Indian Property News on 'March, 2010'

Further Rate Hike by RBI can Dampen Residential Demand

Any further hike in policy rates by the Reserve Bank of India (RBI) is expected to dampen the demand for the residential real estate segment due to the rising cost of home loans. RBI recently hiked the repo and reverse repo rates by 25 basis points to check the spiraling inflation in the country. Any further rate hike is also expected as the RBI has hinted to do so in order to suck excess liquidity from the market.

However, the only silver lining for the real estate players is that banks are yet to raise home loan rates despite the hike in policy rates. “In the post-hike scenario, we don’t see any kind of impact on demand for residential houses as banks are yet to raise rates. However, any further hike in policy rates is expected to put pressure on demand as banks will follow suit,” J C Sharma, managing director of Shobha Developers said.

He also said that as long as home loan rates stayed within single digit, the present demand would persist. Presently, home loan rates are hovering in the range of 8-9 per cent with schemes of teaser loans floated by some banks. “There is a clear indication by RBI of tightening rates and rolling back of stimulus package. However, it is yet to be seen how the policy rate hike is transformed into a rise in home loan rates,” H S Upendra Kamath, executive director, Canara Bank said. He also said that though there would be some kind of a hike in housing loan rates, that would not be abrupt to destabilise the demand scenario. In addition to home loan rates, policy rate hike will fuel higher lending rate by banks. So, real estate players with higher cost of funds are expected to pass this cost to the consumers, which in turn may see price rise in this segment.

As per a CRISIL report, residential market is expected to turn positive this year owing to improvement in affordability, steady economic growth and greater liquidity. A research report of Fitch also notes that fundamentals of Indian real estate sector is improving as seen by better liquidity and improved demand in the residential segment. However, concerns of moderately adverse policies still remain as economic conditions become more stabilised, the report says. “Demand from residential segment remains robust as of now and any rate hike will work as a deterrent for this sector. However, demand will not be substantially impacted,” Shailesh Kanani, an analyst of Angel Broking said. He also said that real estate players had again started raising prices in residential segment, which could negatively impact demand scenario with further rate hike.

New Delhi and Mumbai Considered Most Preferred Real Estate Investment Destinations

New Delhi and Mumbai are considered the most preferred real estate investment destinations for this year (2010), with 62 per cent of prospective buyers wanting to invest in a home and live in these two cities, a nationwide survey revealed here Monday. The survey by housing and realty portal entitled “Realty Trends-2010″ conducted in the metros and tier II cities found that nearly one-third of the people – 34 percent – would like to buy a house in the national capital. Mumbai follows close behind with 28 percent of the people desiring to settle in their own home in the city of dreams. Surprisingly, Bengaluru and Hyderabad came a distant third as the option of only 11 percent of the people surveyed, said Aditya Verma, vice-president, makaan.com.

“The survey also revealed that in 2010, the realty sector will be driven by the end users who shied from making property purchases last year in view of the recession and fluctuating prices,” Verma added. As many as 67 percent of those surveyed wanted to buy a house for self-consumption while 23 percent looked at it as a long-term investment and the remaining 10 percent as a short-term investment proposal. A majority of the buyers have also said that the speculators driving the realty boom of 2004-07, have been more or less driven out of the markets. As far as Mumbai is concerned, the survey has some unexpected results. While 72 percent of the property seekers want to buy a home for self-consumption, nearly 20 percent plan to take the plunge this year itself. The remaining 8 percent will treat it as a short-term investment option.

About the location choices, the north-west Mumbai suburbs – Andheri, Jogeshwari, Goregaon, Malad, Kandivli, Borivli and Dahisar – have emerged as the hot favourites with 30 percent of the people opting for this region. Another 29 percent will prefer to consider relatively cheaper options in Navi Mumbai, while only 12 percent plan to buy a house in the south Mumbai areas. The survey was carried out among people in the 26-35 age group, who form the main chunk that invests in property for long-term purposes.

Rise in Mahindra and DLF Stocks

Indian stocks rose for a fifth day, driving the benchmark index to its highest level in two years, amid optimism that a global economic recovery will spur investment in the nation’s equities.

