Indian Property News on 'February, 2010'

Real Estate Sector Looking Forward to Successful Execution

After a year of consolidation and successful fund-raising, the Indian real estate sector is looking at 2010 as a year to build on the foundation made. While concerns over liquidity and demand constraints have eased, developers are looking to execute the planned projects to maintain cash flows rather than raise more debt. In 2009, the demand for property revived as buyers looked to benefit from low mortgage rates and lower prices. Real estate biggie DLF launched the two-phase Capital Greens project with a total developable space of 4 million square feet and it has been completely sold. Its rival Unitech launched over 24.4 million sq ft of residential projects, while HDIL launched 3.3 million sq ft of such projects.

Till now, the residential prices have remained stable or moved up nominally which has helped the demand to remain strong. But now prices in several cities have started appreciating significantly and, with rising inflation, higher lending rates and likelihood of a reversal in the government stimulus policy, demand is unlikely to strengthen further. Analysts covering the real estate sector told DNA Money that a large quantum of supply coming up in the national capital region (NCR) is likely to prevent prices from moving up in the very near term, but rates would climb up later in 2010.

Developers such as Unitech, Parsvnath and DLF have been able to attract good demand for new projects, which were launched in April last year at a 30-35% discount to the prevailing market rates of that time. In neighbouring Gurgaon, new projects have been launched at a 5-10% discount to the launches in the previous six months. However, in Mumbai, the country’s second-largest real estate market, prices have moved up 25-30% over the past six months, especially in regions of South and South-Central Mumbai.

Unitech, which has constructed 35 million sq ft of residential projects since it started off operations in 1986, launched 24.4 million sq ft in the first nine months of the current fiscal. This has led to concerns about the company’s ability to execute its plan within the time period. The company plans to invest Rs 1,880 crore and Rs 3,520 crore, respectively, in construction activities in fiscal 2011 and 2012. It recently tripled its construction work force to over 20,000 workers. “During the last 9 months, the company has ramped up construction activity at various project sites… it currently has over 60 projects under execution. Workforce employed at project sites has increased significantly and currently stands at nearly 20,000 workers. Structural work is complete in over 80% of the past projects and nearly half of these projects are in handover/finishing stages,” Sanjay Chandra, managing director at Unitech, said.

Even Parsvnath Developers, the sixth-largest real estate firm by sales, has announced plans to launch 10-12 million square feet of projects in the next fiscal. “We would invest Rs 1,500 crore as cost for these projects, which would be met from internal accruals and customer advances. Our total goal is to launch 42 million sq feet in the next 24 months, but that is it — we are looking to execute these projects rather than launching new ones. 2010 and 2011 will be the execution years for us,” Pradeep Jain, chairman, Parsvnath, said. This year might also see the ambitious Real Estate Regulation Bill, that aims to facilitate growth and promote a transparent, efficient and competitive real estate market in the country, being tabled in Parliament.

The government is keen on introducing a system of rating for builders and developers through the Bill. The move is expected to help improve transparency of their operations, and help the beleaguered sector regain the confidence of financial institutions and potential customers. But everything is not rosy in the commercial realty space, which is yet to recover from the slowdown. Though demand has picked up in the third quarter, the absorption levels are still to catch up. There is an estimated 62.3 million sq ft of leasable commercial space to be completed in calendar year 2010 and 45.6 million sq ft in 2011 across Mumbai, NCR, Bangalore, Pune, Chennai and Hyderabad, according to PropEquity, a real estate consultant.

The improvement in the commercial realty demand is directly related to IT growth in the country and, with Nasscom predicting 2010 to be better for the sector, the commercial demand may slowly follow the growth in the IT sector. The real estate sector is hoping the Budget will introduce measures to boost demand and bring in more liquidity. “Measures like tax breaks for affordable housing/ integrated townships, increased tax exemption on repayment of housing loans, clarity on taxation of REMFs (real estate mutual funds) as equity oriented mutual funds, rationalisation of stamp duty, and clarity on FDI policy for the sector would give the desired fillip,” said Ajit Krishnan, tax partner-real estate practice at Ernst & Young.

