HYDERABAD REALITY

Indian Real Estate: Investors Are Shopping, but Are They Buying Hype?

2009-02-12T23:34:00.000-08:00

By M H Ahssan

Drive through any of India's major cities and it will be impossible to go a mile without running into brightly colored cranes, construction rubble and men in yellow helmets scurrying up and down skyscrapers. Commercial high rises, residential townships, industrial parks and shopping malls are exploding into existence, encouraged by both long-term and speculative investors. Oversized private equity commitments by a growing number of foreign investors and home-grown financial institutions are helping to feed the frenzy.

But several astute industry watchers have begun poking big holes in that picture. For one, they say that many foreign investors have actually brought in only a small portion of their promised investments. Second, soaring land prices and price resistance from buyers are narrowing investors' margins significantly. Finally, they note that concerns continue to run high about the regulatory opaqueness for real estate ventures, bureaucratic red tape and the absence of title insurance, in addition to a host of other issues. India Knowledge@Wharton spoke with prominent private investors, property developers and brokerage firms to understand how these factors are tempering investors' appetites for Indian real estate.

With yields between 30% and 40% during the past two years, India's real estate industry has been the toast of global investment funds. But expectations for future returns have been sharply reduced to between 12% and 20% over the next few years. For many foreign investors, this means having to weigh Indian real estate opportunities against deals that offer comparable returns in other emerging markets like Eastern Europe or Latin America.

Fears of a real estate bubble and an overheated economy have led India's central bank to require a lender cutback on real estate loans. That move has pushed up interest rates, lowering consumers' appetites for home financing and simultaneously raising rents for apartments and offices. Most Indian real estate companies are privately held and their financial information is not readily available. The absence of comprehensive market data across product types like office, retail, industrial and residential properties further hurts the ability of investors to read the right signals, and the occasional rumor of a large deal going bust or a property developer resorting to a distress sale can damage investment sentiments far more than warranted.

More Hype than Actual Investments

Clearly, local investors understand the terrain far better than foreign investors. Much of the foreign capital committed to Indian real estate ventures has yet to be invested, says Aashish Kalra, co-founder and managing director of Trikona Capital, a private equity firm with offices in New York City, London and Mumbai. "Last year, less than $1 billion [was actually invested in] Indian real estate. That's less than the value of half a building in Times Square," he says. That compares with market estimates of between $15 billion and $20 billion in foreign capital headed for Indian real estate.

Kalra cited these figures during a panel discussion on real estate investing at a recent New York City event organized by The Indus Entrepreneurs (TiE), a network of entrepreneurs founded 15 years ago in Silicon Valley. "A negligible amount of foreign capital will get invested in Indian real estate in the next 24 months," he told the panel.

Sameer Nayar, managing director and head of real estate finance-Asia Pacific at Credit Suisse, offers a similar assessment. "There is a lot of hype about capital going into Indian real estate ... [but] not a lot of money is actually going in," he says. Extracting good returns from those investments calls for significant local market expertise in dealing with regulatory and other obstacles. "You make money because you can deal with the problems, and that's why your returns could be 50%," he adds. "If it were an easy market to work in, you would make only 15%."

Short-term Disenchantment

In April 2006, Trikona Capital group firm Trinity Capital raised 250 million pounds ($500 million) for Indian real estate investment in a public offering through London's Alternative Investment Market (AIM). Kalra says his company has deployed about $400 million in Indian real estate projects over the past year.

Including Trinity, about a dozen real estate funds targeting India have raised a combined $2 billion in the past year through listings on the AIM. Most of them are currently trading at levels significantly below their offer prices, revealing investor disenchantment. Trinity's share made its debut in April 2006 at one pound; it now trades at about 86 pence. Hirco, an Isle of Man-domiciled company promoted by the Mumbai-based Hiranandani Constructions group, raised about 382 million pounds ($755 million) from its IPO last December; since then, its shares have lost considerable sheen, down from 5 pounds to about 390 pence in the second week of May. Exceptions include Unitech Corporate Parks, which listed on the AIM last December at 93 pence and now trades at 96.25 pence.

"We see the opportunity [in Indian real estate], but we also see the risks and challenges involved," says Chanakya Chakravarti, managing director of real estate at Actis, a London-based private equity fund that manages assets of about $3.4 billion. Actis plans to set up a $300 million India real estate fund. It already has two other existing funds with an estimated equity of $475 million that have invested in Indian real estate, auto ancillaries and other industries. "Each fund has a unique risk-return profile, and we work with these. For us, India is a long-term story," he adds.

Chakravarti lists three main risks or challenges that real estate investors in India will be up against in the short term. The first, he says, is an oversupply of office space in the major and second-tier cities. A hazy regulatory framework fostering indecision and delayed investments is another concern. Finally, he notes, opaque deal-making processes that narrow the exit routes will deter serious investors.

"The property market today is rife with uncertainties. Prices as well as interest rates have been rising," says Anuj Puri, managing director of real estate services firm Trammell Crow Meghraj, the Indian joint venture of Dallas, Tex.-based real estate services firm Trammell Crow and the Meghraj Group, a financial services firm in London. "It is not advisable to expect any short-term gains; but of course, for long-term investors, India's strong fundamentals are still intact. A long-term investor can expect average returns of 15% to 20% per year."

Vikas Oberoi, managing director of Oberoi Constructions in Mumbai, says the risk-return profile for real estate investments is far brighter for those who have accumulated land inventory at prices much lower than prevailing levels. "The average net margin in today's market is 20% to 25%; we can easily do 15% better than the market," he says. Oberoi claims his company can achieve those higher returns because, among other reasons, "most of the land has been bought earlier."

Oberoi Constructions has an inventory of 15 million square feet of mostly prime land in Mumbai. At today's prices, Oberoi expects it to generate gross revenues of $2.2 billion. The company is focused mostly on for-sale residential apartments, although it dabbles in shopping malls, hotels and other commercial property lines. Oberoi expects his company to post $200 million in revenue this year, rising to $300 million in 2008.

This past January, Morgan Stanley's Special Situations Fund invested $152 million for a 10.75% stake in Oberoi Constructions, effectively valuing the company at about $1.4 billion. Oberoi says the untapped upside in his company's land bank was a major attraction for the institutional suitors it attracted. For instance, five years ago it bought a land lot with 8 million square feet in Mumbai's northwestern suburb of Goregaon for Rs. 100 crore ($24 million). Oberoi says the property would be worth 20 times more today.

"Where is the supply? There is only demand," says Oberoi. "In fact, I want the market to stabilize or [prices to] come down because then we would get land at cheaper prices. It is absolutely a seller's market."

Second-tier Migration

The most visible changes in the Indian real estate sector include the emergence of well defined product categories, the division of the market into tiered cities and a widening of financing options.

In the past, real estate was sold either as residential or as commercial property. With the maturing of the market and globalization of the investor base, the categories have been sharpened and new ones established. "Investors in the residential market are very different from the office and retail space investor," says Sanjeev Dasgupta, CFO and head of investments at Kshitij Investment Advisory Services, part of the Future Group, a large Mumbai-based owner of shopping malls across the country. In the residential sector, investors are in for high returns and are willing to take high risks, he says. This also allows for easy exit, although the risk of a mismatch between potential and real returns is high, he adds.

According to Poonam Mahtani, a national director of retail services firm Colliers International in India, "The investment risk is lower in the metros, but prices there are much higher than those in tier II cities." Several equity funds have consciously focused on tier II cities, because they believe that this offers the most potential. "Land prices are skyrocketing. Buying to sell is a very risky strategy. Land prices are way beyond levels that will generate a decent return. It doesn't make sense to invest any more unless you go to second- or third-tier markets."

Kalra, too, sees the markets outside of India's major cities as the most attractive, simply because they are not the low-hanging fruit sought by the early crop of investors with relatively lower risk appetites. "There are lots of opportunities outside the main metros. India has 30 cities with a population of a million people each," he says. Adds Dasgupta, "The returns are huge in tier II cities, where there is a large untapped potential." He believes that this sector will see a rental yield of 12% to 14% in the next few years.

In office space, experts see a migration towards second-tier cities. A recent report by Deutsche Bank on real estate trends notes, "As the demand for modern space has continually increased, new office locations have had to be developed in the south and east of the urban area (Mumbai and Delhi)." In Mumbai, secondary business districts have emerged in recent years, including the Bandra-Kurla complex in the central suburbs, 25 miles from the old commercial hubs in the southern end of the city.

Much-needed Transparency

For foreign investors, one troubling fact is a pan-India phenomenon: inadequate transparency in land valuations they use to price their investments. In an interview last month, M. Damodaran, chairman of the Securities and Exchange Board of India, discussed the lack of clarity in real estate companies' disclosures, especially with respect to their land banks. "We sought clarity ... on matters like, 'What does your land bank comprise, [and] what are the valuation aspects you have indicated?'" he told the India news wire service. "Where there is only an agreement to develop land, there must be complete disclosure. All such agreements are to be made available for inspection," he said, adding that he preferred land valuations to be made at current prices and not on the basis of future projections.

Trammell Crow Meghraj's Puri agrees. "There is a marked lack of transparency, corporate governance and accountability among India's real estate developers. There also continues to be a serious lack of quality infrastructure. In addition, India scores low in terms of congenial political environment in terms of the real estate sector. This means that there is a lack of clarity in pertinent policies."

But Puri also believes those issues will soon fade away as India's real estate markets mature. "Although real estate is a regional and highly location-specific industry, India will replicate the events that occurred in emerging markets like Mexico and Central Eastern Europe [including Russia, Bulgaria and Poland]," he says. "In these countries, too, foreign investments were the primary drivers for transparency, accountability and higher capital appreciation in the real estate sector."

Real Estate - Reeling under debt

2009-02-12T00:43:00.000-08:00

By M H Ahssan

Unitech, the second biggest real estate player is overburdened with short term loans and is struggling to keep its head above water. The company's difficulties are further compounded since they are unable to raise fresh loans to service existing ones.

Overburdened with short-term loans and facing serious cash-flow problems, India's second biggest real estate player Unitech Ltd is struggling to keep its head above water. It is facing difficulties in raising fresh loans to service the existing ones, with bankers and financial institutions wary of lending to the real estate sector when stock markets are in the dumps. Meanwhile, credit ratings agencies have downgraded the company's various loan instruments on concern that it might default on repayment. The company has failed to mobilize required Rs. 5,000 crore fund as per schedule. And given the widespread perception that the real estate sector is due for further price correction, Unitech's fund mobilization plan seems unlikely to be going anywhere.

Unitech has a total debt of about Rs 8,000 crore, of which Rs 2,500 crore was due for repayment in the period up to March 31, and another Rs. 2,500 crore later in 2009. But taking advantage of the government's stimulus package, Unitech has got loans worth Rs 1,000 crore rescheduled. It is negotiating with banks for roll-over of another Rs 500 crore loan. As part of the second stimulus package, the Reserve Bank of India has relaxed non-performing asset (NPA) classification norms for commercial real estate advances, which are restructured till June 2009.

Meanwhile, the Industrial Finance Corporation (IFCI) sold 1.75 crore shares pledged with it by Unitech promoters at the National Stock Exchange (NSE) in a bulk deal. The IFCI resorted to this move after the promoters defaulted on repayment of loans raised against the mortgaged shares. That indicates that Unitech is having problems raising money.

The IFCI's move that came just ahead of the extraordinary general meeting (EGM) called by the company on January 19 to seek investors' approval for raising Rs 5,000 crore to meet its loan repayment obligations, put downward pressure on Unitech's share prices. Analysts expect a further drop in the coming trading days.

Hardnews finds out, Unitech promoters have been periodically pledging shares since March 2008 to raise money. The promoters borrowed Rs. 200 crore from Indiabulls Financial Services, which was repaid in November 2008. Analysts believe about eight per cent of the promoter shares are pledged with lenders. One of the non-banking finance companies (NBFCs), DBS Chola Finance, had on December 24, 2008 sold 1.28 crore shares of Unitech's shares.

