Indian Property News on 'January, 2010'

KP Singh Awarded Padma Bhushan for Services to Real Estate Sector

Even as the domestic economy is showing clear signs of a pickup, the Indian real estate sector is not out of the woods yet as oversupply of residential and commercial projects will continue to haunt realtors for the next 12-18 months, DLF Limited chairman KP Singh said. In an interview Mr Singh said that the real estate sector will witness consolidation and some players (fly-by-night-operators) may go down under as part of a normal business cycle. “I feel overwhelmed by a deep sense of gratitude and humility. I would like to express my heartfelt thanks to the Government of India for this great honour and for recognising my lifetime work. I consider it a tribute to all those who have supported us in the mission of building a new India. This is recognition for the entire housing and construction industry”, he said on receiving the honour.

While appreciating the government for not allowing the liberal flow of funds in the real estate sector, Mr Singh said that the government needs to give importance to this sector as it is one of the largest employment generators and is considered a major engine of growth. “For growth of India, realty is an important sector as it contributes substantially to the GDP and is also one of the biggest employment generators,” he said. Mr Singh said that although the award is recognition to the industry as a whole, the government needs to take significant steps towards reforms to boost the sector. So far, enough attention has not been paid to the industry, now it is time to change in that behaviour at the ground level, he said.

“There is a need for massive reforms in the real estate sector and change the archaic law that prevents growth. Realty has so far been a laggard area,” he added. Reform will also prevent the mushrooming of entry of unauthorised and unscrupulous developers. Currently 60% of development in India is through unauthorised. The Reserve Bank of India (RBI) had relaxed the provisioning norms for the banks last year for the real estate sector, allowing them to restructure the real estate loan beyond one year. As a result, those entire loan which were restructured in 2009 are coming for payment later this year. Experts feel that some of the mid-sized companies are unlikely to meet their commitment, which in turn will affect the entire sector.

On the issue of need of regulator, the largest developer said given the legal structure of the country, it is not required as it would create a multi-layers system for every state government. Because real estate is a state-subject, it would be difficult for a central regulating authority to operate, he added. Mr Singh said that the government needs to bring in changes in its thinking process. India should ‘think big and create surplus’ as against the current mindset of ‘think small and manage shortage’. Because of socialistic approach, the country has adopted the philosophy of optimising usage for every one. India of 21st century can now afford to think big and create surplus, he added.

Hardening Interest Rates Could Jeoperdise Real Estate Prospects- Fitch

The global rating agency Fitch on Wednesday warned that hardening of interest rates could jeopardise the prospects of the real estate sector in the coming months. “Any significant increase in property prices and a tightening monetary policy, could have an adverse impact on the future demand,” Fitch said in a report on the domestic realty market, two days ahead of the Reserve Bank’s monetary policy review.

The apex bank is slated to announce the third quarterly credit policy on Friday, in which it is expected to strike a balance between the conflicting needs of contain inflation and promoting growth. The RBI had in its half-yearly review of the monetary policy raised the standard asset provisioning requirements for banks from 0.4 per cent to 1 per cent.

The Fitch report also said affordable homes would drive the housing sector in the coming months, while the commercial real estate will have to wait for some more time for recovery. “The affordable entry segment should continue as the primary growth driver in the Indian residential sector for 2010,” the rating agency said.

“The commercial segment continues to remain under pressure. We expect demand for commercial space to improve in the second half consequent to the expected resumption of hiring in key sectors like IT/ITeS and financial services,” Fitch added. The rating agency said as retailers move back into the expansion mode, there could be a pick up in volume and rents to stablise in the second half of the year.

Crisil Rates DLF “A+”

Rating agency Crisil has revised its outlook on the long-term debt and bank facilities of the country’s largest real estate company, DLF Ltd, to ‘stable’ from ‘negative’ with a rating of ‘A+’. The revision reflects Crisil’s expectation that the strain on the operating cash flows of DLF will reduce over the medium-term, as the real estate sector is on the path of recovery. The positive rating has come as a shot in the arm for DLF, whose chairman KP Singh has been awarded Padma Bhushan this year for his contribution to the real estate industry.

