Indian Property News on 'April, 2010'

Mall Culture not a Big Success in India

Let’s begin with defining success. In the case of a shopping mall (and most other consumer facing businesses), I believe this lies at two levels — success at a customer value proposition level (end consumer and retailer/occupier), and then at a financial level for the mall developer. For the shopping mall revolution to be considered a grand success, one would want at least 50-60% of malls in the country to deliver on these two counts.

Now, let’s look at the reality. Malls were hailed as one of the key growth drivers for the retail and entertainment sector in the country 5-7 years ago, as they provided a plug and play opportunity for retailers to expand footprint and promote consumption.

Today, there are an estimated 150 malls in India, and the sad reality is that only around 20-25 of these are successful. Malls like Select City Walk and Ambience in the NCR, Inorbit and High Street Phoenix in Mumbai, Forum in Kolkata, Garuda and Forum in Bangalore have done a phenomenal job of creating shopping and leisure destinations for consumers and retailers. They have even impacted traditional high streets such as South Ex., Greater Kailash-1 (M Block) in Delhi, and Commercial Street and Brigade Road in Bangalore amongst others. However, with fewer than 20% malls delivering on the customer and financial counts, one can clearly say that the mall revolution has not been a grand success in India.

Issues with malls exist at a mindset, planning (or lack of it), execution, as well as mall management level. Few developers realise that malls are a “retail” business that needs to be planned, managed and nurtured like one, and not just another piece of real estate to sell to the highest bidder at the soonest possible. Also, with rentals taking up a disproportionate share of revenues for a retailer (25-35% for a number of fashion retailers!), this is a broken economic model for the occupier, hence for the developer. Like in any other industry, understanding, partnering and servicing customers on a continual basis is the key to success for developers. Till this happens, a number of retailers will continue to refer to CAM (Common Area Maintenance charges) as SCAM

Government in Discussions to Consider FDI in Multi-Brand Retail- Sharma

The Indian government is consulting various stake-holders on allowing foreign direct investment (FDI) in multi-brand retail and the scope of such investments in other sectors, Commerce and Industry Minister Anand Sharma said Tuesday.

‘FDI in multi-brand retail is part of the discussion paper being prepared by our ministry. We are also studying the scope of FDI in sectors like agriculture, defence and retail,’ Sharma told reporters here, releasing a strategy paper on growth of engineering exports.

A day earlier, he had said that the government was not working on the modalities of opening up multi-brand retail to foreign investors as it was still trying to strengthen back-end of the retail industry.

‘Back-end operations have to be strengthened first as it would lead to value addition, higher remuneration to farmers and also create jobs,’ he said Monday.

The current policy allows 51 percent FDI in single-brand retail only. The government has not allowed foreign companies to run multi-brand stores in India. The policy allows 100 percent FDI only in cash-and-carry or wholesale trading.

The government is expected to seek industry opinion next month to change FDI norms in sectors like defence, agriculture, retail and pharma.

According to the minister, FDI in India since liberalisation in 1990-91 has been $175 billion. The FDI investment during April-February 2009-10 was $33 billion, he said.

Parsvnath Planning an Exit from Ahmedabad- Sources

Parsvnath Developers Ltd, one of the leading real estate companies in the country, are planning to move their operations out of Ahmedabad, if industry sources are to be believed.

After selling its top property in Satellite for around Rs150 crore last month; the company recently sold off another prime land for Rs 30 crore in Vastrapur, the sources said.

Sarthav Infrastructure Pvt Ltd, better known by its Abshree brand, has bought this land. The company is planning an office-cum-showroom. Two buildings with close to 1.75 lakh sq feet constructed space will come up on the plot next to Swaminarayan Temple in Vastrapur.

The Delhi-based company had earlier proposed a luxury mall project on this 5,900-sq yard plot in Vastrapur. Sources said the land has been sold for Rs 55,000 per sq yard, which is a decent rate in today’s market. However, its strategic location should have fetched the plot anywhere between Rs 65,000 and Rs 70,000.