DLF Pricing its New Delhi Housing Project 60% Higher than its Previous Launch

In the strongest endorsement yet of the turnaround in the real estate sector, DLF Ltd, India’s largest developer, is pricing its housing project in Delhi 60% higher than its previous launch. The project, Capital Greens 3, which is expected to be launched next month, has been tentatively priced at Rs 12,000 per square foot, according to real estate brokers.

Phase I and II of the Capital Greens project, which was launched in April and October last, were sold off in a couple of days as they were priced at Rs 5,500 per sq ft and Rs 7,500 per sq ft, respectively, much lower than the then-prevailing price of Rs10,000 sq ft. DLF had recently indicated in a conference call that demand for luxury homes is back so it would launch some projects in this year.

Phase III of Capital Greens has been termed as a luxury project by the developer with offerings of four-bedroom apartments of 2,600 sq ft in 26-28 storey buildings. The higher pricing was helped by recent healthy sales in the luxury home segment, as DLF sold more than 550 apartments of about 2 million sq ft in the National Capital Region, while it booked about 1 million sq ft of sales in the mid-income housing segment in new Gurgaon, Bangalore, Goa and Kochi. Analysts said DLF’s margins were negatively impacted earlier because of the slew of launches in the affordable housing segment last year.

Kolkata Office Space Rentals Remain High

For those who believe Kolkata as a business destination has been out of favour after the unceremonious exit of Tata Motors’ Nano project in October 2008, a realty check offers an interesting insight into the reality. Office space rentals in Kolkata remains higher than the more fancied Bangalore, Chennai and Hyderabad, a clear indication that business demand is still robust. Only Mumbai and Delhi have more expensive office space.

A study by global realty consultant Cushman & Wakefield revealed that the Burrabazar-BBD-Esplanade area-Park Street belt that comprises Kolkata’s central business district (CBD) commands a rent of Rs 98/sqft, way over Gurgaon prime commercial (Rs 77), Bangalore CBD (Rs 73), Pune CBD (Rs 55), Chennai CBD (Rs 55) and Hyderabad CBD (Rs 50). What’s even more surprising is that rents in Kolkata have been least affected by the downturn that sparked a major price correction in the real estate sector across the country. While rent in the city’s CBD is down 7% against last year, the rentals erosion elsewhere is 10% to 28%.

But despite the 20% rent correction, office space in Nariman Point, Mumbai’s CBD, remains the costliest in the country at Rs 300/sq ft ($107/sq ft/year). It is also the fifth most expensive location globally after Tokyo ($190), London West End ($161), Hong Kong CBD ($160) and Dubai CBD ($120). New York Midtown ($105), Moscow CBD ($102), Paris CBD ($102), Milan CBD ($89) and Zurich CBD ($88) are all cheaper than Mumbai.

Worli follows next at Rs 250/sqft despite a 23% correction. Connaught Place in Delhi at Rs 242/sqft is the next in line followed by again two districts in the western metropolis Bandra-Kurla Complex (Rs 240/sqft) and Lower Parel (Rs 180/sqft). The office space at other CBDs in National Capital Region is in the 151-167 bandwidth followed by Andheri in suburban Mumbai at Rs 110/sq ft. The rentals at Kolkata’s Park Circus Connector (Rs 60/sqft) and Rash Behari Connector (Rs 57/sqft) is higher than the CBD rent of Chennai (Rs 55/sqft) and Hyderabad’s Banjara Hills (Rs 50/sqft).

Cushman & Wakefield India executive director (occupier services) Arvind Nandan said: “While the early part of 2009 was a reflection of the economic slowdown mirroring the rest of the world, by the latter part of the year, there were signs of stability and also revival. This is evident from the fact that more established markets like London (-25%) and Hong Kong (-35%) have seen equal or higher rental correction in the same period. Most micro-markets across India started to record stable rentals indicating a gradual revival in demand. This trend is likely to remain constant in 2010, where we expect rental values to remain stable with a strengthening bias across established markets. Locations with a surfeit of IT/ITeS development may, however, experience further softening of rentals in early 2010, albeit at a much lower rate than before.”

Rentals at IT/ITeS hub Salt Lake Sector V have already declined by 13% and are now hovering around the Rs 42/sqft mark with possibility of further decline till the sector regains momentum in the second half of the year. Maintaining last year’s position within the Asia Pacific region, India captured three of the top 10 spots with Mumbai CBD, Mumbai Worli and New Delhi CBD at third, fourth and fifth positions respectively.