According to Crisil’s guidance, DLF’s operating cash flows are expected to increase over the medium-term. DLF’s sales in the second half of 2009-10 are expected to be better than the figures in the first half, although annual sales for the current year are expected to be lower than that in the previous year, Crisil has projected. Singh had earlier said, “During the last few months, DLF converted short-term debt into long-term debt, mainly by securitising cash flows. To reduce debt, it has initiated a portfolio review wherein it is looking to exit the non-strategic businesses.” The move seems to have worked as is reflected in the upgrade in ratings.

On receiving the government honour, Singh said, “I consider it a tribute to all those who have supported us in the mission of building a new India. This is a recognition for the entire housing and construction industry”. According to Crisil’s observation, DLF’s liability position remains favourable as about 78% of its debt as on November 1, 2009, was long-term. The company has debt payments of about Rs 2,400 crore over the next 15 months, against cash and bank balances of over Rs 1,100 crore as on September 30, 2009. The ratings continue to reflect DLF’s healthy business risk profile, conservative financial policy and significant financial flexibility. DLF’s business risk profile is marked by strong market position, low-cost land bank and economies of scale.

Property IPO wave risks investor indigestion

Investors are more likely to choke on a glut of India property IPOs set to hit the market this year than gobble them up. Even though Godrej made a strong debut this month in the first Indian property listing in two years, IPOs of other developers could meet more restrained investor buying as they compete with a slew of large public sector offerings.

At least 16 real estate firms have lined up plans for initial public offers to raise about $6 billion, buoyed by an 81 percent rise in the Mumbai stock index last year and as property buyers return. “If all the IPOs get bunched up, we have a problem. Everybody may not see the light of day,” said Jayesh Shroff, fund manager at SBI MF, which manages about $8 billion worth of funds.

What awaits India’s property IPO rush may be exactly what happened to China’s offerings in recent years. The Chinese property sector saw early success from some offerings several years ago, but a dozen or so that followed suffered as investors grew tired of the same old IPO story. And it could also play out as it did in India in 2007, when DLF and others floated, but are now among the worst market performers, trading way below their IPO prices, with market valuations sliding between 70-90 percent. Godrej has already dropped 17 percent from its Jan. 5 debut high after its around $100 million IPO.

Sobha Developers calls off land sale talks with Shriram Properties

Sobha Developers, which was in talks with Shriram Properties for the sale of around 400 acres in four cities, is learnt to have called off its negotiations following differences over price. While Sobha confirmed that talks have been called off, it did not provide details. Some of the land the firm had put up for sale include 100 acre at Hinjewadi in Pune, 3.8 acres on St Marks Road, Bangalore, 7 acres of NBCC land behind the Bangalore railway station, 330 acres comprising two islands of Valanthakad & Nadukeri and adjoining lands in Manakunnam & Thekumbaghom villages in Kochi. The total value of these land could be between Rs 600 and 800 crore, according to estimates by Mumbai-based research firm Enam Securities.

The latest move by Sobha Developers comes after it managed to strike a deal with an investment fund owned by Infosys co-founder N S Raghavan to raise Rs 225 crore by selling a part of its land bank. The company has also managed to reschedule a substantial part of its loan portfolio. Last year, Sobha raised around Rs 530 crore by diluting close to 22.5% equity through a qualified institutional placement (QIP). Sobha MD J C Sharma had earlier told ET that the company was looking at a stake dilution of up to 25% at the project level through a special purpose vehicle. While the deal would have generated the much-needed cash for Sobha to develop its projects, it would have also helped Shriram Properties, a part of the $5.5-billion Chennai-based Shriram group, scale up its size in the residential market. In fact, Murli of Shriram Properties had earlier said that the firm was in talks to buy 1,500 acres of distressed assets which could be land with development rights, projects under development or mid-sized real estate company.

The company was eyeing bad assets in Mumbai, Pune and Ahmedabad which were available at throwaway prices to expand its presence in the market. Shriram has completed projects covering 4.5 million sq ft in Bangalore, Chennai, Coimbatore and Kolkata and has 9 million sq ft of residential space under various stages of development in Bangalore, Chennai, Vizag and Kolkata.