Meanwhile, international credit ratings agency Fitch has downgraded Unitech's various loan instruments on concern that the company might fail to raise funds to meet repayment obligations on its short-term debts. Fitch has said that the downgrade reflects the company's continued delay in raising the required funds as earlier projected and increasing uncertainty regarding its ability to service its interest cost and fulfill its immediate debt and land payment obligations.

Fitch has also noted that Unitech's immediate ability to service or refinance its debt obligations is largely dependent on asset sales and the cash inflow from Telenor ASA to repay an estimated Rs. 1100 crore of debt repayment due during January. While the company has made some progress on its asset sales and fundraising from other sources, the quantum and timing of these remain uncertain, increasing the risk of delays in servicing its debt obligations in a timely manner.

"The rating downgrades also reflect the rapidly deteriorating real estate sector and the likely impact on Unitech's operating performance. It anticipates that operating performance in 2009 will continue to be weak due to the significant slowdown in demand for properties. Fitch will continue to monitor the company's financial and operating prospects, as well as its liquidity position," as said in an official statement. Fitch has also put Unitech on the watchlist for further downgrading in case it fails to service the large payments falling due in January.

Meanwhile, Unitech's board has approved the management's proposal to raise Rs 5,000 crore through debt and equity issues in the company's EGM on January 19. Sanjay Chandra, Unitech managing director, was reported to have said that the proposal was just an enabling provision. "The company could raise these resources through private placement, public issues on overseas stock exchanges, non convertible bonds, foreign currency convertible bonds or a combination of these," quoted Chandra. He, however, declined to share specific details.

Ironically, Unitech's troubles also began when the RBI started tightening lending norms for the real estate sector towards the end of 2007. Significantly, the Indian realty was one of the top-performing sectors during the recent economic boom as property prices across all segments went skyrocketing on spurt in demand due to increased economic activities. The low interest rates, easy availability of loans and strong foreign investment inflows further helped to fuel the property market boom. Carried away by the bullish sentiment, Unitech Ltd went on a borrowing spree to support its growth plans.

Meanwhile, a bubble was building in the property market. The government woke up to it late in 2007. But by that time, the bubble had already taken on dangerous proportions. It was too late to secure a soft landing for the overheated property market. When the RBI put the brakes on lending to the realty sector, Unitech was caught unawares.

Later, rising interest rates on home loans forced buyers to postpone plans. Besides, the big retail chains, the segment whose requirement of commercial space was a key factor in fueling the property market boom, also started cutting back their ambitious expansion plans on emerging signs of slowdown in the wider economy. This has created a huge supply side glut.

The government had asked the RBI to relax NPA norms for the realty sector on the calculation that developers would use this breathing space to liquidate their piling up stocks for repaying loans. However, despite benefiting from the RBI's loan restructuring programmes for the realty sector, most of the developers are sitting on their excess stocks in the desperate hope of a turnaround in the market, though some new projects are on hold due to fund shortages. And that is the reason why the market is betting on the opposite possibility of market correction.

Industry analysts say that the current slowdown in the domestic real estate market, stratospheric property prices and high interest rates have adversely impacted the liquidity profiles of real estate companies. And banks' continued risk-aversion has further compounded financial woes of the real estate players.

Over the past one year, demand for real estate has declined significantly in almost all the major markets in the country, with the economy slowing down and interest rates on home loans ruling high. Since this came after a boom period of four years which saw home prices chart a steep rise in all markets, the pain is acute. Currently, while property developers are still holding on to these elevated prices, potential home buyers are deferring plans in anticipation of a price correction.

As for commercial space, demand for the same has also been affected by the current slowdown in the economy and the global meltdown in the stock markets. Until recently, the demand for commercial space was being driven largely by IT, IT-enabled services and the financial services sectors. But in view of the economic slump, a slowdown in the growth of outsourcing services is anticipated, which in turn would impact the expansion plans of the IT/ITES sector.

Faced with a tight liquidity situation and a dip in profits, financial sector companies too have pruned their growth plans. But on the other hand, there is a surplus on the supply side. The liquidity problem for commercial properties is especially grave because developers are required to incur construction expenditure upfront, while payments from tenants and buyers they receive are mostly staggered, unlike in the case of residential projects where construction is partly funded out of customer advances.

Trickle of customers has builders bending backwards

2009-02-03T22:12:00.000-08:00

By M H Ahssan

It was after a lull of six months that a city builder witnessed a rare sight— a potential customer. Not having sold a single property in the last few months, the builder says he was in no mood to take any chances. So, he brushed aside his marketing manager, flashed his best smile, fished out the brochure and gave his best performance. And, as luck would have it, he got a chance to repeat the same act two days later. Two sales in a week, he now beams, are a “positive sign’’ and hopes that these are signs of things to come.

City builders agree. They say after State Bank of India cut its floating home loan rate, which was soon followed by several other banks, they have finally seen a trickle of buyers who had turned elusive over the last few months. Builders, who would routinely send their marketing teams to meet clients and net deals, are now doing the needful themselves.

Anand Reddy, executive director, PBEL, says that while earlier customers had to approach the builders, now “we are going to them’’. “We are making ourselves available 24X7 and trying to establish a comfort level with them, sharing details on home loans and the banks they could approach,’’ Reddy says.

Besides, tapping new customers is the mantra for most builders now as they are now approaching individual entrepreneurs and those in businesses other than IT.

But the excitement of receiving customer calls is evident. “Just today (Tuesday) I met a client who is on the verge of buying property and is looking for the right bank to take a loan from,” says Anwar Pasha, general manager, Sillicon Property Dealers, his excitement palpable over the phone. He shares that he is making personal visits now as against talking to potential customers over the phone. “I now have a one-on-one interaction with them,’’ he says.

Most builders are giving out each and every detail of the property they are developing in the fond hope that at least one detail would woo the customer. C Shekhar Reddy, president of Builders’ Forum, says that builders in the city over the last two weeks have suddenly seen some increased activity after a period of gloom and predictably, wouldn’t want such consumers to look any other way and grab their full attention.

Several real estate firms in the city had started downsizing over the last few months with much of their activity coming to a standstill. Construction activity of many upcoming projects had stopped and their phones had stopped ringing. Some builders had started placing advertisements explaining the downward economy and how it was the right time to buy property.

But consumers were clearly not convinced and what could eventually stir them was the drop in home loan interest rates.

Prem Kumar head of Doyen Constructions says that after a lull in the real-estate market the reduction of interest rates have brought some much needed cheer to the sector. “People want to take advantage of the situation and a number of buyers who had temporarily put their plans of purchasing property on hold, are now approaching real estate agents,” he says.

Shekhar Reddy notes how the high interest rates in the last few months had led to buyers thinking twice before availing of loans. “We were expecting a cut in home loan rates by March or April but fortunately the banks decided to reduce their rates earlier than expected,” says Reddy, adding that with builders lowering their property prices and interest rates declining conditions have become more balanced and conducive for buying.

However, some like Ashwin Rao, director of Manbhum Constructions is not too hopeful, with many private banks that control a large chunk of the home loan sector not slashing interest rates yet. “The rate cuts are uneven and even SBI’s move to increase demand is not adequate to encourage customers. And even though property prices have fallen they haven’t decreased at the rate that customers were expecting, so it is not going to bring a great change in the market,’’ he predicts.

India's Construction Boom: Boon or Bust?

2009-01-23T22:54:00.000-08:00

By M H Ahssan

Almost every Indian company -- big or small -- that has some expertise in construction finds itself flooded with orders that are nearly three to four times its annual sales. The size and pace of orders could threaten the development of the country's already creaking and short-supplied infrastructure. "Execution is the biggest issue in India today, especially on time and within budget," says Pratyush Kumar, president and chief executive officer of GE Infrastructure, India.

Although construction companies are prepared to spend money to raise their production capacities, experts say that a shortage of skilled talent and the limited ability of capital equipment suppliers to meet demand mean that skillful project management and innovative solutions will be necessary to prevent bottlenecks.

India's planned infrastructure outlay over the next five years has been revised upward by various government authorities, from $150 billion to almost $475 billion. The country currently spends around $21 billion a year on infrastructure, compared to China's $150 billion. Corporate capital spending tracked by research firms like the Centre for Monitoring Indian Economy (CMIE) is at a multi-year high in India. The effect of all of this demand can be seen in the order books of infrastructure builders, which have also reached a multi-year high.

Consider just a few examples: Punj Lloyd, one of the country's largest engineering, procurement and construction (EPC) companies, earned 72% more income for the quarter ended June 2007, at Rs 1,4179.5 million ($359.43 million). Yet, its order backlog rose to Rs 152,250 million ($3,859.32 million). Larsen & Toubro, one of Asia's largest vertically integrated engineering and construction companies, announced that gross sales rose 47% in the quarter ended September 2007 to Rs 55.74 billion ($1.41 billion), and yet its order backlog rose to a record Rs 400 billion ($10.14 billion). At Wartsila India, which had an order book of one times sales in 2003, the backlogs have risen to almost three times that amount. And Patel Engineering, which expects to close the current year with sales of Rs 16,000 million ($405.58 million) has an order book of Rs 54,000 million ($1.37 billion).

Rupen Patel, managing director of Patel Engineering, says that alone, the planned roll-out of highways by the National Highways Authority of India (NHAI) over the course of the next 10 years exceeds the total turnover of all construction companies in India today. "Construction companies have never seen such a boom in India. Even if [they all] did only road projects and left all work on building airports and power plants aside, NHAI still has more work to offer than firms can take," he says.

"The turnover of all construction companies in India last year was around $15 billion. This year it may rise to $20 billion. But a total of $50 billion is [slated] to be spent on construction every year in India, which requires a capability of 2.5 times the sector's size," says a senior executive at IVRCL Infrastructures who did not wish to be named. India will need several billion-dollar, pure-play construction companies to be able to execute such projects, but it has only a couple of such companies, calling into question the ability of the private sector to build out infrastructure in a public-private partnership mode.

Foreign firms might view the huge gap between the sector's existing capabilities and those required as an opportunity to make their mark in India. Indeed, the infrastructure spending boom in India has benefited a bevy of overseas companies, such as Dongfang Electric Corporation in China and Doosan Heavy Industries and Construction Company in Korea, who are filling orders for turbines used to generate power. A number of leading global construction companies, such as Australia's Leighton Holdings and Italian-Thai Development Public Company, have also entered India.

Skilled-labor Shortage
It's difficult to fathom the words "talent shortage" in a country of a billion people that's getting younger over time. But speak to any infrastructure builder, and you hear anecdotes about shortages of trained fitters, welders, masons and plumbers. "Whether we will get the people necessary to support the growth is the real challenge. Both engineering and blue-collared skilled workers are in short supply. Fitters and welders are not available in the numbers you want. The industry also needs mechanical engineers who have worked in capital goods industries and would like to pursue a career [in that sector] rather than switch into software," says Allen Antao, vice president, process equipment, at Godrej & Boyce Manufacturing Company.

"Once, India had such a supply of labor that we never thought we'd run out, but today things are certainly moving towards that," says Satish Magar, chairman and managing director of Magarpatta Township Development & Construction Company, which has developed a 250-acre plot near the city of Pune in western India.

According to Magar, semi-skilled labor was once brought in from the neighboring south Indian states of Andhra Pradesh and Karnataka, but now projects in the west Indian state of Maharashtra are pulling in laborers from far flung Eastern states of Orissa and West Bengal where surplus laborers are still available. Importing lower-skilled workers from overseas would be too problematic, "given the significant wage differentials and the effect such inflated costs would have on a project's viability," says Patel.

The construction industry remains one of India's largest employers. Realizing the need for skilled vocational staff, the industry has begun collaborating with academic institutions to either train staff for plumbing and masonry type work, or to set up in-house training programs. "We are tying up with industrial training institutes for education and vocational development as well as organizing local training at our school," says Godrej's Antao.