Mahindra & Mahindra Ltd., a carmaker, and DLF Ltd., a real estate developer, gained. Foreign funds bought more shares than they sold for an 18th day on March 26, sending the the rupee to its strongest per dollar in 18 months. U.S. consumer spending rose for a fifth month and European confidence in the global economy improved, reports yesterday showed.

“As long as the recovery in the U.S. and Greece remains stable, the fund inflow momentum will remain strong,” said Rajen Shah, chief investment officer at Angel Broking Ltd. in Mumbai. “India’s story is positive, company earnings will be excellent and we expect the Sensex to touch 19,500 by December.”

The Bombay Stock Exchange’s Sensitive Index, or Sensex, rose 26.71, or 0.2 percent, to 17,738.06 as of 12:15 p.m. in Mumbai, headed for its longest winning streak since September. The gauge is poised for a fifth quarterly increase, its best stretch since the third quarter of 1994.

The S&P CNX Nifty Index on the National Stock Exchange increased 0.1 percent to 5,308.35. The BSE 200 Index increased 0.3 percent to 2,220.52. Mahindra, India’s biggest sport-utility vehicle and tractor maker, climbed 2.1 percent to 565 rupees. DLF advanced 2.8 percent to 307.4 rupees. Overseas investors bought a net 10.8 billion rupees ($238 million) of Indian stocks on March 26, taking their total purchases of the equities this year to 187.7 billion rupees, according to the nation’s market regulator.

Foreign fund inflows into India’s stock market climbed to a record 834.2 billion rupees in 2009, beating the high set two years earlier in local currency terms, as the biggest rally in 18 years lured foreign investors. They sold a record 529.9 billion rupees of shares in 2008, triggering a record annual decline.

The rupee, the third-best performer among 10 major Asian currencies excluding Japan’s yen, has climbed 3.5 percent against the dollar this year to its strongest since September 2008, according to data compiled by Bloomberg. HDFC Bank Ltd., the third-largest lender, retreated 1.3 percent to 1,939.50 rupees, snapping a six-day rally. The 14-day relative-strength index, measuring how rapidly the stock rose or fell, exceeded 70 for the past five days. Some investors see readings above that level as a signal to sell. Earnings in India may grow 20 percent over the next three years, according to estimates published on March 10 by Sukumar Rajah, chief investment officer at Franklin Templeton Asset Management India Pvt.

The world’s fastest-growing major economy after China may expand 8.2 percent in the 12 months from April 1, from an estimated 7.2 percent in the year to March 31, India’s finance ministry forecast Feb. 25. In Europe, an index of executive and consumer sentiment in the 16 nations using the euro rose to the highest level in almost two years in March, the European Commission said yesterday. The Commerce Department in Washington said U.S. consumer spending climbed for a fifth month in February.

Mexico’s Homex to Partner with Indian Company for Housing Project

Mexico’s Homex said on Monday it intends to partner with Indian construction company Puravankara on new public housing projects in India. Homex has agreed to terms with Puravankara for a “future, nonexclusive strategic alliance to begin operations in the public housing segment,” the Mexican company said in a stock exchange filing. The first project being looked at will be in Chennai, a city in southern India, Homex said.

The real estate firm Puravankara expects to boost revenues from low-cost housing projects, which developers in India see as helping to counter falling demand in the premium segment. Homex specializes in mass-producing homes that sell for less than $40,000 each in Mexico and has eyed expansion in other international markets, such as Brazil. The Mexican company’s fourth-quarter revenue fell 7 percent year to year, underperforming analysts’ expectations.

Homex shares were up 2.03 percent to 58.24 pesos on the Mexican stock exchange and up 0.53 percent to $27.95 per share in New York in late-morning trade.

Only 25% Delhi Properties Paying Property Tax

Only 25 percent of the properties in the national capital are paying property tax, the Municipal Corporation of Delhi (MCD) told the Central Information Commission (CIC), which has termed the revelation ‘startling’. The revelation was made during a hearing of an appeal filed by an RTI applicant, Naved Ahmed, who sought information regarding property tax of a particular property in Okhla village. Municipalities levy tax on properties within their jurisdiction on the basis of their value. It is a major source of income for the civic agency.