Sobha has sold 3.92 lakh sq ft space in Q2 of this financial year compared to 2.5 lakh sqft in Q1. Currently, it has about 9 million sqft of ongoing projects. The company’s Q2 net profit was down to Rs 27.5 crore versus Rs 51.3 crore in the corresponding quarter last year. The turnover during the same period was Rs 226.3 crore as against Rs 230.4 crore last year. Walton Street Capital made its first investment in India through Shriram Properties.

There is a need for massive reforms in Realty

Even as the domestic economy is showing clear signs of a pickup, the Indian real estate sector is not out of the woods yet as oversupply of residential and commercial projects will continue to haunt realtors for the next 12-18 months, DLF Limited chairman KP Singh said.

Talking to ET after being awarded the Padma Bhushan, Mr Singh said that the sector will witness consolidation and some players (fly-by-night-operators) may go down under as part of a normal business cycle. “I feel overwhelmed by a deep sense of gratitude and humility. I would like to express my heartfelt thanks to the Government of India for this great honour and for recognising my lifetime work. I consider it a tribute to all those who have supported us in the mission of building a new India. This is recognition for the entire housing and construction industry”, he said on receiving the honour.

While appreciating the government for not allowing the liberal flow of funds in the real estate sector, Mr Singh said that the government needs to give importance to this sector as it is one of the largest employment generators and is considered a major engine of growth. “For growth of India, realty is an important sector as it contributes substantially to the GDP and is also one of the biggest employment generators,” he said.

Mr Singh said that although the award is recognition to the industry as a whole, the government needs to take significant steps towards reforms to boost the sector. So far, enough attention has not been paid to the industry, now it is time to change in that behaviour at the ground level, he said.

“There is a need for massive reforms in the real estate sector and change the archaic law that prevents growth. Realty has so far been a laggard area,” he added. Reform will also prevent the mushrooming of entry of unauthorised and unscrupulous developers. Currently 60% of development in India is through unauthorised.

The Reserve Bank of India (RBI) had relaxed the provisioning norms for the banks last year for the real estate sector, allowing them to restructure the real estate loan beyond one year. As a result, those entire loan which were restructured in 2009 are coming for payment later this year. Experts feel that some of the mid-sized companies are unlikely to meet their commitment, which in turn will affect the entire sector.

On the issue of need of regulator, the largest developer said given the legal structure of the country, it is not required as it would create a multi-layers system for every state government. Because real estate is a state-subject, it would be difficult for a central regulating authority to operate, he added.

India should ‘think big and create surplus’ as against the current mindset of ‘think small and manage shortage’. Because of socialistic approach, the country has adopted the philosophy of optimising usage for every one. India of 21st century can now afford to think big and create surplus, he added.

Unity Infra to Develop Housing Projects in Kolkata and Bangalore

Construction firm Unity Infraprojects today said it will develop two mixed-use housing projects aimed at middle-to-high income segments in Kolkata and Bangalore with an investment of around Rs 500 crore. “We have already acquired 37 acres of land in these two cities. Work on the projects will kick off next quarter,” company Chief Operating Officer Yogen Lal told PTI. The total cost of developing the projects would be around Rs 500 crore, including Rs 90 crore for acquisition of land.

Unity Infraprojects has two wholly-owned subsidiaries – Unity Realty & Developers and Unity Infrastructure Assets. While the former is into real estate development, in the later the company takes up cash contracts on Build-Operate-Transfer (BOT) basis in various segments of the infrastructure sector. Although the promoters of the company had earlier did some residential projects, none is comparable with the planned two projects in Kolkata and Bengaluru, in terms of size.

Meanwhile, Lal said that Unity Infraprojects is on track to achieve its targetted Rs 4,500 crore orderbook before the end of the current fiscal. “Our orderbook stood at Rs 4,040 crore as on October 31, 2009. We are also the L1 bidder for around Rs 500 crore worth of projects and as such, very much on track to achieve the targetted orderbook,” he said.

LS Retail Chooses DVS to be its Retail Centre of Excellence

LS Retail has chosen Gurgaon based Dynamic Vertical Solutions (DVS) to be its ‘Retail Centre of Excellence’ in India. The proposed retail centre is an initiative to provide retailers of all sizes insights into usage and application of cutting edge technologies in the retail industry and would showcase end to end solution roadmap for the retail industry.

