautious,” Madhok said. Travel Agents Association of India chief Rajender Rai said traveller inflow looked better this winter after a long time. Vatika group director (marketing and operations) Gaurav Bhalla agreed that business activity was looking up and would continue on the upswing till the Commonwealth Games at least.

55% Hike in Mahindra Lifespace Developers Profit

Mahindra Lifespace Developers, the real estate and infrastructure arm of the Mahindra Group, on Monday recorded a 55% rise in quarterly net profit on surge in sales. The company’s net profit for the second quarter ended September 30, 2009, surged to Rs 17.34 crore, against Rs 11.2 crore in the year-ago period. Sales, during the period, grew more than 100% to Rs 102 crore. Its operating income rose 109% to Rs 63.52 crore. For six months ended September 30, 2009, the company posted a net profit of Rs 27.8 crore as compared to Rs 20.95 crore in a year-ago period.

“The residential sector has bounced back during the last two quarters. The volume has gone up following the price reduction of 5-10%,” Mahindra Lifespaces managing director and chief executive officer, Anita Arjundas, said. The commercial real estate still remain under pressure, she added. The company said its projects in Mumbai, Pune, Faridabad and Chennai were on schedule.

The wholly-owned subsidiary of Mahindra & Mahindra is present in five markets in the country that is two projects in Mumbai and one in Pune, one in the national capital region and one in Chennai. The company’s current residential ventures include a 12-acre project in Pune and a 22-acre project in Chennai. The company also has launched a project, Mahindra world City, in Jaipur. Shares of the company slipped 4%, or Rs 14.95, to close at Rs 355.05 on the Bombay Stock Exchange on Monday.

Ahmedabad: Vertical Growth is the solution to Space crunch

Impressed by the infrastructure development and synergy between town planning and bylaws in Japan and South Korea, real estate players in the city now believe vertical growth is the solution to the crunch of land in Ahmedabad. Recently, a team of around 120 real estate developers of Gujarat had been on a 10-day tour to Japan and South Korea. The tour was organised by Gujarat chapter of Confederation of Real Estate Developers Association of India (Credai).

The developers were very much impressed by the city development projects undertaken by the governments of the two countries. Unlike the US, Japan and Korea feel severe crunch of land, so they prefer vertical development, said Dushyant Pandya of Vishwanath Group. He also said horizontal development would mean higher prices of land.

“At present, the land prices in the city are no longer affordable for citizens. Though, many say the prices here are still lower than that in Pune or Bangalore, one should not overlook the fact that even the average earning of people here is lower,” he said. Suresh Patel, vice president of Gujarat Institute of Housing and Estate Developers (Gihed), said though Japan is under higher risk of earthquake, the government allows 100-storey buildings. “It makes us wonder why we are not allowed to build 20-25 storey residential complexes in the city,” Patel said.

Almost half of the representatives of the delegations were from Ahmedabad. The delegation visited Osaka, Tokyo and Kyoto in Japan and Seoul in South Korea during the 10-day tour. It had business to business meeting along with having a look at various infrastructure projects there. “Town planning is not only about building houses, it is also about traffic, law and order and civic amenities,” said Jaxay Shah, president of Credai, Gujarat Chapter. He said there must be a perfect blending of development and services. He felt that since the government was about to prepare a plan of Ahmedabad’s development for 10 years, the officials concerned should also visit these countries.

Shah said there was a need to create skilled human resource pool that for providing quality works. He said Credai is planning to set up centres for training of all levels of people involved in real estate sectors. However, the government should help the association with providing adequate land for setting up such centres, he said.

“We want to set up such training centres first in four major cities of the state – Ahmedabad, Vadodara, Surat and Rajkot, and then take it further to small towns,” he said. Shah also stressed the need to develop knowledge back up. “Though the government-run ITIs are running some courses, for real development public-private partnership is a must,” he said.

Banks and Realty stocks Dragged Indian Shares Lower

Institutional selling in blue chips, mainly banks and real estate stocks, dragged Indian shares lower in a choppy session Monday even as most regional markets ended higher. The Bombay Stock Exchange’s 30-stock Sensitive Index fell 0.4% to finish at 16,740.50, after trading between 16,706.08 and 16,938.88.