‘The respondent (MCD) states that until 2004, the property tax department used to send bills to the owners of property…. After 2004, when self-assessment scheme was implemented, the MCD has not been able to clearly identify which properties have paid property tax,’ noted information commissioner Shailesh Gandhi in his order dated March 25. ‘The respondent admits that whereas there are about 40 lakh (four million) properties in Delhi, only about nine lakh pay property tax. This is indeed a startling revelation and if the city taxes less than 25 percent of properties it is a very sad comment on the way it is being administered,’ he added.

Positive Change in Commercial Office Space Sector

The demand-starved commercial office space market is slowly seeing positive signs, with several large and mid-sized US corporates firming up their plans to outsource their work to India for the first time. Major cities like Bangalore, Mumbai and Gurgaon have seen substantial business deals in the last few months and this has led to several new India-based subsidies and back offices which may generate substantial employment opportunities as well.

Experts tracking realty developments say that out of the new jobs being created, 80% will be in the IT sector alone, with the corporate sector accounting for the rest. Also, with new vistas being thrown open by US President Obama’s recent healthcare push—which may trigger an outsourcing spree in health and knowledge sectors—both job and office space markets may see major gains. Though the office space market has not been able to bring prevalent vacancies under control, there is scope for growth for realty, according to experts.

In an interaction with the media, Collin Dyer, president and CEO, Jones Lang LaSalle Inc, says India presents a huge opportunity in terms of attracting jobs outsourced by US firms. India has graduated from being a back office hub for Western companies to housing knowledge process outsourcing centres and research and development wings of multi-national firms. “Asia, which includes robust nations like India, has shown signs of an economic revival, and these are more evident that those seen in economies like the European Union, because of strong banking and financial systems present here”.

According to Jonse Lang’s India Office Map 2010 findings, the demand for office space is gradually improving with opportunistic tenants taking up space at lower rentals. The markets in Mumbai and Bangalore are leading the property cycle and are likely to recover the earliest among office-space markets. Also, the markets of NCR-Delhi, Chennai and Pune are expected to stabilise sooner that those of Hyderabad and Kolkata.

However, the real estate sector, which has been showing signs of a revival, could come under severe pressure if builders resort to a price hike to cash in on the emerging demand in the residential and commercial office space sectors, says Anuj Puri, chairman and India head, Jones Lang LaSalle Meghraj (JLLM). The builders in Delhi and Mumbai may have hiked the prices of residential apartments when sales were picking up, resulting in a slowdown in apartment sales.

CREDAI May Knock Court’s Door if Service Tax on Land is not Removed

The Confederation of Real Estate Developers’ Associations of India (Credai) today said it would consider taking the government to court if its demand for excluding land cost from the proposed service tax on housing complexes under construction was not met. “There is an option of approaching the court and Credai will decide to go to court, if at least land cost is not excluded from the ambit of service tax. Land is not at all a service,” Credai NCR President Pradeep Jain said.

Jain, who is also the chairman of realty major Parsvnath, said the industry body would convene a national meeting to discuss the option of using legal machinery if its request was not met when the Finance Bill was accepted. Realty developers already pay different types of taxes under various heads, including stamp duty on land cost and addition of one more tax would only put extra burden on consumers, he added. “We had a meeting with the Service Tax Department and submitted our post-Budget memorandum to officials. Now, we are seeking a meeting with the finance minister or his officials for the same,” he said.

Finance Minister Pranab Mukherjee, in the Budget for 2010-11, brought development of real estate complexes under the ambit of service tax, unless the entire consideration for the property was paid after completion of construction. Finance ministry officials later clarified that the service tax would be imposed on 33 per cent of the total selling price, which, the real estate players said, effectively means about 3.5 per cent cost escalation for the buyers. When asked if there was any possibility of revoking the taxation proposal, Central Board of Direct Taxes member Durgesh Shankar said: “We can’t say anything now as constant discussions take place for various proposals, but there are never closed minds.”