Interestingly, Parsvnath had signed an MoU with the state government at the Vibrant Gujarat Global Investors’ Summit (VGGIS) 2007 for developing various projects with an investment of Rs 1,600 crore over a period of two-three years in the state. The company again signed another MoU in VGGIS-2009 worth Rs 1,050 crore that included projects proposed in the city. One of them was a ‘mall-cum-5-star hotel-cum-multiplex’ project with an estimated cost of Rs 350 crore on 100-foot road in Satellite. However, they sold off the land.

MD of Parsvnath Developers Ltd, Sanjeev Jain, said he can’t comment on the sale of the plot. “I cannot comment on any development related to it. The right person is Pradeep Jain, my elder brother who is also the CMD of the company.” However, he was unavailable for comment.

The company bought the land parcel in 2006-07 from Ahmedabad Urban Development Authority (AUDA) which has been provisioned for commercial development.

Industry experts believe that when the company bought the land the retail market was booming. However, since then we have seen oversupply of malls in the city. Therefore one of the reasons for them selling it is the struggling retail market. One of the company officials had at the time of Satellite land deal clarified that the company is selling off the lands for increasing the cash inflow and completing the ongoing projects in Gurgaon and Delhi. The company targets to complete 42 million sq ft of space in the next two years.

Shubhranshu Pani, managing director, retail, Jones Lang LaSalle Meghraj, said, “There is no doubt that retail is struggling in Ahmedabad as it is not performing as per the expectations. Therefore, companies may be rethinking on their projects. For instance Parsvnath, I think that they might have relooked on their expansion strategies.”

CEO of Real Estate Studies and Management Academy, Jigar Pandya said “Retail is not doing as good as it used to two years back. Apart from getting the right brand mix in a mall, the developer has to bear the burden of maintenance too.

As per an estimate, the cost of maintenance comes to around Rs 20 per sq feet. Therefore, viability of new malls is questionable at this moment, added Pandya.

Residential Prices in Mumbai going Sky-high once Again

Apartments at Ashok Towers in the Parel area of Mumbai command a price of Rs 28,000-29,000 a sq ft. This is higher than what developers were charging at the peak of the property market boom during 2007-08. The prices then were Rs 25,000-26,000 a sq ft. During the slowdown in 2008-09, the rates had come down to Rs 16,000-Rs 17,000 a sq ft.

Ashok Towers isn’t alone, something noted by the Reserve Bank of India’s governor last week. In his monetary policy statement, the governor mentioned real estate prices in Mumbai having gone beyond the pre-crisis levels.

There are other instances. Flats in Lodha Bellissimo, another upscale project in the nearby Mahalaxmi area, are selling at Rs 23,000-24,000 a sq ft, nearly 10 per cent higher than at their peak. Prices had gone down to Rs 15,000 a sq ft during the slowdown. Apartments at Raheja Vivaria in the same locality today quote at Rs 28,000 a sq ft, about the same as the peak levels. That’s a smart recovery from the slowdown days, when the same apartments were available at 40 per cent lower prices.

Home prices across the country’s commercial capital have crossed their peak levels as developers raised prices in the backdrop of improved demand. Home buyers had returned to the market since the second quarter of 2009, as developers cut prices by 20-30 per cent to woo buyers.

But, since then, according to property consultants, Mumbai developers have increased prices by up to 40 per cent in both new and existing projects, depending on the possession target and locality. The result, say observers, is that residential sales have come down by 20-25 per cent since December 2009. What has surprised industry-watchers is that developers are not ready to cut prices even after this.

“Since March this year, sales are almost at a standstill. I clearly see a bubble in the making, as prices are going up without sufficient sales to back it up. If the same situation continues, I think developers will face a huge debt pile-up, like in 2008-09,’’ says Pankaj Kapoor, managing director of Liases Foras, a real estate research firm.

By government estimates, developers have accumulated debt of Rs 75,000 crore and need to pay Rs 25,000 crore in interest and principal in the current financial year.