Speaking on the partnership, Gunnar Gunnarsson, CEO of LS Retail sounded confident about the growth of retail in the country. “LS Retail is very proud to announce DVS as our chosen Retail Centre of Excellence in India. Their domain expertise and retail industry experience of the Indian & the Indian sub continent markets have made them the best fit organization to drive an initiative of this nature forward,” Gunnar said.

Changing Trends in Indian Real Estate

The finance ministry has reportedly turned down a proposal by the Department of Policy and Promotion (DIPP) that had suggested doing away with the mandatory three-year lock-in period for FDI in the real estate sector. The ministry’s point of view is that a lock-in acts as a deterrent, checking speculation and protecting the sector from the sudden flight of capital. This could be particularly true at times of an unprecedented crisis, such as the global meltdown in 2008, when foreign institutional investors pulled out nearly $5 billion worth of equity investments between September and October 2008. For sure, there is a big difference between portfolio investments or hedge fund money coming into the stock market and money that is being channelled into the development of projects that by nature are of a much longer gestation. However, the ministry’s contention is that despite the correction after the meltdown, real estate prices were not eroded to the extent that values of some other asset classes were, largely because the lock-in prevented investors from sending their money back home.

The ministry may have a point. After all there’s no running away from the fact that there could have been some volatility in real estate prices had investors been allowed to repatriate their investments. However, given the fact that there is tremendous interest in the Indian real estate market and that most of the investments are of a long-term nature, how much money would have flowed out, is debatable. According to one estimate, nearly $20 billion worth of foreign investment has come into the Indian market since FDI was first allowed. So, in any case, imposing a lock-in on the original investment, which is between $5 million for a joint venture and $10 million for a 100% subsidiary, depending on the structure of the entity, should not bother long-term investors. As of now, it appears that the lock-in will be imposed on a rolling basis—in other words, the investment amount will be locked in for three years. That may seem harsh but again, shouldn’t hurt too much. All that investors would need to do at their global investment committee meetings is to point out that the Indian government has shifted the goal post. But that shouldn’t really make anyone too uncomfortable about putting in money to work in India given its reputation as one of the world’s top business destinations.

Some investors have been suggesting that the minimum space requirement of 50,000 sq feet, for a project to be eligible for foreign investment, should be reduced because smaller projects tend to lose out. There could be some merit in that though it’s hard to know where to draw the line. Actually, it’s not such a bad idea given that there is a shortage of good projects in any case. The other area where foreign investors have been looking for easier regulations is when it comes to selling fully developed property to foreign buyers. There are some assets, such as malls, which when fully constructed, can’t be bought by a foreign investor. There is a clear rationale for this, namely that there is a fair chance that such purchases would fuel asset inflation and moreover, the government believes it would be tantamount to trading in land. However, foreign investors argue that if foreign money has been used to develop an asset, the investor should be allowed to sell that property to another foreign investor locally. They argue that the original purpose, namely that foreign money should have been used to create the asset, would have been served. It’s a tricky situation and for the time being perhaps, it’s best to leave the rules as they are. One way in which a foreign company can sell out to another foreign entity is through an overseas transaction but that’s not really desirable.

Not surprisingly, foreign investors also want to send more money home. Typically, foreign investments, in real estate space, are made either in the form of pure equity shares, preference shares or compulsorily convertible debentures (CCDs). Dividends are payable on equity shares as also preference capital while interest can accrue on the debentures till the time that they are converted. Repatriating dividends, investors say, is tax inefficient because it would attract dividend distribution tax at the rate of 17%. They want a way out of this and want to send home money in a more tax-efficient manner, of course, only once the project is completed. How that can be resolved isn’t clear right now. It’s true that investors need to make returns and also to prove to their overseas shareholders that their money was wisely invested. That will encourage further investment and all said and done India is a capital-starved country, so it won’t hurt to encourage project finance. At the same time, when foreigners enter a market, they do so with some idea of what they’re going to make. So dividend distribution tax should be pencilled into those returns.