He said all proposals were made after due deliberations and anticipating repercussions also, if any. Last week, Urban Development Minister Jaipal Reddy had said his ministry would approach the finance ministry within a few days for a review of the proposed service tax on housing complexes under construction as it felt the levy would hurt the sector, which is yet to recover from the recession. “The urban development ministry feels the proposal of service tax made in the Budget needs review. I am recommending the review of the proposal by the finance ministry,” he had said. K P Singh, chairman of the country’s largest realty firm, DLF, had also asked not to impose service tax at this time as the sector was not in a “correct shape”.

Govts Plan to buy Stake in RBI put on Backburner

Three years after a Cabinet decision to buy out Reserve Bank of India’s stake in National Housing Bank and Nabard and list them, the government has conceded to RBI’s objections in this regard and put the plan on the backburner. In Budget 2010-11, the finance ministry has, therefore, dropped the allocation of almost Rs 1,900 crore it had earmarked for the purchase. The sum was on the books for the past two years. A senior government official said the delay and abandonment of the significant plan for the development of the real estate sector and improvement in agricultural financing could have been avoided, if the Financial Stability and Development Council had been set up earlier.

NHB is the regulator-cum-apex bank for the realty sector. Nabard too performs a quasi-regulatory role in agri-finance, besides being the chief refinance organisation for agriculture, small scale industries and other related sectors. The government had planned to list the two entities as part of its plan to make them strong leaders in the two critical sectors. But that will not be possible as long as RBI holds a stake in them. As per company records as on June 30, 2009, total sanctions by NHB stood at Rs 15,729 crore. The year-on-year growth in sanctions was 18%. As on March 31, 2009, Nabard had made an advance of Rs 98,852 crore, a year-on-year growth of 19%.

A government official, aware of the issue, said it was precisely such a setback which the FSDC, possibly headed by the finance minister, would be able to sort out. Among others, the FSDC’s mandate is to ensure financial sector reforms. “FSDC will do what is currently not being done”, he said. The Cabinet decision could then still be salvaged, he said. It is expected that in the new fiscal, the issue of transfer of stake in NHB and Nabard will be among the first to be placed before the FSDC, once it is constituted. In February 2007, the Cabinet decided that the shareholding of RBI in both these entities should be bought out by the finance ministry. This was necessary to create a distance between the banking sector regulator and its interest in these organisations. At the same time, the government took a similar decision for State Bank of India too.

While the finance ministry was able to buy out RBI stake in SBI for Rs 35,000 crore by June 2007, the plans for Nabard and NHB were stymied. As per the Cabinet note, it was supposed to be completed before June 2008. One of the reasons for the delay, acknowledge finance ministry officials, was the long preparatory work for the share transfer in SBI, including arranging cash for the listed company. Subsequently, when the plan to change ownership was discussed, RBI put up several objections. It contended that as the market conditions in real estate was immature, there was a consequent need to keep lending norms for the sector in congruence with that of the banking regulator, RBI. On Nabard too, the arguments supported the need to keep priority sector lending in close contact with the RBI. This was disputed by the finance ministry, which feels that regulatory action would be hard-hitting if it is not circumscribed by the need to provide for protected players in the market. It had cited the cabinet decision in its favour.

The Cabinet had noted that following the transfer, “RBI will be able to focus on its regulatory and supervisory functions, and it will also remove the conflict of interest in due discharge of its duties as the banking regulator and also having ownership in banks/financial institutions”

Falling Realty and Labor Costs Attract Indian BPOs to Expand Operations in US

Indian back-office processing firms are planning to expand operations in the US following a fall in real estate prices and labour costs and a rise in anti-outsourcing sentiments there. The industry, which traditionally followed the offshoring model, is now looking to open facilities and hire locals in low-cost locations in the US. Their aim is to woo first time outsourcers and win projects in highly-regulated sectors. As these firms boost their onshore presence and follow the IT services industry in hiring locals, their business model is set to shift from a primarily offshore-revenue model to an onsite-offshore model, companies and experts tracking the sector said.