According to Liases Foras’ research, the difference between the weighted average price of properties sold a year earlier and those available today is up by 86 per cent. If the weighted average price of properties sold in the Mumbai Metropolitan Region was Rs 3,700 a sq ft in 2009, today they are at Rs 6,900 a sq ft.

Take the instance of areas adjoining the Jogeshwari-Vikhroli Link Road (JVLR), which connects Mumbai’s western and eastern suburbs. Apartment prices here are around Rs 10,000 a sq ft, as against the Rs 6,200 a sq ft at which apartments were sold in 2009.

“If properties were not selling at these rates at the peak of 2008, how can they sell now during the recovery phase? Besides, home loan rates have also gone up to 9 to 9.5 per cent now,’’ Kapoor adds.

According to Pranay Vakil, chairman of property consultancy Knight Frank India, property transactions with most developers have dropped to just three to four a month, as compared to 20-25 a month earlier. “There is a clear resistance to price rise. I don’t think prices will go up from here,’’ Vakil says.

If sales are not happening, why are developers bidding for big-ticket land deals and launching new projects? According to Vakil, developers have increased the carpet to built-up area ratio, the proportion between the net usable area you get and the total constructed area, which includes thickness of walls. This ratio, he says, has risen from 42 per cent to over 50 per cent now.

“Developers are making up high-value land deals with higher loading (the term for the carpet to built-up ratio). In such cases, buyers end up paying more for what they get,” says Vakil.

In first three months of the year alone, deals worth Rs 5,000 crore have taken place in Mumbai. Liases Foras’s Kapoor also sees an initial public issue (IPO) angle in the skyrocketing of prices. “Developers are not bothered about sales. They are hiking prices to show higher valuations to investors, so that they can dilute less in their issue,’’ he adds. A dozen developers have lined up IPOs worth Rs 17,000 crore.

Some developers are seeing the benefit of not raising prices. Vijay Wadhwa, promoter of the Mumbai-based Wadhwa group, claims the company has not raised any prices since January and sells around 150 apartments a month as against 80-100 a month in December. “We believe those who have raised prices irrationally will face problems. We want to maintain affordability and steady sales,’’ he says. But in contrast to Mumbai, other cities such as Bangalore, Chennai and many places in the national capital region may see continued buyer demand, as home prices have risen at a comparatively slower rate. “In other cities, prices went up by 10-15 per cent as against 30-40 per cent increase in Mumbai because of high demand from users and investors,” says Ashish Joshi, managing partner, real estate, at Milestone Capital.

“Any correction is welcome, as even a small correction brings enormous demand with it. Fence sitters will come into the market,’’ Joshi adds.

Unitech Takes Advantage of Revival in Affordable Housing- Sells Properties worth Rs 7033cr

Unitech Ltd has sold properties worth Rs 7,033 crore during the last fiscal on the back of a revival in housing demand, particularly in the affordable segment.

In a presentation to investors, the company said it has become a key player in all four metros. Earlier, Unitech had a greater presence in the national capital region (NCR). “Value of sales booked in last fiscal year is more than Rs 7,000 crore,” Unitech said.

Of the total sales booked, nearly Rs 5,000 crore came from housing, while the non-residential segment contributed Rs 2,056 crore to overall sales, the presentation said. Last year, Unitech started to focus on the affordable segment to boost its sales and launched a separate brand, Uni Homes, to focus on this category.

As per the presentation, the company sold 16.6 million sq ft of area during the 2009-10 fiscal out of 26.2 million sq ft that it launched. It has sold 13.5 million sq ft of housing and 3.1 million sq ft of non-residential property.

The company aims at launching 30 million sq ft of area in 2009-10. Unitech said it has increased the number of workers at its various sites to 21,000 from about 3,000 at the start of the last fiscal.

On the delivery status of past projects, the company said 6.8 million sq ft has been delivered, while 15.6 million sq ft is yet to be delivered. “Work progressing as per plan in all projects. Construction or pre-construction activities have commenced in 99 per cent of recently launched projects,” Unitech said.