Investors dumped banks and real estate on worries that the Reserve Bank of India may hike interest rates at its policy review Tuesday. DLF, the nation’s largest property developer by sales, slumped 5.4% to 430.10 rupees to be the biggest percentage loser, while State Bank of India–the largest lender by assets–slipped 2.1% at 2,305.60 rupees. ICICI Bank, the second-largest lender, lost 1.5% to 890.70 rupees, while HDFC Bank slid 0.1% to 1,687.95 rupees. Shares of Reliance Industries, India’s most valued company, stayed weak and contributed to the index’s fall, ending down 1.6% at 2,015.45 rupees.

Reliance Industries had plummeted 4.0% Friday after its partner in a block off India’s east coast said the first well of the partners’ four-well program will be abandoned after it was found dry. Brokerage Credit Suisse said in a note that the first well would have been drilled at the most promising location, meaning that Reliance Industries will need to re-work its plans for the block. Infrastructure company Jaiprakash Associates, down 3.5% at 229.20 rupees, and aluminum maker Hindalco Industries, down 3.1% at 137 rupees, were other big losers.

Engineering giant Larsen & Toubro ended up 0.5% at 1,579.40 rupees as a 6.1% slide over the past two sessions prompted investors to accumulate the stock at lower levels. Maruti Suzuki, India’s biggest car maker by sales, ended flat at 1,517.40 rupees after it Saturday posted a 93% jump in its fiscal second-quarter net profit and said it will invest 1.50 billion rupees in raising capacity at one of its factories in northern India.

FIR against Unitech’s Grande Project in Noida

Unitech sold its apartments in the Grande project in Noida in 2007 without getting the requisite layout and building plan sanctioned alleges an FIR registered by the Economic Offences Wing (EOW) of Delhi Police.

Interestingly, the developer had bought the land from the Noida Authority in an auction to develop a township in June 2006. The Authority sanctioned the layout plan in 2008 and the building plan for the project is yet to be cleared. The developer in its response said it had submitted the plans to the Noida Authority in January 2007.

EOW lodged the FIR after receiving a complaint from one Om Arora, an apartment buyer. Arora in his complaint had claimed that an RTI reply from the Authority in May 2009 says the company had not received the sanction for building plan. Arora had alleged that the developer refused to pay back the amount when he asked for it.

However, a Unitech spokesperson said, “Last year, due to the extraordinary market conditions prevailing because of global economic meltdown, the company has stood by its customers and is offering various options on specifications and even substantial price benefit to the existing customers.”

RBI Asks Banks to Stop Relying on Bulk Deposits

The Reserve Bank of India (RBI) has asked banks to stop relying on bulk deposits, which it has described as ‘purchased liquidity’, and instead strengthen their liquidity management by shoring up core retail deposits.

The regulator has said banks’ asset liability mismatches have been exacerbated by such deposits on one end, which are essentially shorter in tenor, and lending in mortgages and core projects on the other. In its report – Trends and Progress in Banking – released on Thursday, RBI said minimising regulatory and tax arbitrage will be a challenge. The central bank also said it alone is best suited as a single regulator responsible for financial stability.

“Responsibility for financial stability cannot be fragmented across several regulators; it has to rest unambiguously with a single regulator, and that single regulator optimally is the central bank,” the report said. RBI has also warned banks that regulatory intervention can take place if banks fail to adhere to KYC norms, and has called for a minimum leverage ratio on off-balance sheet items that have snowballed in recent years.

“What needs to be borne in mind is that while at an individual customer level, retail deposits may be volatile, but for the bank and the banking system as a whole, it provides solid foundation for the banks to fund their longer term assets like infrastructure and similar business activities,” the central bank said. In what is being seen as a message to private banks, RBI has said, “But how to cultivate this aspect in the business model and risk management process is a challenge.”

The regulator’s concerns emanate from the freeze in the credit markets seen a year ago last year after bulk deposits were withdrawn in the wake of the global financial crisis. The central bank had to release several thousand crores of liquidity by easing reserve requirements to bring about a thaw in the markets. RBI has noted that an increase in the growth of housing loans, real estate exposure and infrastructure has resulted in the extension of the maturity profile of bank assets.

“There is growing dependence on purchased liquidity and also an increase in the illiquid component in banks’ balance sheets with greater reliance on volatile liabilities like bulk deposits to fund asset growth. Simultaneously, there has been a shortening of residual maturities, leading to a higher asset-liability mismatch.”

RBI also called for coordination across regulators on a regular basis. As of now, the RBI governor chairs the high-level coordination committee on the financial market while the finance ministry provides the secretariat. “While these meeting are informal in nature, a formal structure will mean accountability, but the flip side is that it would make the forum excessively bureaucratic,” the report said.