Banks ask RBI to Clarify Pricing of Old Home Loans

Banks have sought clarity from RBI on pricing of old home loans once the new ‘base rate’ regime sets in. Loan agreements, stretching for 15-20 years, have no provision for replacing the prime lending rate (or PLR) — the anchor interest rate to which the floating rates are linked. However, RBI has told banks to start benchmarking loans to a ‘base rate’ instead of the PLR from April 2010. The base rate is to be calculated on a cost-based formula and would be lower than the PLR, while banks are free to charge a risk spread over the base rate they cannot lend below the base rate.

Significantly, RBI has directed banks that at the time of loan renewals or resetting interest charges, banks should take the ‘base rate’ as the anchor rate. Since home loan agreements, like other loan deeds, are legal documents, bankers fear that many retail borrowers will resist a switchover from PLR to ‘base rate’ and signing on a new agreement. Bankers will also have to grapple with the fact there is no renewal date in case of home loans and existing loan agreements are for the entire tenure of the loan. Secondly, since the base rate is a floor rate, there is a possibility that interest rates on some home loans may have to be hiked if the base rate of the bank is higher than existing loan rates.

At least, three senior bankers told ET that there is ambiguity on the matter and they are seeking clarity from RBI. “The moot point is the floating rate home loan do not have renewal clause, making it difficult for banks to link these loans to base rate. Alternatively, banks can give customers an option to shift to base rate. But, if customers have availed of loan at rate lower than the base rate, they may resist shifting to base rate. Banks also cannot force base rate on them as it’s a legal document (loan agreement).” The other alternative would be to maintain two parallel rates —PLR and base rate till the maturity of all old loans in their book. However, bankers feel this move may not go down too well with RBI.

The central bank aims to do away with discriminatory prices for old and new customers. As of now, all old home loan customers are paying higher rate interest compared to new home loan borrowers, even when both of them have taken floating rate loans. Banks say they have priced new loans at cheaper rate because their incremental cost of funds came down. But RBI has urged that reduction in incremental cost also results in reduction in overall cost of funds and thus the benefit of lower rate should be passed on to old borrowers as well. Thus if BPLR continues to be anchor rate for old home loans, it may negate the propose of introducing base rate.

“In case of short-term loans given to corporates, individuals and small businessmen, banks may have to keep alive its BPLR. But whether it can be kept active for home loan which has a 15-year maturity is yet not clear,” said a senior banker. Also, one of the key reasons for RBI to introduce base rate was to improve the transmission of police rate to the credit market. Very often, RBI has observed that the reduction in policy rates has not translated in banks lowering lending rate by the same quantum. In the policy document of January 2009, RBI governor, D Subbarao pointed out: “While changes in RBI’s policy rates were quickly transmitted to the money and government securities markets, transmission to the credit market was slower. Evidently, the transmission is still in progress.”

Between October 2008 and December 2009, RBI substantially reduced policy rates — the repo rate by 425 basis points and the reverse-repo rate by 275 bps. CRR was also reduced by 400 basis points of NDTL. But reduction in the range of BPLRs was 125-275 basis points by public sector banks, followed by 100-125 basis points by private banks and 125 basis points by five major foreign banks.

No Hike in Interest Rates Confirms SBI

RBI hiked the cash reserve ratio by 75 basis points but the increase in overall credit was still moving at snail’s pace. Keeping this in mind, India’s largest lender State Bank of India (SBI) announced on Monday that the lending rates would not be changed much and would largely remain stable for the coming 5-6 months.

There are now enough liquidity ratios in the system and the credit offtake is still slow thus the home loan rates are to remain stable for some time. SBI had given teaser home loan rates earlier this year to which the central bank had expressed concern. The authorities feel that once the interest rates go up it would be tough to repay the home loans. ‘Teaser’ rates are referred to as rates when the interest rate of the loan is low for the first few years, which increases later during the term of loan. SBI had offered such loans.

The repayment capacity of the borrowers is first tested before the loan is given to them. The banks follow the KYC (know your customer) norms to assess these. The base rate that SBI has proposed is 8%.

Emaar to Set up Private University in India

Emaar Education, a subsidiary of real estate company Emaar Dubai, is setting up a private university in India, a newspaper reports has said. “We have a plan to start the Raffles International University in Jaipur, which will provide higher education in business studies, information technology, science, art, hospitality and other subjects,” Emaar Education Vice-President, Marketing and Admissions, Celia Her told the local Emirates Business daily.