Service Tax on Real Estate can be Reconsidered- Ministry

The Urban Development Minister, Jaipal Reddy, will soon take up with the Finance Ministry, the contentious issue of service tax imposition in the real estate sector proposed in the Budget.

This assumes significance as the service tax imposition can translate into a three-four per cent increase in the cost of under-construction apartments for most home buyers.

“The industry is not in the pink of health…My ministry feels the proposal for service tax needs to be reviewed. I will recommend a review of the proposal to the Finance Ministry in the next few days,” Reddy said on the sidelines of an Assocham conference.

The Union Budget had proposed that unless the entire consideration for the property is paid after the completion of construction (that is after receipt of completion certificate from the competent authority), the activity of construction would be deemed to be a taxable service, provided by the builder or developer to the prospective buyer; service tax would be charged accordingly. This is slated to come into effect from a date to be notified after enactment of the Finance Bill, 2010.

The tax works out to about three-four per cent of the total cost of the apartment, as it is applicable only on the value of services. So roughly, if a buyer books a flat of Rs 20 lakh, he will be required to fork out an additional Rs 60,000-80,000 on account of the service tax component.

Also there is no clarity on some critical issues — whether the imposition is with retrospective effect and what the additional outgo would be in case the home buyer has already paid a substantial portion of the overall amount.

“This is not the right time (for imposing service tax). If it is not rolled back, costs would go up. The demand is still restricted and the sector continues to need support,” said DLF chairman, K P Singh.

Real estate associations such as the Confederation of Real Estate Developers’ Associations of India (Credai) have vehemently opposed the proposed service tax imposition, saying it will ultimately make buying houses more difficult. Credai has stated that such a move would lead to double taxation (as all States require buyers to pay Stamp Duty on the transfer or sale of apartments). Imposing a new tax is contrary to the declared policy of reducing the transaction costs on the sale of immovable property, it has said.

“We have already met Finance Ministry officials and we are asking for a roll back,” Credai chairman, Kumar Gera, said.

Asked about the recent RBI move to raise key policy rates (repo and reverse repo) by 25 basis points, K P Singh said the move was on expected lines, but he expressed the hope that there would be no further tightening.

“I had expected it to happen. It was designed to ensure that the real estate market does not overheat. But if there is any further tweaking, the market will get disturbed and prices will go up,” he said.

Saffronart Partners with Cushman & Wakefield for Online Sales of Premium Residential Properties

A Rs 26 crore (Rs 260 million) luxurious flat with a stunning sea view in South Mumbai or a duplex apartment in Bangalore can now be bought at just a click of the mouse. Saffronart, the online portal that sells art and jewellery, has joined hands with real estate services firm Cushman & Wakefield for online sales of premium residential properties. According to C&W research, approximately 9,000 homes in luxury segment are planned in major cities in India over the next two-four years.

Through this new initiative, Prime Properties, Saffronart and Cushman & Wakefield will offer online sales and auction platform to the premium residential market. This is the first online venture in India for sales and auctions of prime residential properties. The sales figures in the realty sector started showing signs of revival by the end of 2009 after the economic downturn. Even Mumbai and Delhi markets had felt the heat as prices crashed.

Currently, many developers have started showing more attention to the super-luxury residential segment as the demand for high-end residences is on the rise. The joint venture company has identified seven high-end residences across the country, priced between Rs 2 crore and Rs 26 crore (Rs 20 million and Rs 260 million), for this purpose.

It will be sold through the online platform of Saffronart to high networth individuals. The total value of the properties showcased is around Rs one billion (Rs 100 crore). “This is an innovative step within the residential services sector. Our properties are targeted at high networth individuals and Non-Resident Indians,” says Anurag Mathur, managing director, Cushman & Wakefield India. “Our partnership will focus on the online auction of some of the premium properties available in India,” he adds.

GMC’s Plan to Impose Service Tax can cause Hike in Gurgaon Realty Prices

Owning property in Gurgaon is set to become more expensive with the Gurgaon Municipal Corporation (GMC) planning to impose property tax.