UK’s Premier Inn to open its First Hotel in Bangalore

Premier Inn, the UK’s largest hotel chain, is popular among international travellers as a budget hotel. But in India, where it will open its first hotel in Bangalore early next month, Premier Inn is pitching itself as a value-for-money mid-market brand. “In India we realised that the consumers’ connotation of a budget hotel means something that might not offer quality. So we decided to term ourselves as value for money mid-market hotel brand,” says Aly Shariff, managing director of Premier Inn, which plans to build 80 hotels across the country for an investment of 300 million pounds.

It’s not an exception, though. As a rule, most international hotel chains are positioning themselves higher than their global equity in India, thanks to the country’s peculiar business model for building and running hotels that just can’t survive here without restaurants and banqueting facilities. For example, Park Inn, an international three-star hotel chain belonging to the US-based Carlson Hotels Worldwide, is branded as four-star hotel in India. “Mid-market hotels in the western countries do not have elaborate food and beverages options or room service since people tend to be select service hotels. But in India, food and beverages contributes significantly to the overall hotel revenues and so most international mid-market brands tend position themselves as 4 star,” says Ajay Bakaya, executive director of Sarovar Hotels & Resorts that runs Park Inn and Park Plaza hotels in India under a franchisee agreement with Carlson.

In India, where the concept of ‘select service hotels’ does not exist, food and beverages account for about one-third of a hotel’s overall revenues, according to industry estimates. Total ancillary services in a 5 star hotel, which also include renting of banquet halls, spas and night clubs, could constitute as much as 45% of a hotel’s business here. “In India, hotels are food and beverages destinations and host weddings unlike the western countries,” says Rajiv Menon, area vice president (India, Pakistan, Malaysia and Maldives) of Marriott International, a US based hotel company.

This has forced moderately priced brands like Courtyard by Marriott to offer elaborate in-house dining services, concept restaurants or banqueting services in India, while globally they have elaborate dining options outside the hotels, he says. Another aspect that’s making hotels to upgrade their positioning is the high real estate costs, says Siddharth Thaker, executive director of hotel consultant HVS India. According to him, real estate costs in India at 35-40% of total project costs is double that of global average. “This leads most international hotel brands to position themselves higher than what they are branded globally so that they can become profitable faster.”

This trend, however, can confuse international travellers visiting India and Indians traveling abroad. It can even lead to cannibalisation of brands, warns Larry Malarkar, an independent hotel consultant. The former Starwood Hotels regional director expects stricter branding standards in the future as most international hotel chains are now introducing multiple brands in the country. “If international hotel brands do not work towards uniform branding, it could lead to cannibalisation of brands,” says Mr Malarkar.

Some hoteliers have started doing that, by realigning hotel brands to position them as per global markets. For instance, ITC Maurya Sheraton in Delhi was recently rebranded as ITC Maurya-The Luxury Collection as the hotel offered far more facilities than what brand Sheraton offers globally. This made Starwood Hotels and ITC Hotels to rebrand the hotel, an ITC spokeswoman said.

Single-brand chains like Premier Inn may not be too bothered about such confusion, but the Carlsons and Marriotts may go the Starwood way as India steadily climbs to the top of the world.

Enormous Black Money in Gujarat Realty

It is said, and is backed by some research works in the recent past, that black money may constitute 5.1% to 20% of India’s gross domestic product (GDP). A rough estimate in 1983 said about Rs36,780 crore of black money was floating in Indian markets. In 2005, a study conducted by Arvind Virmani, director of Indian Council for Research on International Economic Relations (ICRIER), put the figure at over Rs9,00,000 crore.

It is difficult to trace the exact share of Gujarat in the black money floating in the market, yet looking at the trend of real estate developers and businessman admitting unaccounted money before the income tax (I-T) sleuths, the amount must be enormous. Sources said that in last 18 months, I-T raids on real state developers and others in Gujarat have yielded nearly Rs600 crore unaccounted wealth. What is surprising is the fact that realty developers were targets of I-T department in about 35% of around 50 search and seizure operations in the period. The remaining 65% includes businessman, doctors and industrialists. Real estate developers have admitted nearly Rs250 crore, which have been 40% of the unaccounted money seized in the last 18 months.