The university is being started in collaboration with the Gamber Education Foundation and is likely to start formal operations by April. Recruitment has been progressing for the faculty and senior staff, the report said. Raffles International School, under Emaar Education, has already got a boarding school in Jaipur with about 1,000 students. Emaar has big construction and residential projects in India through its joint venture Emaar-MGF, a JV between Properties PJSC and India’s MGF Land.

Emaar’s education business is expected to complement the residential projects in the second most populous country in the world. Emaar Education acquired Singapore-based Raffles Campus Pte Limited, a premier education provider, in September 2006 to spearhead its projects in the education sector. Raffles Campus has campuses in Singapore, Dubai, India and Vietnam.

Godrej to Announce Acquisitions

Godrej Consumer Products Ltd may announce some acquisitions as early as in the financial year beginning April, a top official said on Tuesday. The company has been scouting for acquisitions in personal care products, haircare space and household categories. “We are looking at several acquisitions and we hope to announce some early in the next financial year, depending on how the negotiations go,” Chairman Adi Godrej told Reuters via telephone.

The consumer products maker also plans to raise its advertising spend by 25 percent in the coming fiscal but has no plans to raise product prices, he said. The group’s real estate arm Godrej Properties, which recently sold shares in an IPO, is also looking at about 15 more joint venture projects, he said. “Most of our projects are joint ventures with land owners, wherein we share either the profits, the area or the revenue. We have completed at least 15 such joint ventures and we are doing at least 15 more,” he added.

Ansal Revives Plan- Launching SEZ in Haryana

Ansal API, the New Delhi-based real estate player that deferred plans to launch special economic zone (SEZ) projects in the National Capital Region (NCR) due to falling commercial demand in sector, is now launching an agro and food processing SEZ at Murthal in Haryana, spread over 250 acres. The developer is also looking to set up a biotech park in Lucknow across 80 acres, which will house 42 biotech firms. The company would invest Rs 1,000 crore in the unit. In the first phase of the project, Ansal would sell plots in the sizes of 5-10 acres and multiples to companies, which would be operational from early 2011.

The developer has already signed memorandum of understanding (MoU) with five rice exporters and is expecting sales in the range of Rs 600-700 crore from the initial phase. The funds raised from selling the plots would be used to construct built-out units in the subsequent phases, which would be either leased or sold. Ansal officials refused to comment. Last year, Pranav Ansal, managing director of the company, had hinted the company might denotify the SEZ due to delays in getting approvals and also because of global headwinds. In 2008, DLF Ltd, the largest real estate developer in the country changed its earlier plan of building an information technology SEZ in New Delhi and instead launched a housing project called Capital Greens.

That was because DLF expected demand for housing to remain strong. It was able to sell two phases of the project within hours of launch. However, the source added that Ansal has already tied up with several companies to set up operations in the SEZ.“Ansal is selling plots in the first phase, so there is not going to be any major construction cost for them and demand in the agro sector is very strong compared with IT,” the source told DNA. The Murthal SEZ would house companies manufacturing cereals, Basmati rice, dairy products and other agro products and would have warehouses, cold chains and test labs etc.

Global Financial Crisis Keep Foreign investors Away from Realty, Construction Sectors

Foreign investors have remained bullish on India’s housing, real estate and construction sectors in the last two years, undaunted by scarce global financial resources. Foreign Direct Investment (FDI) in terms of inflows into equity in the Indian construction and realty sectors have seen a sharp rise from USD 1.19 billion in April-December 2007 to USD 5.6 billion in the first three quarters of the current fiscal, as per the official data.

In March 2005, the government had liberlaised the foreign investment norms with a view to catalysing investment in the realty sector. The government allows 100 per cent FDI through automatic route in construction development projects, including housing, resorts, commercial premises, educational institutions, recreational facilities, city and regional level infrastructure and townships. Though the FDI norms were liberalised in 2005, the government had imposed certain conditions like a lock-in period on repatriation of investment for three years. The repatriation could only be allowed with permission of Foreign Investment Promotion Board.