Training is important, because by mechanizing their operations, companies have needed to substitute low-end, semi-skilled artisans with comparatively high-end machine operators who are in short supply. As a result, wages for crane operators and others with higher levels of expertise have risen faster than the average for other industrial workers. For instance, Sanjay Verma, head of ship power for Wartsila India, estimates that welders have seen their wages rise by 30% to 40%, while those for traditionally well-compensated naval architects and marine engineers have risen by 50% over a 3-4 year period.

Antao says that the appreciation of the rupee and the rise in wages are happening so quickly that their effect on costs cannot be countered with a rise in productivity. "If margins drop as a result, companies may not be able to commit large sums for capital investments with the same freedom as we would otherwise."

One area of shortage which hurts all infrastructure builders is the availability of skilled project managers. In the case of many developers, "there may not be that level of experience available to execute the size of the projects [that are] planned," says Aniruddha Joshi, executive vice president of the Hiranandani family-controlled Hirco Group, which has large realty projects underway in India. India hasn't seen many large projects until very recently, and the country has traditionally not produced enough skilled project managers to coordinate multiple vendors and optimal allocation of resources.

For prospective engineering students, civil engineering had lost its charm and was seen as a low-growth area, where progress would be limited and the hours long and hard. In comparison, many males who completed computer engineering programs found jobs as code writers in India's burgeoning software services industry. These jobs, which came with a possibility of overseas placements, also made the men good prospects in the traditional Indian marriage market. But with the construction boom, "salaries for civil engineers from reputed colleges, which averaged around Rs 7,000 ($190) a month three years ago, have risen to around Rs 25,000 ($600) a month now, which makes them comparable to what software engineers get. As a result, we are seeing engineering colleges report a higher percentage of students opting for civil engineering courses after several years of relative drought," says Patel.

Many companies have turned to acquisitions to cover their short-term labor needs. Punj Lloyd has acquired Singapore's Sembawang E&C to help provide expertise in EPC projects, while Patel Engineering has bought U.S.-based Westcon Microtunneling to build on its construction expertise. Many firms are also hiring expatriate project managers to take charge of projects and train juniors to assume such positions over time.

Verma feels that the high wages for such positions in India may help in attracting talent from other areas like Eastern Europe and Japan. Patel says skilled project managers and planning engineers could be hired from outside India as well. Reliance Industries, for instance, has an expatriate as its chief of drilling services, who helps train its drillers and rig operators to meet target dates for commercial production of gas.

Joshi sees a silver lining in the shortage of human resources as well. He cites the example of Japan, where construction companies adopted a "top-down" method that helped attract talent to the industry -- one that Japanese society considered a "tough, dangerous and dirty" profession. "It's good to have constraints; it forces you to come up with new solutions," says Joshi.

Wanted: Equipment (and Capital)
At the lower end of the skills chain, companies are responding to labor shortages by automating parts of the production process, which makes them less susceptible to shortages of vocational staff. As a result of this, and partly in response to customer demand for faster build-outs, construction companies that once relied on an army of cheap labor now employ a variety of equipment, from low-end concrete mixers to goods elevators and tipper trucks for transporting materials, tower cranes, tunnel-boring machines, robotic drills and hydraulic excavators.

Patel, for instance, has spent Rs 600 million to Rs 800 million ($ 20.28 million) so far to build an equipment bank, while IVRCL estimates it has invested between Rs 2,500 million to Rs 2,750 million ($69.71 million) in equipment so far. "We even think about having a second set of fall-back equipment ready for certain contracts. We now need national equipment yards, as high-end equipment required for finishing jobs in time is not available for hire," says one official from IVRCL.

"A lot of this equipment could be rented at some point, but these days many companies, including ours, have been purchasing used equipment. Often, the required machinery is not available at the right price and within the desired time frames," says Patel. The boom in building activity in Asia and the Middle East has not only increased demand for such building equipment but also resulted in a rise in lease rentals and forced many companies to own equipment. This has made the operations of such companies far more capital intensive.

As companies take on larger size projects, the capital intensity of their operations increases, forcing many companies to rely on private equity or the public markets. So far, the Indian capital markets have been supportive of this, with DLF Ltd. -- one of India's largest real estate developers -- raising capital in a record-breaking IPO earlier this year. Many realty companies also managed to raise funds on London's Alternative Investment Market for investing in projects in India.

Lately, as real estate stocks have come under increasing pressure, many companies have begun to reassess the premiums they can hope to receive when they go public. Infrastructure builders, however, have discovered that the stock market is still receptive, with Mundra Port & Special Economic Zone becoming the first SEZ developer to go public in October this year.

While funds can be raised, companies have also been rethinking their work methods and the building materials they use. Many companies now employ ready-mix concrete rather than prepare a cement and sand mixture on site. This helps speed up production since ready-made cement can be poured faster and in a uniform consistency to lay out foundations and pillars. Companies have also started employing prefabricated materials -- like brick wall sections or Siporex blocks for ceilings -- to help speed things up while using less manual labor. "India may soon move to [another] stage of mechanization, where developers use completely knock-down assembly components to build projects," says Magar.

One of the reasons for using alternative materials is the reduced availability of materials like clay bricks and sand which traditionally came from the outskirts of a city. With cities expanding, the typical 50 kilometres distance of such brick kilns from a city centre work site no longer holds true. "Thanks to India's huge foreign exchange reserves, import of goods has been liberalised so supply side constraints in the domestic market can be compensated with global sourcing," says Joshi. This has not come a moment too soon: Companies want their projects built in much shorter times than what it historically took in India.

Challenges on the Supply Side
At this point in time, many of India's capital equipment and shipbuilding firms face a Hobson's choice: There is great demand for their products and services and a global shortage of available capacity, but forecasting future demand is difficult. "Putting up a manufacturing facility for turbines, for instance, requires a couple of years, and by the time the project starts commercial production, we expect China to have surplus production capacity seeking global markets," says GE's Kumar.

Dhananjay Nalwade, president and CEO of GE Equipment & Services, India, also raises the issue of how fast firms can digest new technology required to set up advanced manufacturing facilities that can meet market demand. "You need a local supply chain which supports this technology transfer into India. This process takes time and a huge investment on the part of the suppliers to implement modern manufacturing techniques, such as Six Sigma."

"In the case of our investment in Titagarh Wagons, for instance, we will hire people well before the factory is built, train them in our U.S. factories to build the products that will be manufactured in India and then bring them back to India to train other staff in turn," says Kumar. However, GE says some of its partners are reluctant to transfer designs to Indian companies as there is no patent protection available here.

Despite these limitations, firms have been expanding capacity. But several capital equipment and shipbuilding firms find that their component suppliers who have gone from one shift to three and de-bottlenecked their facilities can no longer expand capacity without fresh investments. "With demand showing continued growth, delivery lead times have lengthened. For instance, a ship engine which could be delivered in as little as four to six months from the date of the order could now take as long as 24 to 30 months to arrive," says Verma. According to Antao, "Steel suppliers can't match demand for the exotic grades of steel firms such as ours use. As a result, project timelines have almost doubled. But expanding capacity at the supplier's end requires high capital expenditure, and these firms are afraid that [the demand] bubble may burst and they may not recover their investments."

In the meanwhile, equipment manufacturers are coping with lengthened delivery times by becoming far more choosy about what orders they take. "One prioritizes customers whom one has a long history of working with, and new markets where one may seek to establish oneself," says Wartsila's Verma. "We are going slow on taking fresh orders until our new capacity is ready. Our order book has already doubled in the last year," says Prakash Chandra Kapur, managing director of Bharati Shipyard.

"Contractors these days want to work with companies who will be a source of repeat business and will be regular in paying dues. In the past, it was difficult for these firms to be choosy about their clientele, but today, when they have people knocking on their door, they would prefer to work with people who will be around in the long term too," says Joshi.

Bumps in the Road: India's Industrial Growth Seeks Solid Ground

2009-01-23T22:42:00.000-08:00

By M H Ahssan

For a small car, the Nano has traveled quite a bit. Just in October it has moved from Singur, in West Bengal -- where Tata Motors abandoned a production facility two years in the making and gearing for start-up -- to Sanand, in Gujarat. En route, Tata surveyed other sites for the production of its Rs100,000 ($2,000) automobile.

It hasn't been an easy ride. In Andhra Pradesh, the villagers of Seetarampuram, one of the sites offered by the state government, staged a protest, blockading the Bangalore-Mumbai highway for several hours. Like the farmers of Singur whose tactics eventually forced out the Nano, they resisted the industrial project. In Maharashtra, a senior politician publicly declared that the Nano was not wanted because the state was facing an electricity crisis.

The going has been smoother at Sanand, although bumps in the road still exist. The state government thought it was playing safe by allotting the Tatas 1,100 acres belonging to the Anand Agricultural University. But farmers have already petitioned the Gujarat High Court to stop the deal. They say that the British government acquired the land from them in 1902 on a 90-year lease, and that it should have been returned in 1992, but was not. Now that the land's value has risen sharply, they are demanding compensation. Land prices in neighboring areas have gone up from around Rs400,000 (US$8,000) per bigha (an Indian land unit equivalent to about 25,000 square feet) to Rs1.2 million (US$24,000) per bigha.

The Congress opposition in Gujarat, a state ruled by the rightist Bharatiya Janata Party, has hinted at a Singur-style agitation. But the agitation's purpose would not be to drive out the Tatas. It would aim to secure compensation for farmers deprived of their land a century ago.

The farmers, meanwhile, are organizing themselves under banners such as the Rashtriya Kisan Dal. Maharana JaiShiv Sinh Vaghela, the scion of the royal family of Sanand, an erstwhile princely state, has led a delegation of farmers to the state chief minister, Narendra Modi, to demand their share. Meanwhile, Anand Agricultural University has asked for equivalent land in other districts of Gujarat as compensation for the 1,100 acres it has surrendered for the Nano.

"The real debate is about the correct compensation price," says Rajesh Chakrabarti, assistant professor of finance at the Hyderabad-based Indian School of Business (ISB). "Once land is acquired, the value of the entire area goes up several times and the people who benefit the most are those who own land just outside the area of the acquired lands." Those initially dispossessed -- no matter how handsomely they may have been compensated -- are invariably left feeling they have been given a raw deal.

Soaring Land Prices
According to estimates by the business magazine Business Today, land prices in Singur rose from US$24,000 per acre to US$120,000 per acre. (They have dropped sharply since the Tata pullout.) Land prices associated with other projects and special economic zones (SEZs) have shown similar increases. Among them: the Reliance Haryana SEZ (from US$45,000 to US$200,000 per acre); the Reliance Mumbai SEZ (US$20,000 to US$100,000); the Reliance Maha Mumbai SEZ (US$10,000 to US$100,000); Tata Steel's Kalinganagar project in Orissa (US$6,500 to US$10,000); and the Renault Nissan plant at Oragadam in Tamil Nadu (US$40,000 to US$160,000).

"We follow an 1890s act for land acquisition," Chakrabarti explains. The huge projects that change neighboring lands' value by such huge multiples didn't exist back then. "So there is definitely need to change the laws in such a way that the people who are being evicted get compensated in a fair manner," Chakrabarti says.

The Nano's woes may have grabbed headlines, but land acquisition problems spread across sectors and the entire nation. The government of Uttar Pradesh, led by Bahujan Samaj Party president Kumari Mayawati, recently canceled a deal allotting 190 acres for a railway coach factory in Sonia Gandhi's parliamentary constituency Rai Bareli. Gandhi is the powerful chairwoman of the ruling United Progressive Alliance in Delhi. Mayawati gave in after Gandhi threatened to stage a protest and court arrest. But land has clearly become the currency of political vendetta, too.