“We see the BPO industry changing. Based on the availability of skill and cost, about 15-20% of work will eventually be done in local geographies,” said Sanjiv Kapur, senior VP and head of BPO at Patni Computer Systems. This shift comes even as the more high-profile IT industry attracts flak for not hiring locally in countries such as US and UK. Last year, a legislation proposed by senators Chuck Grassley and Dick Durban sought to prohibit firms that have over 50% of staff on H-1B and L-1 visas from hiring more people on these two visas. Indian IT firms are the biggest users of H-1B visas but in contrast, their BPO arms have limited use for them because most of their projects are done offshore.

But as new opportunities — unlike the traditional outsourcing format — open up, BPO firms find merit in having onshore facilities and hiring locally. Compared with the IT industry, which hires technology workers, BPO firms have more diverse manpower requirements. Knowledge of local regulations in a specific industry or process too would be handy here. A comparatively high jobless rate in the US, hovering at around 10% now, which has driven wages lower and made more manpower available, is helping the BPO firms. According to Keshav Murugesh, who recently took over as CEO of India’s second largest BPO exporter WNS Global Services, real estate prices have dropped nearly 30-40% in places like Scottsdale, Arizona. Cities such as Kansas, Memphis, Detroit, Miami and Omaha offer potentially attractive locations for setting up onsite facilities. Omaha, the home of insurance, for instance, is a low-cost location with many universities, Mr Murugesh added.

“In the BPO context, about 95% of the work is done offshore and only 5% onshore. These firms have started thinking about nearshore and onshore delivery centres,” said Arup Roy, a senior technology analyst at research firm Gartner. Last week Patni acquired a BPO delivery centre in El Paso, Texas, following a deal with a healthcare insurance provider. The 150-person centre will mainly do compliance related work for the insurance provider. But it can be leveraged for other deals too. “In this case, it was more of a regulatory requirement, but we have instances where the client preference is to do the work in the US,” Mr Kapur said.

“Where the nature of work is complex, where it requires physical verification and where there are associated security aspects — these are instances where work will be done onshore. This is also a reflection of the fact that the BPO industry is moving up the value chain. Initially, onsite revenues may not be a very significant percentage, but if you look at it as a percentage of the new processes coming in, it will be significant,” said out Alok Shende, principal analyst at technology research firm, Ascentius Consulting. An official from BPO firm Firstsource Solutions, points out that as opposed to high street banks or large MNCs, healthcare providers are extremely conservative and business is often relationship based. “Even large US insurers are wary of new entrants,” the official said. Firstsource, an early mover in the healthcare provider segment through its MedAssist acquisition in 2007, has facilities in Kansas, Colorado, Kentucky and Miami.

Opportunities such as those emerging from the US Healthcare Bill may mandatorily require sensitive information pertaining to patient records to be within the country, and if BPO firms don’t have onshore facilities, they could risk losing the business. Reasons such as these and concerns about job losses are guiding BPO providers decisions to start onshore facilities. “Even if some revenue is high cost, it drives long-term growth. So it is okay,” said Mr Murugesh about the potential impact onshore hiring would have on profit margins of BPO firms. He also views this as a two-step process, where work is first outsourced to an onshore location and then offshored with increase in customer confidence.

Tightened Monitory Policy and Newly Imposed Service Tax Set to Boost Property Prices

Further monetary tightening by the Reserve Bank of India (RBI) and imposition of service tax on under-developed housing complexes, as proposed in the Budget 2010-11, will lead to increase in property prices, according to real estate companies. India’s central bank last week hiked two major policy rates – the repo rate and reverse repo rate – by 25 basis points each. “The recent monetary tightening by the RBI was on expected lines, but further tightening will certainly lead to increase in property prices. Further rate hikes will impact affordability of home loans,” K.P. Singh, chairman of DLF, India’s leading real estate developer, said here Friday.

“The monetary policy should be such as it encourages this important sector of the society. The policies should encourage people to buy homes, particularly the middle class who wants to buy,” he added. In the budget, Finance Minister Pranab Mukherjee proposed to bring development of real estate complexes under the ambit of service tax. At this, Singh said this is not the right time to impose service tax as the industry has just started recovering.

According to Navin Raheja, managing director of Raheja Developers, if the RBI hikes the key policy rates further and the government decides to impose service tax on under-construction apartments, “it will pressurise the real estate companies to pass on the burden to consumers.” “The prices of properties will go northwards in that case.”