Global property consultant Jones Lang Lasalle Meghraj in a report said, “Contrary to the commonly held belief of capital flight occurring during 2008, the actual deployment of FDI into India’s real estate sector increased 29 per cent year-on-year during the financial year 2009.” Dubai-based Emaar is a major foreign investor which has entered the country in a big way.

Think before you Invest in Real Estate Sector

A Typical salaried person spends her entire working life, building nest egg for herself and her dependents. We put money in bank FDs, buy post office schemes, invest in mutual funds, subscribe to multiple insurance schemes and invest our life-long savings in real estate. We do all this to make sure that our dependents are not forced to cut their lifestyle after our retirement. In real life, however, things do not always work to be as planned. Quite often, when the monthly salary cheques stop arriving, we realise that the financial planning falls short of the target forcing painful adjustments for retirees.

It gets even nastier if you suddenly have to meet large unexpected expenses such as medical emergency in the family. And we have seen this happening in families where prime breadwinner has retired from a cushy government job and receives generous pensions. So what can lead to such a situation given that Indians are one of the biggest savers in the world? A typical urban household saves nearly a quarter of his/her recurring income on a regular basis. If planned diligently, this savings would grow into a large pool at the end of your working days.

Among the common causes of such a mishap is over investment in a particular assets either because we fall in love with it or due to lack of opportunity. Former is particularly severe in the case of traditional favourites such as real estate and life insurance policies. Real estate assets, especially a residential property, have a special lure in urban India given the housing shortage in the country and the fact that relative to income, real estate prices in India are one of the highest in the world.

Not surprisingly, for those who can afford, house is typically their biggest investment and one that can eat up bulk of their life-long disposable income. But the lure of a house doesn’t stop at a roof over your head. It has now transformed into one of the most popular asset classes for upwardly-mobile urban India. And surprisingly, real estate investment doesn’t seem to carry any of negative attributes associated other assets such as equities (risky and unfaithful) and banks and post-office deposit.

The scramble to secure a pie of the lucrative real estate market has turned into frenzy ever since the government announced a tax-break on housing loans opening floodgates to the private sector investment in real estate projects. It’s not uncommon to find individuals owning three or even four residential properties. But this over reliance on real estate as financial planning tool can turn out to be a liability in old age. Consider this, post retirement, an individual needs an income stream that is regular, fairly predictable, can rise with the increase in inflation and most importantly easy to administer.

For all, its advertised virtues, real estate fails on the most of the above criteria. As mentioned above, a house is most often the largest investment for any individual, but it is seldom the biggest source of income/cash flows for a retiree. This is because post-tax yields (i.e. rents adjusted for municipal taxes, income tax on rental income and maintenance costs) are pitifully low in India. For instance, in Mumbai, yields in most localities range from 2-3%, and this doesn’t take into account the effort involved in extracting even this nominal amount.

Find a “nice and trustworthy” tenant, prepare a lease deed, get it registered and renew the agreement every 11 months and every few years find a new tenant. Proponents of real estate investment, however, push it as a capital appreciation tool. This requires one to sell the property at the opportune time. This is, however, easier said than done. Even in a market as liquid as Mumbai, it may take months to find a right buyer at the right price. And even longer for the cash to land in your pocket. And this involves a fair amount of footwork and not to talk of the documentation involved.

If a real estate transaction is so complex and time-consuming in Mumbai, you can imagine the situation in other parts of the country. Young people or those in the working age group can still hope to do the necessary running around. But the same cannot be said about retirees. They need an asset that is no-nonsense and has almost zero transaction cost and can be liquated in the shortest possible time. But what if you need cash quickly and an amount that is much less than the market value of the property? Not surprisingly, even for people with large real estate portfolio, it is hardly ever the prime source of cash-flow. This is fine as long as you are working, but post retirement, it could prove fatal.

Recently, I came across an old couple, who own six properties between themselves and their son, but can’t afford a medical surgery and the post surgery expenses, despite the fact that one of them earns a decent pension. They are now caught in a bind — they can’t rent their vacant houses for fear of losing its control; but neither are they able to sell it despite their best efforts. Instead, if they had invested in fewer properties and had diversified portfolio, including equities, bank FDs, post-office deposits coupled with a medical insurance, their old age would have been much happier. The lesson is clear: the life is uncertain, so spreads your bets and never fall in love with an asset just because it is in circulation.