Here's a rundown of some other projects running into acquisition problems, for a variety of reasons:

Sterlite Industries, the Indian arm of the London-based metals and natural resources conglomerate Vedanta, has the go-ahead from the Supreme Court to mine bauxite in the Niyamgiri hills in the Kalahandi district of Orissa. But the indigenous tribal community treats the area as a shrine. Kumuti Majhi, a tribal leader, has visited London to explain to Vedanta shareholders that digging up Niyamgiri would be equivalent to demolishing St. Paul's Cathedral.

Navi Mumbai airport, the much-needed lifeline for India's business capital, has stayed on the drawing board for years. The latest objection is from a government department. The Union environment ministry has refused to clear the project because mangrove forests occupy part of the area. The public-sector agency overseeing the project has offered to replant the mangroves -- which occupy just 7.3% of the total area -- elsewhere. But the Delhi bureaucrats are unmoved.

Close to the proposed Navi Mumbai airport, at the Raigad SEZ, villagers and farmers have voted in a symbolic referendum. Activists claim that the referendum has produced a 95% vote against the project being set up by India's richest industrialist, Reliance Industries chief Mukesh Ambani. The farmers in Raigad, in Maharashtra, simply want a better deal. The project is being delayed while its promoters consider their next steps. Reliance, meanwhile, had appealed to the Bombay High Court opposing the Maharashtra government's decision to hold the referendum. While that judgment is pending, the Maharashtra government has announced that the Raigad referendum was unique and will not be repeated elsewhere in the state.

In Jharkhand, the world's largest steel company, ArcelorMittal, is facing tribal opposition against a proposed 12-million-ton steel plant. The project needs 11,000 acres, including 2,400 acres for a township. The protests have been building since mid-October, when ArcelorMittal met villagers to hard-sell the plan. (The 700MW Koel-Karo hydroelectric project, which was proposed some 35 years ago in the same areas, battled opposition from villagers for decades before it was abandoned.)

In West Bengal, the locals of the Chakchaka area in Cooch Behar district have launched an agitation against expansion of the local airport. The airport is critical because Chakchaka (part of a designated backward district) is being projected as a growth center by the West Bengal Industrial Infrastructure Development Corp. The Trinamool Congress, which spearheaded the Singur agitation, has been active here too, accusing the government of forcible land acquisition. (Meanwhile, things are moving smoothly at the Madurai airport in Tamil Nadu, where 614 acres are required for expansion.)

Large-scale Controversy
All projects can pose problems. But the SEZ arena is likely to witness the most controversy because the zones need large amounts of land. The Raigad SEZ, for instance, proposes to cover 25,000 acres; the Nano production facility needs just 1,100. Before the passage of the SEZ Act of 2005, just 19 SEZs functioned in the country. Many of them were barely limping along. Since the act's passage, some 260 new SEZs have been established. Prior to the act, state and central governments and private companies had invested some Rs7,745 crore (US$1.56 billion) in SEZs. From February 2006 to June 2008, an additional Rs73,348 crore (US$14.74 billion) was pumped in, according to Union Ministry of Commerce and Industry data. Some 100,000 jobs have been created. But land issues still bog down many of the zones.

This is proving expensive. According to a recent estimate by the Centre for Monitoring Indian Economy (CMIE), a Mumbai-based data agglomerator and think tank, projects worth a whopping Rs250,000 crore (US$50.23 billion) are encountering hurdles in acquiring land.

"We should not expect the government to allot us land," says Irfan Razack, chairman and managing director of the Bangalore-based Prestige Group, which has interests in real estate and infrastructure. "That's where the controversy comes in. Either the government must auction the land at market prices or the developer must have the capacity to buy the land and then go to the government for approvals. The heartburn comes when the government buys land at a subsidized price and allots it to the developer who then goes on to make big money."

Razack is talking principally about SEZs. But what he says applies to large industrial projects as well. An additional catch is that the government may well subsidize the land it gives to a project like the Nano because such projects are expected to act as catalysts for further investment in the region or state. Tata Motors was supposed to pay US$200,000 a year for the first five years for the Singur land. This was to rise to US$2 million a year in the next 10 years, and $4 million a year after that. The government, meanwhile, paid US$24 million to the farmers as compensation. In the short term, the Tatas were required to pay peanuts. This lends itself to accusations of corporate houses profiteering.

Industry appears to be able to pay more. CMIE data show that in the five years ended March 2008, large-market-cap companies spent US$3.33 billion in land acquisition costs. These companies' total fixed capital expenditures were $113.97 billion. Land is just 2.9% of that total, leaving room for growth in what the companies can pay for land. Industrialists privately confess that they are prepared to pay more for land acquisition. But it has the danger of becoming a never-ending spiral.

No model has proved problem-free. Where the state has acquired land, farmers have cried foul over the rates. Where the private sector has tried to go it alone, accusations of intimidation have arisen. Landowners have realized the advantages of holding out. It often boils down to who blinks first. Says Chakrabarti of ISB: "There is the issue of sorting out 'hold-up' lands," where the landowner has asked for an exorbitant price because he knows that the project cannot proceed without his land.

Chakrabarti has a suggestion. "The government should definitely not do the entire acquisition on its own because, as soon as the government gets into the act, a lot of political forces come into play. On the other hand, the private sector cannot do it completely on its own because of the hold-up problem. One model is that the private partner acquires around 70%-80% of the total land required by paying a fair compensation. The remaining [including the hold-ups] can be acquired by the government by paying the same rate as what the private party has paid.

"There are other ways. Let us say the SEZ needs 1,000 acres. But the consortium [of private players and the government] can acquire 1,500 acres and then ration out the extra 500 on a pro-rata basis to those from whom the land has been acquired. That will mean that instead of giving just cash compensation, everyone will have some real estate holding in the developed area, which will enable them to get the appreciation benefits of that land. This, of course, requires multiparty negotiations, and I don't think it is in practice in India." And Chakrabarti points out a catch. "Being agriculturists, the landowners are not trained for anything else," he says. "They need to be provided with training so that their future is protected."

Comprehensive Ground Rules
What is needed is a comprehensive set of ground rules. They may be in the works, albeit belatedly. The government has been working on a replacement for the Land Acquisition Act of 1894 for a couple of years now. The prime minister's office has written to the Ministry of Parliamentary Affairs asking that the processing of bills related to land acquisition be expedited. Three bills are involved: the Rehabilitation and Resettlement Bill, 2007; the Compensatory Afforestation Fund Bill, 2008; and the Land Acquisition (Amendment) Bill, 2007.

The Land Acquisition Bill has just been vetted by the parliamentary standing committee concerned. The prime minister's office wants all this speeded up to get these bills on the statute books before it demits office next year. Sonia Gandhi told a farmers' rally at the end of September that the bills would be piloted through parliament soon.

The standing committee on the Land Acquisition Bill, which submitted its report on October 21, recommended that:

- States should be allowed to acquire 100% of the land required.
- The definition of "public purpose," which allows the state to take over land, should be expanded.
- States should be given more power to decide on use of agricultural land.
- The compensation benchmark should be the highest price paid in the last three years plus 50%.

The report's submission doesn't necessarily mean that the Land Acquisition Act is on the fast track. "We have to examine the report," Raghuvansh Prasad Singh, the Union minister for rural development, told the Delhi-headquartered business daily Business Standard. "But it is not necessary that all the recommendations of the standing committee have to be accepted."

Political analysts in Delhi say the bills may not be passed this parliamentary session. Compensation is a contentious issue. The definition of "public purpose" is another. In Singapore, "public purpose" can mean residential buildings. Not so in India. The Nanos of the future may have some distance to travel to find a home.

Real Estate Developers Can Expect Relocation, not Dislocation, from the Internet

2009-01-23T22:39:00.001-08:00

By M H Ahssan

Some real estate developers see the Internet revolution the same way an aristocrat during the French revolution might have viewed the guillotine. The reasons for their dread are easy to fathom. As more and more CEOs recognize that the Internet is here to stay, they wonder how e-commerce will affect demand for real estate. E-commerce, after all, is about moving business from physical to virtual space and replacing brick-and-mortar storefronts with digital ones. As mainstream Corporate America embraces e-commerce, shouldn't those whose revenues and profits are derived from brick-and-mortar construction fear for their lives?

Not really. Real estate developers and brokers must recognize that the coming of the Internet does not eliminate demand for real estate; it simply changes it, according to academics and industry professionals who met at Wharton recently for the fall members' meeting of the Samuel Zell and Robert Lurie Real Estate Center. Speaker after speaker at the conference — which featured the first Max M. Farash Roundtable on E-Commerce and Real Estate — pointed out that the Internet offers more opportunities than threats to property developers and brokers. As such, real estate professionals would be better off embracing e-commerce rather than ignoring or fearing it.

How does e-commerce change demand for real estate? By way of an example, consider Amazon, the Seattle-based granddaddy of online merchants. The company, which did not exist five years ago and now claims to offer the biggest selection of products on earth, does not occupy a single square foot of space in any mall or shopping center. And yet, as its operations have grown, the company has had to build large stocks of inventory and find warehouses to house them. "Amazon wants to build a fleet of warehouses," says Christopher Peacock, president of Jones Lang LaSalle, a global real estate services firm. In New Jersey alone, Amazon last year was in the market for one million square feet of warehouse space.

That is just one way e-commerce changes demand for real estate. It also changes the skills requirements within real estate companies, which must now increasingly build expertise in technology. "We must help our clients make the right infrastructure decisions," Peacock says. "Our challenge is not just to hire brokers but experts in telecommunications, energy, corporate finance and logistics." Building such skills is crucial as real estate firms seek to redefine their roles for the digital economy. "Success does not begin and end with designing a web page for your company," Peacock adds. "We should use e-commerce to serve our clients."

Jones Lang Lasalle has begun to explore ways of doing that. The company's property management business buys services worth $6 billion from more than 35,000 vendors. In the past, sales orders were typically placed and processed by fax. Recognizing the potential of the Internet to transform the purchasing process, the company decided to move these operations online. Result: Jones Lang Lasalle was able to slash costs by 10% — or $600 million. "That's just one project, so consider the potential," says Peacock. "The future will be even more exciting. I can see a day when the ability to trade in intellectual property relating to real estate will be as valuable as the real estate itself."

Other speakers emphasized that the Internet makes it essential for companies to act fast. One reason is that the web itself has grown — and continues to grow — at an incredible pace. In a presentation on "Forces Shaping the Digital Economy," Gerald Lohse, research director of the Wharton Forum on Electronic Commerce, pointed out that while radio took 38 years and television 13 years to reach 50 million users, the Internet reached that milestone in just five. E-commerce, too, has been exploding. Forrester Research, a consulting firm, estimates that global e-commerce transactions by 2003 will exceed $3.2 trillion. (To put that number in context, Lohse explains, the U.S. economy today is $20 trillion.)

In a panel on e-commerce and retail, Wharton real estate professor Todd Sinai offered another perspective. Discussing whether e-commerce would cannibalize or augment bricks-and-mortar retail, he pointed out that the latter would certainly happen in some markets. "There are places where no one would set up a shopping center, and the Internet can pick up those sales around the edges," he says. In other instances, though, e-commerce sales may not cannibalize traditional retail as much as catalog sales. Time-starved consumers who once browsed through catalogs and ordered products by phone or by mail may now do so over the web. "The Internet is a direct marketing channel," he says.

The Internet also transforms where and how property is built, which means that real estate companies must re-think old assumptions. The maxim that the three most important things in real estate are location, location and location assumes a new meaning in a global, web-based economy. When business is transacted over the web, producers of intellectual products need no longer be physically close to their customers or even their suppliers. Carrie Byles, an architect with the firm Skidmore, Owings & Merrill, says that if one country's regulations are too onerous, Internet-based companies could easily move overseas or to tax havens. Technology, in many ways, makes location less relevant than it used to be. "For companies like Yahoo, the most important consideration is being close to bandwidth," she says.

Technology also makes it possible for architects to design better environments in which people can work. "We can create offices with casual collision spaces, where new ideas spawn," she says. "Our goal is to create environments that support learning, casual interaction, flexibility and speed in a setting where technology is invisible and the buildings and landscape sustain the human soul."