Gurgaon, located in the National Capital Region, has for long been the cradle of private property developers and is also known as the IT city of Haryana. Municipal Commissioner of MCG, Rajesh Khullar said the corporation expected to generate over Rs 100 crore annually in revenue by the imposition of the new tax.

He added that the maximum rate of taxation had been decided as Rs 3 per square feet of the covered area or 2.5 per cent of the annual rent for rented premises in residential areas and 5 per cent for rented properties in commercial areas.

The objective method of assessing the rent would be used to calculate tax in cases where the owners do not provide details of property and rent.

The local residents have demanded more clarity on the proposal to impose property tax from the state government.

President of Chamber of Udyog Vihar, Colonel Raj Singla said most of the dwelling areas in Gurgaon had been developed by agencies like Haryana Urban Development Authority (Huda), Haryana State Industrial and Infrastructure Development Corporation (HSIIDC) and private developers like DLF and Unitech. He demanded that the area should be handed over to the municipal corporation before the implementation of any new tax, in the same way as the panchayats had handed over the land to the municipal corporation.

The residents raised doubts about who is the authority responsible for maintaining the area.

Unitech Infra to be Listed in NSE and BSE within a Year

Unitech Infra, the demerged entity of the country’s second largest real estate developer is aiming to get listed on the National Stock Exchange and Bombay Stock Exchange within a year, banking on its high order book and low leverage.

The infrastructure arm would have an order book of about Rs 2,700 crore, its services division manages over 10 million square feet of commercial and residential space and over 1,000 acres of townships. Unitech Infra’s portfolio includes 11 hotels comprising about 2,100 rooms. The entity also includes three amusement parks, one each in Delhi, Noida and Chandigarh.

The company would pursue build-operate-transfer (BOT) opportunities in the highways and the power transmission sectors. It intends to generate and distribute captive power within the existing and future developments of its parent firm. The company has valued itself at about Rs 5,000 crore based upon assets it owns and has a debt of Rs 350 crore, giving it a low level of leverage. On April 14, DNA Money reported that the non-core assets Unitech could be valued at Rs 5,000 crore.

For the nine months end-ed December 2009, sales of this business were Rs 327 crore and net profit was at Rs 57 crore. On Tuesday, Unitech agreed to the swap ratio of 1:1 for the de-merger of Unitech Infra. Unitech Ltd would keep 35% holding in Unitech Infra, while the rest would go to shareholders.

The demerger is aimed at increasing the focus on the company’s infrastructure businesses and to provide significant financing flexibility for the infrastructure projects in terms of access to various pools of funds and availability of longer term and cheaper financing as compared to real estate projects.

“Infrastructure development has been at the heart of our core strengths over the years and this step will provide us the opportunity to capture the significant growth opportunity in the sector,” Unitech chairman Ramesh Chandra said.

Unitech, Ansal, Omaxe and Parsvnath Rate Positive in Fitch’s List

Credit rating agency Fitch on Tuesday placed four real estate companies — Unitech, Omaxe, Ansal Properties and Parsvnath — on rating watch positive, in view of the improvement in industry fundamentals. Rating watch positive reflects the possibilities that the ratings can either be upgraded or affirmed at the current levels, Fitch said.

Fitch said sustainable operating performances, continued de-leveraging by developers over a longer period could lead to rating upgrades in the second half of the year. “The fundamentals of the domestic realty sector are improving, as seen by better liquidity and improved demand,” Fitch said.

All these companies reported increased year-on-year residential volume sales in FY10. It said enhanced affordability, lower mortgage rates, and better job security have helped revive demand for homes.

Demand in the commercial segment, however, remains weak. Fitch said it expects demand for commercial spaces to improve in the second half of this fiscal, consequent to the expected resumption of hiring in key sectors like IT/ITES and financial services.

A substantial amount of equity funds raised and non-core asset sales by real estate companies have been utilised in the repayment of debt and interest costs, which has helped developers in general deleverage their balance sheets.

Overall, credit metrics are expected to recover in 2010 and 2011, as developers are expected to improve their capital structure, operating margins, and liquidity.