Foreign Business Families Continue Investment in India

Large business families in the US, Europe and West Asia are increasing their allocations to private equity funds focused on India, reposing their faith on the India story at a time when traditional investors in such funds are refraining from committing additional money. Some of the families that have invested, or have shown an interest, in Indian companies are the Oppenheimer’s of the US, the Swarovski’s of Austria, Germany’s Grillo Group and some business families in West Asia such as the Al Ghurair Group. Increased flow from business families has come as a boon to private equity funds. The global meltdown that shaved off almost a fifth of the stock values has discouraged the traditional investors such as pension funds, large institutions and university endowment funds from increasing allocations. Most institutional funds have their investments marked to the market. Mark-to-market or fair-value accounting refers to the accounting practice that records the price or value of a security, portfolio or account to reflect its current market value rather than its book value. Wealthy business families have been keen to invest in Indian companies, said fund managers and advisers to such families.

Family offices, or private companies that manage investments and trusts for business families, see limited avenues to invest, said a fund manager, requesting anonymity. Their decision may also have been influenced by the fact that most family offices are advised by Indians, he added. However, data on the increase in allocations are not available as business families are highly secretive about their wealth and investment plans. The family offices are typically advised by high-profile Indian professionals as they understand the local environment better. Guru Ramakrishnan, a former Morgan Stanley senior executive and ex-CEO of former Citigroup hedge fund, Old Lane, is one such adviser. Mr Ramakrishnan is well known in investment circles. He, along with Vikram Pandit, current Citibank CEO, had walked out of Morgan Stanley to start Old Lane. After closing down Old Lane, he has now formed a $300-million hedge fund, Meru Capital.

Another adviser to foreign investors is Vinod Sethi, the former Morgan Stanley adviser, who is involved in drawing wealthy overseas investors to alternate energy projects in India. He is also one of the co-promoters of Mount Everest, which was bought by Tata Tea. Former Deloitte managing partner Dilip Choksi, now actively involved in promoting family-office business in India, is also advising foreign clients to invest in India-focused funds. Investment by institutional investors in private equity funds has come down dramatically, post the global meltdown. The $203-billion California Public Employees’ Retirement System, considered a bellwether investor in most PE funds, recently said its private-equity portfolio was off 6%, while its real estate portfolio fell 47%. “Although, it’s not clear whether allocations between the two classes of investors have changed, it is being seen that more private equity firms are going to family offices to seek investments. Indian companies provide a perfect opportunity for such funds to increase their returns given the growth trends in our economy,” said Vikram Uttam Singh, head of private equity at professional advisory firm KPMG.

India’s economy, which was quick to recover from the economic downturn induced by the global recession, is expected to expand at the pre-slowdown rates of over 9% in the coming fiscal years. The country’s growth is also not limited to a few sectors. Car sales from all domestic companies have seen record figures last month and consumer durables is expected to grow 20% this year. “Most of the interest in India is in sectors such as infrastructure and consumer-related industries, where the consumption is directly linked to customers,” said Avinash Gupta, head of Deloitte’s financial advisory.

Most private equity firms don’t reveal the names of their investors as it could harm allocation prospects. Apart from CalPERS, other regular India investors include the Fidelity family fund and Michael Dell, the American multi-millionaire businessman who has invested in Indian technology firms. ICICI Venture, one of India’s largest PE firms, which is planning a $500-million fund, has said it intends to raise $200 million from overseas investors. Preqin, a private equity research firm said that adverse market conditions globally contributed to the fall in the number of exits for private equity firms, an important factor that affects profitability of existing investments and also led to the slowdown in fund raising. The total value for new private equity-backed deals in 2009 totalled $77 billion, which is a 61% fall from 2008, the firm said.

The increase in allocations from family funds could also be because of the fact that such funds are focused in their approach. “The family funds, with largely equity-focused assets, have done very well over the past year with greater upside in non-PE investments. So, they are rebalancing towards PE. The pension and endowment funds are run on a widely-diversified asset allocation-basis,” said Rafiq Dossani, a director with the Centre for South Asia at Stanford University. The Stanford University Endowment fund regularly invests in private equity. Prequin said in 2009, private equity fund raising had its worst fund-raising year since 2004, with only $246 billion being raised by 482 funds worldwide. This is 61% down on the $636 billion raised in 2008.