James Young, president of the Jameson Group, points out that the coming of the Internet is not a short-term change, like the typical 10-year real estate cycle. "This is a major socio-economic shift," he says, comparable in world historic terms to the agricultural revolution and the industrial revolution. The implications for real estate companies, Young says, are clear. "If you sold barns at the end of the agricultural age, you might consider something called a factory."

Is Commercial Property Still a Good Investment?

2009-01-23T22:36:00.000-08:00

By M H Ahssan

These are blissful times for commercial real estate investors. Having fallen into a deep slump with the ending of the Internet boom, the market has come surging back. In 2004 alone, prices rose 26% for apartment complexes, 21% for industrial properties, 14% for retail properties and 6% for office buildings, according to Real Capital Analytics, a New York real estate research firm.

And the market gives no sign of slackening. "We're not seeing any slowdown at all," says Steven Dunn, chief economist for CB Richard Ellis, a big commercial real estate services company based in Los Angeles. "The numbers are great, not just for sales but for leasing, too."

But not everyone is so confident. Over the past few months, a number of major institutional and private investors have been selling off large chunks of their portfolios of prime commercial real estate. These investors, which include Calpers, the $186 billion pension fund, have been taking advantage of what they see as a frothy market. They are putting the sale proceeds into less expensive real estate or into other assets entirely.

The Rubenstein Company, a Philadelphia-based real estate firm, is one investor that has pulled its money out of real estate with the expectation that prices will come back down. Last year, the company sold nearly all of its office buildings for about $1 billion. "We thought the markets weren't going to get much better and had a chance to get considerably worse," says CEO David Rubenstein.

To be sure, for every seller there is a buyer, and other investors have rushed forward to buy these properties, often at record prices. But as the consensus builds that the housing market has become seriously overvalued, some are asking whether the same might be true of commercial property. The answer matters not just to the individual and institutional investors who are committing ever-greater sums to real estate, but also to the growing number of companies who are using their valuable property to obtain cheap financing.

A Flood of Capital
Several forces are driving commercial real estate's revival. Most obviously, the economy is improving and businesses are growing once more. As they expand their operations and hire new employees they need additional space. But real estate pricing has recovered faster than the economy itself. Indeed, while prices have rebounded nicely, rents have been sluggish: The average rent today is $15.42 a foot, down from $28.92 in 2000. A more important reason for real estate's rise has been a flood of new investment capital. Some of this comes from individuals seeking better returns than they can achieve in the debt or equity markets. These investors have channeled great sums to investment vehicles such as REITs and TICs (tenants-in-common).

The big money has come from institutions. Spooked by their losses after the dotcom bust and drawn to the reliable cash flows offered by property, these investors are now paying closer attention to commercial real estate. One is TIAA-CREF, a national financial services company with over $340 billion in assets under management. "We see this asset class as a great addition to our portfolio," says Tom Garbutt, the company's managing director and head of real estate. "It's a nice diversifier, has a current income stream and a potential for appreciation." The company now owns $14 billion of real estate properties.

The resulting upswing in prices for the best properties has been a boon for the owners. In fact, a growing number of corporations are taking the opportunity to use their real estate as a financing tool. Through sale-leasebacks, companies can sell their property to an investor who will agree to lease it back to the company for a specified period. Many find this as attractive as issuing debt, since property values are high but rents remain affordable. Some of these deals have been gargantuan. Last year, Bank of America did a $770 million leaseback for most of its bank branches. McDonald's (which has historically been an owner of property) also did one, valued at $340 million. Companies are using the money for different purposes, ranging from balance sheet improvement to acquisitions.

Few Signs of Trouble
How sustainable are today's high prices? Not very, argue some. "We feel that properties are overvalued," says David Harris, a research analyst who covers REITs for Lehman Brothers. Harris notes that the "euphoria" of bidding on certain commercial properties should give investors pause, especially since rising interest rates may soon make real estate a less attractive investment.

Another potential concern is that yields on property ownership are falling. Also known as capitalization rates ("cap rates" for short), yields have dropped over the past three years to near-historic lows. While this is the natural outcome of higher prices -- cap rates are the ratio of a property's yearly income to purchase price -- it can also indicate that operating income hasn't kept pace with the higher prices. This can make real estate less attractive to investors primarily interested in the cash stream.

But there are good reasons to believe that the market is actually quite strong. One is that the fundamentals are improving. Metropolitan office vacancies, for example, have fallen from 16.8% during the first quarter of 2004 to 15.4% today. Dunn points to San Francisco as an example of an area where the improvement has been substantial: In eight quarters, vacancies in that market have fallen from 23% to just 15%.

And improving occupancy levels mean higher income. "People often forget that income goes up faster than occupancy," says Peter Linneman, a professor of real estate at Wharton. "That's because as occupancy picks up you can boost your rents a little and you pick up more ancillary income from things such as parking and health clubs. I think this year will be good in terms of income for commercial properties, and next year will be great."

Furthermore, the market does not suffer from excess construction. "There was huge overbuilding in the late 1980s which really hurt the market when we had a recession," says Joseph Gyourko, also a professor of real estate at Wharton. "But for the most part real estate did not get overbuilt before the last downturn." Nor do developers' plans seem excessive. One reason is that banks have become more conservative in their lending, requiring developers to show that their buildings will be fully leased. Another is that the soaring price for concrete and steel (a product of China's massive construction boom) has made new construction costly. The result, of course, is limited supply at a time of growing demand, which suggests that prices have further to rise.

Ultimately, say many experts, investors should be asking how commercial real estate compares with other investments. And next to stocks and bonds, it remains attractive. "If you do CAPM or other risk pricing models, you find that real estate remains 15 to 35% underpriced based on its cash stream and its risk profile relative to other alternatives," says Linneman. In other words, not only does real estate give investors a better current income than debt or equity, but it's safer.

The reason is simple: commercial real estate is a lease claim on the same companies that make up the S&P 500. If a company runs out of cash, it will always pay its rent before it pays a dividend and will usually pay rent before it makes debt payments. "Real estate has a risk profile closer to bonds, but it's trading as if it's equity," says Linneman.

Largely because of this comparatively attractive income stream, the institutional investors are unlikely to abandon the market. This may be true even if cap rates fall farther. Because institutional investors often pay with cash, they can accept lower cap rates: Without interest payments, their effective yields are higher that those of more leveraged buyers. Garbutt says that TIAA-CREF has no plans to reduce its exposure to real estate. "We don't play the short game. For us, the question is, 'What makes sense for our participants?' And the answer is to stay well diversified and active in all markets."

What about interest rates? While higher rates can dampen the real estate market by raising borrowing costs, rates remain at historic lows. The Federal Reserve has signaled its intention to increase rates gradually, about a quarter point per quarter, but this may not be enough to ward off buyers. "If we saw a 200 basis point uplift in the 10-year treasury over a year, that would have some effect on real estate pricing," comments Garbutt. "But remember that an abrupt jump in interest rates and the 10-year would affect other asset classes, too."

Buyer Beware
None of this is to say that some real estate isn't perilously overpriced. In particular, speculation appears to be driving the prices of many apartment buildings and condominiums to unsustainable levels. "There some people who are being wildly aggressive when it comes to pricing cash streams for apartment buildings," says Linneman. "They are looking at a building with 45% vacancy and saying 'I'm going to buy it as if it's 90% occupied.'" Similarly, condominiums -- which offer virtually no income stream since they are owned, not leased -- are looking shaky. Between 50% and 60% are now being presold to investors who don't plan to live in them. Once buyers stop showing up to the presales, the prices will tumble.

David Rubenstein also sees weakness in certain office markets, especially in the suburbs of Washington, D.C., and in southern California. In those markets leasing costs are rising, net operating income is falling (due to leases that tenants signed five years ago but are now up for renewal, at lower rents), and investors are taking on what he considers excessive leverage. That should produce lower prices for some properties.

And there's always the risk of some broader meltdown that would bring down the real estate market along with stocks and bonds. Linneman argues that in this case, an investor would be wise to be in the asset that's the least overvalued to begin with: commercial real estate.

Barring a calamity, investors should expect solid, if not spectacular, returns, says Gyourko. He predicts that while the real estate market will continue to do well, the days of double-digit appreciation are over. "Relative to historic pricing, real estate is pretty expensive, and that's something that should make everyone think hard," he says. "Does it mean that prices are going to fall? No it doesn't. But it almost certainly means that the returns will be lower going forward. The million dollar question is this: Will you be disappointed relative to other things you could have done with your money?"

Commercial Real Estate's Perfect Storm: What Lies Ahead?

2009-01-23T22:33:00.000-08:00

By M H Ahssan

"For the last few years we've enjoyed a perfect storm in commercial real estate," said Brian Lancaster, head of structured products research at Wachovia Securities, the brokerage group within Wachovia, a financial services firm with more than $541 billion in assets. "There has been a simultaneous occurrence of stabilizing rents, improving fundamentals, and really, really cheap money."

The commercial real estate market has been on a tear in the last few years. Banks, insurance companies and institutional investors funneled money into the market because its returns, in an environment of low interest rates, exceeded those of alternative asset classes. This segment of the broader real estate market typically includes office, retail, multifamily and industrial properties.

Lancaster observed that the commercial real estate market remains strong, although "not as great as it has been in the last few years." More than 10% of Wachovia's assets are in commercial real estate.

Lancaster made these comments at a conference last month on Innovation and Risk Management in Real Estate Markets, sponsored by the Wharton Financial Institutions Center and Mercer Oliver Wyman, a financial services strategy and risk management consulting firm. He took part in a panel discussion about the emerging risk profile of commercial real estate lending. The other industry experts were Caroline Blakely, a vice president in multifamily housing and community development at Fannie Mae; Richard Edelstein, a professor at the Haas School of Business at the University of California at Berkeley; and Bradford Case, an economist with the Board of Governors of the Federal Reserve System.

Fannie Mae's Blakely agreed with Lancaster that investments in commercial real estate continue to be strong, adding that in the multi-family sector, "real estate fundamentals are on the mend." U.S. demographic trends and steady job growth bode well for apartment rentals. In line with that, "vacancies are declining and asking rents are climbing," she said. Fannie Mae is slightly less optimistic about rent growth than other institutions in the real estate industry, but nonetheless expects it to be in the 2.5% to 3.5% range over the next year.

The mortgage financing giant also does not see the expanding supply of multi-family rental properties as a threat. "We're not concerned right now about an increase in multi-family construction, although we're certainly watching the condo conversion market and the oversupply in condos," Blakely said. Last year, Fannie Mae helped finance more than $25 billion in multi-family rental apartments in the U.S. The company's portfolio of multi-family commercial real estate assets totals more than $124 billion.

Low Rates
After the 2000 dot-com crash, Wachovia's Lancaster noted, commercial real estate revenues declined, vacancies rose and rents decreased. But since late 2001, revenues have steadily increased, with investors pouring more money into the sector. The key was the Federal Reserve flooding the market with liquidity through low interest rates, enabling commercial real estate investors to enjoy "phenomenal returns in the face of poor fundamentals," he said. One result was extremely low levels of delinquencies and default for Wachovia's and other banks' commercial real estate portfolios.

While Lancaster said he remains bullish on commercial real estate returns because fundamentals have improved in recent years, he also expects to see a "significant slowdown" in price appreciation for real estate. He added that the high prices still being paid in some areas of the apartment sector are "worrisome." However, property transactions overall have already slowed this year and buyers have been holding out for better prices, Lancaster said. In his view, this "cooling" is rational and a sign that some of the effects of higher interest rates are percolating through the system.

Lancaster noted that Wachovia's views on the commercial real estate market are predicated on its positive economic views. The firm expects the 10-year Treasury note to rise to about 5.40% by the end of the summer, with inflation concerns easing later this year. However, he said, "all bets are off in a stagflationary scenario or if job growth tanks, or if we get real significant increases in interest rates."