According to sources, the real estate is one sector where major investments take place and majority of that is unaccounted money. That may be one of the reasons the I-T’s investigation cell keeping a watchful eye on the sector. Some of the well-known realtors whose houses and officers have been raided in recent times include Soumya Construction, Radhe Developers and Sheth Builders. Sources, however, said the proportion of black money in real estate dealings has been witnessing a steady decline. There are some projects wherein the amount of black money has gone down – about 30%, much lower from 70% around five years back.

Says Manan Choksi, a noted chartered accountant in the city, “The land owners are charged heavily on capital gains and they want to avoid the same. So the builder has to compulsorily take black money. The construction industry, labourers, material suppliers and professionals also evade taxes by taking part of the consideration in black.” Choksi said the black money hurts the industry a lot. He pointed out that even today banks’ home loans only finance 100% of white money component of the price of the unit. “Salaried people don’t have black money. Fear of embezzlement for the entire chain and lack of accountability and transparency among others don’t clear price of the property which hurts the resale of the property,” he said.

Cucine Lube to Strengthen Retail Presence in India

Italian modular kitchen company Cucine Lube today said it plans to strengthen its retail presence in India by opening nine more outlets across the country by 2011. The company, which currently has four outlets in India, also introduced range of modular kitchens at its store located in the capital.

“To expand its retail presence in the country the company is planning to add nine more new stores by 2011 in the metros and mini-metros,” Cucine Lube said in a statement. Cucine Lube, however declined to divulge investment details for the purpose of expansion. The new range “is available in various themes, colours, textures and designs to suit all tastes and budgets. Customers can also create their own look and design, ranging from the modern to the classic”. Cucine Lube is one of Italy’s leading kitchen manufacturer, which constructs 434 modular kitchens per day, it added.

Developers Benefit from Low Cost Homes

DLF and Unitech, the two biggest real estate developers, are poised to lead the sector in reporting that profits plunged in the September quarter as sales were lower than a year ago due to high prices. But earnings may be better than the June quarter as sale of low-priced homes brought in hopes of revival, which may fizzle out if developers keep raising prices. Many real estate firms which were teetering on the brink of collapse a few months ago, have come back to life as they used the record stock market rally last quarter to raise equity funds and cut their debt which almost ruined them during the credit crisis.

“Developers such as DLF and Orbit will gain from the launch of city-centric projects at aggressive price points,” said a report from brokerage Edelweiss Capital. Unitech and DLF have sold over 7 million sq ft and 4 million sq ft of space, respectively, from their new launches during the current fiscal. DLF may report that its net profit crashed 75% to Rs 491 crore and its cross-town rival Unitech may say earnings nearly halved to Rs 191 crore, analysts’ forecast shows.

“Significant revenue contribution is expected from DLF’s West Delhi project where the company has recorded sales of Rs 16 billion following a 30% quarter-on-quarter rise in unit sale prices,” said a CLSA report. The industry’s focus on buyer affordability with smaller and functional homes helped it cut down inventory and arrest a sharp decline in sales. On a year-on-year basis, however, the industry’s revenue is expected to shrink 19% during the quarter. But it will be an improvement from declines of 30% and 70% in June 2009 and March 2009 quarters respectively.

Some developers are also improving their stretched balance sheets by selling non-real estate assets such as wind power and hotel businesses. Those sale of assets also helped them generate enough cash to complete under construction projects at a time when presales had completely vanished. DLF sold its wind energy business and hotel properties, which helped it to improve cash flows. Similarly, Unitech sold a couple of its hotel projects. “Thus the average debt-to-equity of key real estate companies is expected to decline significantly from 1x in March 2009 to 0.4x in September 2009,” said a report by Motilal Oswal Securities.

Improved liquidity coupled with new launches of low-cost budget homes has lowered construction costs for most developers, reducing EBIDTA margins by as much as 10 percentage points. Some exceptions like Mumbai-based HDIL may report an improvement in operating profit margin, thanks to a 15% gain in transferable development rights. Average EBIDTA margin for September 2009 will be 27% as against 39% for June 2009. However, net margins will show some gains because of lower debt and fund raising through share sales. This new fund flow has helped many developers to lower their leverage and thus save on interest cost. The overall PAT margins for the September quarter will be 300-350 basis points higher than June 2009 PAT margin of 26%. Seeing the demand pick up, builders have been quick to increase prices. However, this will have a dampening effect on demand as well as buyer confidence. Out of the three segments, it is only the residential market that has seen a recovery. Commercial and retail segment are still under stress.