Fannie Mae's Blakely, while also positive about prospects, sounded a further note of caution. Commercial mortgage debt outstanding as a percentage of GDP crept toward 16% in the fourth quarter of 2005, surpassing the record set in 1988, she said. In addition, 70% of conduit loans (loans that are securitized) are partly or fully interest-only loans, triple the level two years ago. With interest rates continuing to rise and more capital seeking commercial real estate deals, Fannie Mae's worry is that debt underwriting standards could decline. The company is also "a little worried about stress levers" in the interest-only and low debt service coverage markets, added Blakely.

Edelstein, a real estate professor at the University of California at Berkeley's business school, was less sanguine about prospects for the commercial real estate market. He agreed that commercial real estate is currently in a good position, and that the U.S. economy's strength and resilience will benefit the industry generally. But he pointed out that the world we live in now is more global than it was 10 or 20 years ago and that capital can be rapidly pulled out of markets because of events that occur thousands of miles away. That makes commercial real estate's status as a favored child more precarious, he said.

"Capital market integration and securitization is going on and is inevitable," Edelstein observed. Securitization refers to the pooling together of relatively illiquid assets into more diversified financial products, whose securities are then sold to investors. This enables markets to develop by expanding their investor base and providing lower-cost financing. However, investors can now respond to new information more quickly than ever before -- and in Edelstein's view, this has the potential to create more volatility, not less.

"There has been a capital tsunami and that's likely to continue for a while, but there's nothing so mobile as capital," Edelstein said. "The tsunami could flow out very, very quickly." Events in other parts of the world could affect demand for many U.S. assets, including real estate. At the same time, the commercial real estate market's shift in the last year or two into higher-risk and leveraged assets could exacerbate any problems that develop, he added.

What could cause this to happen? China could revalue its currency faster than expected, Edelstein said. That would translate into higher prices in the U.S., which would impact the real estate market. An unanticipated jump in U.S. interest rates could also cause investors to shed real estate very quickly. "All you need is a few performance failures, because a lot of real estate is being bought with the notion that there will be growth in fundamentals," Edelstein noted. "I think we're at a very high risk point in real estate," he said.

Institutional Interest
Despite the rise of interest rates, institutional money from pension funds and other large investors continues to flow into the commercial real estate market. The robust commercial mortgage-backed securities (CMBS) market shows little sign of cooling off. CMBSs are securitizations backed by mortgages on commercial properties. Last year, U.S. CMBS issuance was a record $169 billion, up from the previous record of $93 billion in 2004, according to the Commercial Mortgage Securities Association, an industry trade group. In the first four months of this year, U.S. CMBS issuance was higher than it was during the same period last year.

Another market that has gained steam on Wall Street is the commercial real estate CDO market. A commercial real estate CDO, or collateralized debt obligation, is typically backed by a wide range of real estate debt assets, including riskier and shorter-term debt. Traditional CMBSs are usually backed by long-term fixed-rate mortgage loans. Since 2004, numerous actively managed commercial real estate CDOs have also been issued. These enable new collateral to enter and exit the CDO and have a shorter average life than the other bonds in the pool.

The result is that these CDOs have opened up narrowly financed parts of the commercial real estate market to new investors, said Wachovia's Lancaster. Various forms of debt -- such as mezzanine loans, B-notes and preferred equity -- can now be included in a managed real estate CDO vehicle, which is then sold to investors all over the world. Real estate risk is thus transferred to more players in non-U.S. geographic markets, Lancaster said.

Fannie Mae's Blakely noted that CMBS issuance forecasted for this year totals $182 billion, while commercial real estate CDOs are forecasted to reach $34 billion. She added that the growth of the CMBS market over the past 15 years has clearly benefited the commercial real estate market. Indeed, as it has grown it has also become Fannie Mae's chief competitor for apartment building mortgages, aside from Freddie Mac. Blakely pointed out that the CMBS market views multifamily rentals as one of the stronger real estate classes -- and therefore a class that CMBS issuers seek.

Analyzing Correlations
Bradford Case, an economist with the Board of Governors of the Federal Reserve System, focused his comments on the quality of data in the commercial real estate market. He noted that as the institutional market continues to expand, insufficient data could take a toll on both investments and risk management. In particular, the paucity of key performance data about markets and market segments could make managing the risk associated with a portfolio of commercial real estate assets more difficult.

Unlike the stock and bond markets, which produce a stream of intraday data, the commercial real estate market is often lucky to have monthly performance data, Case said. He noted that national real estate data sources mainly cover the larger markets, while smaller markets may or may not be included in local or regional data sources. Consequently, researchers and real estate portfolio managers tend to "analogize" between a market for which they have data and those they think are similar.

However, this can be risky since the markets may not behave as similarly as expected under all circumstances. Case noted that his comments did not necessarily reflect the views of the Federal Reserve.

"Good information comes from really deeply knowing the market," Case said. He referred to this as "unsystematic local expertise," since it is expertise particular to a local segment of the market. An example may be the apartment rental market in Tallahassee, as opposed to the overall commercial real estate market in Florida, which comprises many market segments that could have different characteristics and performance results. Without this local-level expertise, Case said, lending can be risky and inefficient because of the existence of an "information asymmetry problem" -- a situation in which the person with better local knowledge has a leg up on a lender who is less familiar with the price and performance dynamics in that particular market.

Case also noted that managing a portfolio of commercial real estate assets requires investors and analysts to understand how asset classes within the real estate market move in relation to one another. This could involve knowing how and when asset classes in various areas are affected by factors such as unemployment and population growth -- and when they're not. He suggested that the dearth of detailed and uniform performance data in commercial real estate should also cause investors and others to question how they define a particular real estate market.

For example, the Boston office properties segment of the commercial real estate market may have a similar performance pattern to the office market in other Northeast cities, or it may be similar to the office market for large cities across the country. Alternately, it may have more in common with other real estate market segments in the Boston area than it does with office markets in other geographic areas. Too often, Case said, assumptions about how various market segments are correlated reflect seat-of-the-pants views but lack empirical support.

The Federal Reserve economist stressed that without knowing which segments of the larger market move together and which are affected by the same supply and demand shocks, it is hard to estimate correlations among returns within a portfolio, as well as default probabilities and portfolio loss distributions. He added that once various correlations are better understood, it will also be possible to make better predictions for markets that lack data -- or, at least, there will be a stronger basis on which to draw analogies between markets for which information exists and those for which information does not exist.

Case said he has conducted preliminary research into correlations within segments of the U.S. commercial real estate market in more than 50 metropolitan areas. But his research is tentative and he hopes economists within the financial industry will generate better and more thorough data in the near future. As became clear at the conference, this additional knowledge -- whether it confirms or refutes existing assumptions about market segments -- can only help real estate investors risk-manage their portfolios better.

Indian Real Estate: Investors Are Shopping, but Are They Buying Hype?

2009-01-23T22:31:00.000-08:00

By M H Ahssan

Drive through any of India's major cities and it will be impossible to go a mile without running into brightly colored cranes, construction rubble and men in yellow helmets scurrying up and down skyscrapers. Commercial high rises, residential townships, industrial parks and shopping malls are exploding into existence, encouraged by both long-term and speculative investors. Oversized private equity commitments by a growing number of foreign investors and home-grown financial institutions are helping to feed the frenzy.

But several astute industry watchers have begun poking big holes in that picture. For one, they say that many foreign investors have actually brought in only a small portion of their promised investments. Second, soaring land prices and price resistance from buyers are narrowing investors' margins significantly. Finally, they note that concerns continue to run high about the regulatory opaqueness for real estate ventures, bureaucratic red tape and the absence of title insurance, in addition to a host of other issues. India Knowledge@Wharton spoke with prominent private investors, property developers and brokerage firms to understand how these factors are tempering investors' appetites for Indian real estate.

With yields between 30% and 40% during the past two years, India's real estate industry has been the toast of global investment funds. But expectations for future returns have been sharply reduced to between 12% and 20% over the next few years. For many foreign investors, this means having to weigh Indian real estate opportunities against deals that offer comparable returns in other emerging markets like Eastern Europe or Latin America.

Fears of a real estate bubble and an overheated economy have led India's central bank to require a lender cutback on real estate loans. That move has pushed up interest rates, lowering consumers' appetites for home financing and simultaneously raising rents for apartments and offices. Most Indian real estate companies are privately held and their financial information is not readily available. The absence of comprehensive market data across product types like office, retail, industrial and residential properties further hurts the ability of investors to read the right signals, and the occasional rumor of a large deal going bust or a property developer resorting to a distress sale can damage investment sentiments far more than warranted.

More Hype than Actual Investments
Clearly, local investors understand the terrain far better than foreign investors. Much of the foreign capital committed to Indian real estate ventures has yet to be invested, says Aashish Kalra, co-founder and managing director of Trikona Capital, a private equity firm with offices in New York City, London and Mumbai. "Last year, less than $1 billion [was actually invested in] Indian real estate. That's less than the value of half a building in Times Square," he says. That compares with market estimates of between $15 billion and $20 billion in foreign capital headed for Indian real estate.

Kalra cited these figures during a panel discussion on real estate investing at a recent New York City event organized by The Indus Entrepreneurs (TiE), a network of entrepreneurs founded 15 years ago in Silicon Valley. "A negligible amount of foreign capital will get invested in Indian real estate in the next 24 months," he told the panel.

Sameer Nayar, managing director and head of real estate finance-Asia Pacific at Credit Suisse, offers a similar assessment. "There is a lot of hype about capital going into Indian real estate ... [but] not a lot of money is actually going in," he says. Extracting good returns from those investments calls for significant local market expertise in dealing with regulatory and other obstacles. "You make money because you can deal with the problems, and that's why your returns could be 50%," he adds. "If it were an easy market to work in, you would make only 15%."

Short-term Disenchantment
In April 2006, Trikona Capital group firm Trinity Capital raised 250 million pounds ($500 million) for Indian real estate investment in a public offering through London's Alternative Investment Market (AIM). Kalra says his company has deployed about $400 million in Indian real estate projects over the past year.

Including Trinity, about a dozen real estate funds targeting India have raised a combined $2 billion in the past year through listings on the AIM. Most of them are currently trading at levels significantly below their offer prices, revealing investor disenchantment. Trinity's share made its debut in April 2006 at one pound; it now trades at about 86 pence. Hirco, an Isle of Man-domiciled company promoted by the Mumbai-based Hiranandani Constructions group, raised about 382 million pounds ($755 million) from its IPO last December; since then, its shares have lost considerable sheen, down from 5 pounds to about 390 pence in the second week of May. Exceptions include Unitech Corporate Parks, which listed on the AIM last December at 93 pence and now trades at 96.25 pence.

"We see the opportunity [in Indian real estate], but we also see the risks and challenges involved," says Chanakya Chakravarti, managing director of real estate at Actis, a London-based private equity fund that manages assets of about $3.4 billion. Actis plans to set up a $300 million India real estate fund. It already has two other existing funds with an estimated equity of $475 million that have invested in Indian real estate, auto ancillaries and other industries. "Each fund has a unique risk-return profile, and we work with these. For us, India is a long-term story," he adds.

Chakravarti lists three main risks or challenges that real estate investors in India will be up against in the short term. The first, he says, is an oversupply of office space in the major and second-tier cities. A hazy regulatory framework fostering indecision and delayed investments is another concern. Finally, he notes, opaque deal-making processes that narrow the exit routes will deter serious investors.

"The property market today is rife with uncertainties. Prices as well as interest rates have been rising," says Anuj Puri, managing director of real estate services firm Trammell Crow Meghraj, the Indian joint venture of Dallas, Tex.-based real estate services firm Trammell Crow and the Meghraj Group, a financial services firm in London. "It is not advisable to expect any short-term gains; but of course, for long-term investors, India's strong fundamentals are still intact. A long-term investor can expect average returns of 15% to 20% per year."

Vikas Oberoi, managing director of Oberoi Constructions in Mumbai, says the risk-return profile for real estate investments is far brighter for those who have accumulated land inventory at prices much lower than prevailing levels. "The average net margin in today's market is 20% to 25%; we can easily do 15% better than the market," he says. Oberoi claims his company can achieve those higher returns because, among other reasons, "most of the land has been bought earlier."

Oberoi Constructions has an inventory of 15 million square feet of mostly prime land in Mumbai. At today's prices, Oberoi expects it to generate gross revenues of $2.2 billion. The company is focused mostly on for-sale residential apartments, although it dabbles in shopping malls, hotels and other commercial property lines. Oberoi expects his company to post $200 million in revenue this year, rising to $300 million in 2008.

This past January, Morgan Stanley's Special Situations Fund invested $152 million for a 10.75% stake in Oberoi Constructions, effectively valuing the company at about $1.4 billion. Oberoi says the untapped upside in his company's land bank was a major attraction for the institutional suitors it attracted. For instance, five years ago it bought a land lot with 8 million square feet in Mumbai's northwestern suburb of Goregaon for Rs. 100 crore ($24 million). Oberoi says the property would be worth 20 times more today.

"Where is the supply? There is only demand," says Oberoi. "In fact, I want the market to stabilize or [prices to] come down because then we would get land at cheaper prices. It is absolutely a seller's market."

Second-tier Migration
The most visible changes in the Indian real estate sector include the emergence of well defined product categories, the division of the market into tiered cities and a widening of financing options.

In the past, real estate was sold either as residential or as commercial property. With the maturing of the market and globalization of the investor base, the categories have been sharpened and new ones established. "Investors in the residential market are very different from the office and retail space investor," says Sanjeev Dasgupta, CFO and head of investments at Kshitij Investment Advisory Services, part of the Future Group, a large Mumbai-based owner of shopping malls across the country. In the residential sector, investors are in for high returns and are willing to take high risks, he says. This also allows for easy exit, although the risk of a mismatch between potential and real returns is high, he adds.

According to Poonam Mahtani, a national director of retail services firm Colliers International in India, "The investment risk is lower in the metros, but prices there are much higher than those in tier II cities." Several equity funds have consciously focused on tier II cities, because they believe that this offers the most potential. "Land prices are skyrocketing. Buying to sell is a very risky strategy. Land prices are way beyond levels that will generate a decent return. It doesn't make sense to invest any more unless you go to second- or third-tier markets."

Kalra, too, sees the markets outside of India's major cities as the most attractive, simply because they are not the low-hanging fruit sought by the early crop of investors with relatively lower risk appetites. "There are lots of opportunities outside the main metros. India has 30 cities with a population of a million people each," he says. Adds Dasgupta, "The returns are huge in tier II cities, where there is a large untapped potential." He believes that this sector will see a rental yield of 12% to 14% in the next few years.

In office space, experts see a migration towards second-tier cities. A recent report by Deutsche Bank on real estate trends notes, "As the demand for modern space has continually increased, new office locations have had to be developed in the south and east of the urban area (Mumbai and Delhi)." In Mumbai, secondary business districts have emerged in recent years, including the Bandra-Kurla complex in the central suburbs, 25 miles from the old commercial hubs in the southern end of the city.

Much-needed Transparency
For foreign investors, one troubling fact is a pan-India phenomenon: inadequate transparency in land valuations they use to price their investments. In an interview last month, M. Damodaran, chairman of the Securities and Exchange Board of India, discussed the lack of clarity in real estate companies' disclosures, especially with respect to their land banks. "We sought clarity ... on matters like, 'What does your land bank comprise, [and] what are the valuation aspects you have indicated?'" he told the India news wire service. "Where there is only an agreement to develop land, there must be complete disclosure. All such agreements are to be made available for inspection," he said, adding that he preferred land valuations to be made at current prices and not on the basis of future projections.

Trammell Crow Meghraj's Puri agrees. "There is a marked lack of transparency, corporate governance and accountability among India's real estate developers. There also continues to be a serious lack of quality infrastructure. In addition, India scores low in terms of congenial political environment in terms of the real estate sector. This means that there is a lack of clarity in pertinent policies."

But Puri also believes those issues will soon fade away as India's real estate markets mature. "Although real estate is a regional and highly location-specific industry, India will replicate the events that occurred in emerging markets like Mexico and Central Eastern Europe [including Russia, Bulgaria and Poland]," he says. "In these countries, too, foreign investments were the primary drivers for transparency, accountability and higher capital appreciation in the real estate sector."

Indian Real Estate Firms Face a Reality Check

2009-01-23T22:29:00.000-08:00

By M H Ahssan

Future economic historians may remember the month that just ended as Black September. Lehman Brothers collapsed; the Bank of America acquired Merrill Lynch; AIG was nationalized; banks such as Washington Mutual and Wachovia were wiped out. As credit and finance markets around the world tumbled like ninepins, so did stock markets in India, with the Bombay Stock Exchange Sensitive Index (Sensex) falling 3.35% or 469 points on September 15. The worst affected was the realty index which dropped 7.6% on the same day. Since then, while stocks prices in India have seen massive swings, shares of real estate firms have remained depressed, falling a total of 20% as of October 1.

In addition to housing stocks, home prices are taking a beating. By some estimates, prices have dropped by 25% in certain urban markets. While in the U.S. -- and also in Britain -- the subprime mortgage mess has seen home prices fall dramatically, in India, such slowdowns have been rare -- at least in the past. Prices may soften, sales activity may slow and occasionally a distress sale occurs, but there has not been an overall fall in home prices. "India has not seen a boom-bust cycle in real estate mainly because the industry is still nascent," says Anurag Mathur, joint managing director of Cushman & Wakefield, a global real estate solutions company. "India has not seen a boom and bust cycle in almost any sector," adds Rajesh Chakrabarti, a professor of finance at the Hyderabad-based Indian School of Business (ISB). "While there have been variations, we have not had cycles of the kind we see in the developed countries. It is only after liberalization that the Indian economy has been seeing more cyclical movements."

According to Irfan Razack, chairman and managing director of the Prestige Group, a Bangalore-based real estate developer: "We have boom and bust cycles in India but because of our huge population, the demand keeps growing and that sustains the industry. You can build for the next 100 years and there will still be demand for housing in this country."

India has inadequate data on the real estate sector. For instance, no one tracks housing starts, an indicator that is regarded in many countries as an important yardstick of economic health. However, several real estate companies have gone public during the past couple of years, which makes information more transparent. Secondly, equity analysts have begun tracking these companies and the real estate industry.

Still, confusion continues. Consider the reaction of the markets to the Lehman collapse. Real estate was hit for two reasons. Lehman had invested $200 million in DLF Assets, a company belonging to DLF, India's largest real estate company. It had also acquired a 50% stake in Unitech's Mumbai project for $175 million. (Unitech is India's second largest real estate company.) Among other Lehman investments or proposed investments were those in the Mumbai-based Peninsula Land Ltd. and Housing Development & Infrastructure Ltd. (HDIL).

The market was worried that if the money had not already been received, the projects would be in limbo. Most companies (Unitech, for one) claim that the cash is already sitting in their bank accounts so there is no cause for concern. Others, like HDIL, have said the deals were not with Lehman Brothers but with sister companies. These are unlikely to be affected.

The crunch might hit in the future. "With banks reducing their exposure to real estate, coupled with rising interest rates and volatile stock markets diluting the confidence of retail investors over the past one year, private equity investments have emerged as one of the most important sources of capital for real estate developers," says a FICCI-Ernst & Young (E&Y) report on the Indian real estate market released in early September. "The overall private equity investments reported in the real estate sector in India from August 2007 to July 2008 are estimated to be more than $5 billion." This tap could be turned off as a result of the financial crisis in the U.S.

Real estate investors in India were also worried that Lehman might resort to a fire sale of its assets. While India has a three-year lock-in period for foreign direct investment (FDI) in real estate, it is unclear whether this applies when a company declares bankruptcy. The government is holding a meeting to decide the norms in such cases. The other issue is that Lehman holds small stakes -- bought from the market or in bulk deals -- in real estate and infrastructure companies such as IVRCL Infrastructure, Consolidated Constructions, Orbit Corporation and Vijay Shanti Builders. Here, too, there was the possibility of a fire sale, encouraging other investors to bail out.

Temporary Slowdown
Amid this gloom and the real estate-bashing that is going on in the market, many people are optimistic about the sector. Even the bears see only a temporary slowdown. "The Asia-Pacific property markets, which have seen a rapid run-up in rents and capital values in recent years, are now entering a slowdown that will continue over the next 12 months at least," says a report by real estate consultants Jones Lang LaSalle (JLL). Shobhit Agarwal, joint managing director (capital markets) of JLL Meghraj (JLLM), the global company's Indian division, says there is still some pain left. "There is now a period of stagnation, soon to be followed by a fall in prices in certain sectors and locations. Certain overheated micro-markets will see a 5% to 15% price decline. A correction of up to 10% is also expected in South Mumbai, some locations in Mumbai's suburbs, and certain areas of New Delhi that have seen unrealistic price trends.... The market will eventually consolidate."

"In the short term, we expect the market to consolidate," echoes a spokesperson of DHL. "We have not been impacted by any slowdown. We have launched many premium residential projects across the country during the past six months and have gotten a very good response. We feel that the market is moving in the right direction and there is no bubble to burst."

"In the past three to four years there has been a huge inflow of companies and funds in the real estate sector," says Chakrabarti of ISB. "It is possible that there may be a bit of a shake out and consolidation now. Given the fact that we have already seen a 20% to 25% correction, I don't expect prices to fall much further. It will probably now grow at a decent enough rate. Also, infrastructure development is a major area of emphasis and this will fuel real estate prices, especially in the smaller towns."

The problem seems to have affected residential property rather than commercial real estate or infrastructure developers. Several factors have contributed to this. First, the Reserve Bank of India (RBI) has been raising interest rates to tackle inflation. As a result, housing finance companies have had to raise rates on loans. In 2004, interest rates on housing loans were 7.75%; they have now gone up to 12.75%. On a $50,000 loan borrowed for a period of 20 years in 2004, the interest burden was around $48,000. This has now gone up to more than $100,000.

Most housing loans in India are at variable rather than fixed interest rates, which means that monthly mortgage payments -- or EMIs (equated monthly installments), as they are called in India -- go up when interest rates rise. As a first measure, housing finance companies increase the term of the loans. When that period extends beyond the working life of the home buyer, the EMIs are increased. Housing finance companies typically consider EMIs up to 50% of net income. If, in extreme cases, these payments double, home buyers can be left with nothing to live on.

Understandably, defaults on loan repayments are increasing. While specific numbers are hard to come by, bankers say this could develop into a crisis. The financial meltdown in the U.S. -- and the turmoil in the finance sector, which is a key market for information technology and IT-enabled services -- has seen a large number of finance professionals lose their jobs. These young, upwardly-mobile executives were the new generation of house buyers. They are now saving for the proverbial rainy day -- which has arrived. Confidence levels are down and house purchase plans have been put on the backburner.

Finance companies and banks are also being careful about approving loans. Their vetting process is taking more time. Even people who want loans and have the capacity to service their EMIs are being put through greater scrutiny.

Business as Usual?
India's largest mortgage company, Housing Development Finance Corporation (HDFC), however, says that it is business as usual. As Renu Karnad, HDFC joint managing director, told CNBC TV 18: "The demand story is a compelling one. Its plot is often repeated by HDFC's senior management that younger and younger Indians are opting for home loans. The average age of borrowers is down from 40 years to 35 years. Thanks to tax breaks, the effective cost of a loan works out to a moderate 6%. Unquenchable housing demand has the country short of 25 million homes. The loan market is a vast untapped one yet. It has taken 30 years for mortgage penetration to grow from 2.5% to 6% of GDP. With middle India kicking in, HDFC is confident that unlike other consumer goods, home loans are not that vulnerable to a slowing economy."

The FICCI E&Y survey agrees. "Despite the momentary slowdown witnessed over the past 12 months, 62% of developers foresee Indian real estate embarking upon a high growth trajectory in the long term," says the study. It does, however, point to one change. Real estate had become a speculators' haven. Now, seeing no hope of quick returns, they are bailing out. Builders believe it's the speculators who are responsible for the perceived slump. Once they are squeezed out -- many are selling at whatever price they can get to take care of their stock market losses -- things will return to normal. The study notes, "Respondents believe that genuine end-users have taken over from investors and account for 80% to 90% of sales in their current projects."

What are real estate companies doing to deal with the downturn? Well, they are putting their eggs in different baskets. In a way, it is a replay of the rush into real estate. Over the past decade, companies with no experience in property development had entered the market. Some had legitimate reasons. The textile mills in Mumbai, for instance, had been priced out of the market because of high labor costs. One of the first off the block -- Phoenix Mills -- has converted itself into a commercial, residential and entertainment complex. In August this year it raised 200 million euros from German real estate fund MPC Synergy for further development. Morarjee Mills has moved its operations to smaller (and cheaper) cities. Its properties are being developed by its real estate wing -- Peninsula Land.

In addition to the textile mills, 70-year-old Nesco Engineering, a moribund company, is today thriving because it has set up an exhibition center on its Mumbai property and has plans for an IT park. Media Video, an electronics games manufacturer and distributor, has recently listed its real estate subsidiary MVL. Its market capitalization at $87 million is eight times that of its parent. The Kolkata-based Emami group, a FMCG player, has moved into malls and housing complexes.

Now, real estate companies are exploring new investment opportunities. Builders of residential property are taking to developing commercial space. Others, such as Raheja -- a leading homebuilder -- are constructing special economic zones. Omaxe is modernizing and maintaining airstrips. DLF, Unitech and Omaxe are bidding for road projects being offered by the National Highways Authority of India. The Brigade Group is building a health spa in Chikmagalur near Bangalore. It will run the spa in tandem with Singapore-based hospitality brands Banyan Tree and Angsana. Sobha Developers already has an ayurvedic spa offering the traditional Kerala ayurvedic massage at Sobha City in Thrissur in Kerala.

Overseas Markets
The second trend is a move abroad to market real estate companies' products, raise funds, source raw materials and launch projects. PRA Realty has set up shop in Chicago to be closer to venture funds. It has also opened a marketing office in Dubai. According to JLLM, non-resident Indians (NRIs) are major buyers of Indian properties, accounting for up to 25% in certain categories.

Sobha Developers has opened an office in China, from which it sources a lot of raw material. It is building a five-star hotel in Dubai. Parsvnath Builders has a subsidiary in Singapore. Puravankara Projects has started operations in Sri Lanka to build super luxury villas on the outskirts of capital Colombo. It already has a presence in the UAE. "Considering that every market is subject to fluctuations, diversification is certainly the best hedging tool for avoiding the pitfalls of sudden downward movements in any sector," says Agarwal of JLLM. "If one component fails to generate anticipated returns, others will compensate."

Other real estate companies are casting their nets wider and embracing every opportunity that comes their way. Unitech has already made a foray into telecom. It is now eyeing insurance. Preliminary talks are on with a foreign major. Omaxe is moving into steel and cement. It has on its drawing board plans for a medical college and a hospital.

Mantri Realty has earmarked $500 million for a thermal power plant in Nagpur. The Hyderabad-based JR Realtors has aquired a 10% stake in Pennar Aluminium. Indiabulls Real Estate is setting up a solar power plant in the Bastar region of Chhattisgarh. Sobha has even moved into retailing mattresses under the brandname Restoplus. IT major Infosys has already placed the first order.

HDIL has lined up a whole array of diversifications. It is getting into entertainment under the Broadway brand name. It plans to invest $200 million in a chain of 150 theaters. It is also building a coal-fired power plant. It will begin power trading soon. In perhaps the oddest move, it is bidding for oil and gas exploration blocks being auctioned by the government. "Although oil and gas is completely disconnected from our core business and what we are doing now, I can say that it will help in providing better services to customers who we serve in our projects," Sarang Wadhawan, managing director of HDIL, told business daily Mint recently.

"In the long run, given that the India growth story is likely to continue, real estate prices will certainly increase," says Chakrabarti of ISB. "However, they will not see a meteoric rise as they did earlier. It will be a more stable market. Real estate companies are therefore diversifying into different areas where they expect better growth (like telecom). This is probably not so much by choice as by compulsion. It also reduces their risks. In some sense it is sensible given that the market conditions have changed, but whether it plays out in the long run remains to be seen. In general [not just with regard to real estate] unrelated diversifications don't work out very well."

The efforts of various companies haven't had much impact on their share prices. As a high share price is necessary for fund raising, some companies are trying financial engineering. DLF, for instance, has announced a share buyback, but it is also seeking fresh funds. Analysts wonder how the two can go together. "Promoters work in the best interests of the company," responds a DLF spokesperson. "The DLF share has been quoting much below its intrinsic value. We see the share buyback decision as a highly attractive opportunity for our shareholders and a strategic move of sharing returns with investors." HDIL, meanwhile, has come out with a 2:7 bonus issue. All this doesn't appear to have helped sentiments much; both the shares -- as with most real estate companies -- are quoting below their original IPO price.

"The companies that went public rode the boom, and they will bounce back once the markets and the sector picks up," says Razack of the Prestige Group. "At that time the valuations were so aggressive that we were also tempted to go public. We didn't do it because one can't really show quarter-on-quarter growth in real estate. It becomes more [like] window dressing."

Affordable Housing

Another major area into which many real estate firms are moving is affordable housing. Puravankara has set up a wholly-owned subsidiary -- Provident Housing & Infrastructure -- which will build 64,500 homes in Bangalore, Chennai, Hyderabad and Coimbatore over the next five years. Omaxe has set up the 100%-owned National Affordable Housing and Infrastructure, which will invest $20 billion over the next five years in building one million such homes. Many other builders are also climbing on the bandwagon.

The rush is partly explained by the response to government-led housing programs. The public sector Maharashtra Housing and Area Development Authority (MHADA) plans to sell 600 low-priced apartments in Mumbai around Diwali. They will be priced around $50 a sq. ft., at a time when market rates are four times as high. MHADA expects 200,000 applications; there will be a lottery to decide the buyers. Demand for such housing is obviously very strong. A similar prgram earlier this year for 900 apartments attracted 65,000 applications. In Delhi too, the Delhi Development Authority has received 850,000 applications for 5,010 low-cost apartments.

"Affordable housing, until now, was not a part of the Indian real estate sector boom," says the FICCI-E&Y report. "However, affordable housing has recently attracted attention from prominent developers and private equity players. The investment rationale for this asset class largely encompasses an early mover advantage, volume-driven profitability, priority-sector status accorded by government and subsidized land costs, among other drivers."

Yet skeptics see dangers here. First, affordable housing may end up as substandard housing as builders cut costs to maintain margins. Second, affordable housing will go to the less-privileged classes, financed by easier norms for bank loans. Earlier this year, the government wrote off $15 billion of farm loans, which severely impacted its finances. Some observers fear that "affordable home loans" could face a similar fate. They are, after all, subprime mortgages of the kind that sparked the housing crisis in the U.S.

The consensus view about Indian real estate is that the slowdown is temporary but lots of reasons exist for optimism about the future. "Short-term concerns on the sector remain," says a report by research house Enam Securities. "End user demand (is) subdued on account of high capital values and global uncertainty keeping the capital markets under check. Developers remain strapped for liquidity. However, the long-term outlook (is) still positive. Favorable demographics, increased urbanization and higher disposable incomes will result in continued demand." According to Mathur of Cushman & Wakefield, "If you believe in the India story, the outlook for real estate, which is a critical part of the whole development process, is bright. I am very bullish about it."

Chennai Property Values

2009-01-11T21:34:00.000-08:00

By Unnikrishnan

Chennai is the fourth largest city in India and situated on the south eastern coast. Historically, it has been a mega city and famous trading port with the rest of the world. It has a population of about 78 Lakhs with a high literacy rate of 80%, much above the national average. Though it may lack the cosmopolitan culture of Mumbai and Bangalore, it never affected its position as a center of knowledge and industrialization. There are over 400 colleges, which produces at least 300,000 graduates every year, in Chennai. It is a major hub of automobile industry having a presence of industry leaders such as Ford, BMW, Hyundai and Mitsubishi. Chennai accounts for 60 per cent of the country’s automotive exports and is sometimes referred to as \"the Detroit of India. It is also rapidly becoming a preferred destination for medical health tourism and competing aggressively with Kerala.

Facts and Figures

Area
181 Sq. Kms

Population
78,00,000

Literacy Rate
80%

Major Industries
Automobile, KPO, BPO, IT, Healthcare

Major Companies
BMW, Ford, Hyundai, Infosys, OfficeTiger

Economic growth
11.2%

The rapid industrial development of Chennai and abundant supply of manpower as well as jobs have led to an increase in real estate development. This growth has been widely supported by successive governments by announcing pro-investments policies and projects and establishing several IT parks and SEZs. There is a unique feature of Chennai real estate sector - it is relatively insulated against speculation. One reason may be because office space development in residential area is limited and mostly restricted to outskirts or designated areas. This has not allowed a mindless increase in property values as we see in NCR, Mumbai and Bangalore. The other reason being demand has been mostly fuelled by consumption and not investments. According to the CII, Chennai\'s is estimated to grow to a $100-billion economy, 2.5 times its present size, by the year 2025.

Chennai Residential Sector:
With the economic development of India after liberalization, Chennai naturally became a hub of development and industrial activities. People started moving from western countries to Chennai in search for better opportunities. A number of NRIs as well as “liberalization kids” fuelled the demand for residential properties in the recent past. The demand for high end properties by wealthy individuals and NRIs remained strong. The city is growing in a southward direction and developers are looking at Grand Southern Trunk Road (GST) and East Coast Road (ECR) as new growth corridors. However, the overall demand is down by around 20% quarter-over-quarter (Q-o-Q).

Central Chennai: It is a major commercial hub in the city and includes places such as Georgetown, Egmore, Triplicane, Nungambakkam and Royapetah. Naturally, this region also has the highest premium on property prices. Central region of all mega cities in India has the same problem – acute shortage of land and properties. Chennai is no exception to it. This shortage of good quality space has led to extremely high appreciation in both capital and rental values. Sooner than later, prices will close to that of in Mumbai. This region is characterized by independent units and bungalows.

Prominent projects: It includes Llanstephan by Doshi Housing in Chetpet, Templeton by Akshaya Homes, West Hills by AppaSwamy Real Estate and Lumbini Homes by True value Homes

North Chennai: It includes places such as Ennore, Perambur,Pozhal,Purasavakkam, Tiruvottiyur, Tondiarpet and is unfortunately the least developed among all the major regions of Chennai. North Chennai is home to majority of low income population and small scale or cottage industries such as textiles and dyes.

Prominent projects: Not available

Upcoming projects: It includes Orchid Springs by Alliance Infrastructure and Pinewoods by Appaswamy Real Estate Limited near Inner Ring Road.

South Chennai: It includes places such as Adyar, KK Nagar, Kotturpuram, Meenambakkam, Mylapore, Saidapet, Tambaram, Teynampet,Thyagaraya Nagar, Tiruvanmiyur, Velachery . South Chennai like most of southern regions of other metros is witnessing rapid development of properties owing to increase in demand. Most of IT parks are situated in this region. Also the announcement of IT corridor on Old Mahabalipuram Road (OMR) has led to increased activities in these areas.

Prominent projects: Estancia in Maraimalai Nagar by L&T - Arun Excello, Hiranandani Upscale in OMR, Swanlake by Purvankara, Adora by Akshaya Homes

Upcoming projects: Zen Garden in KK Nagar, Harmony Homes in T Nagar

West Chennai: It includes places such as Ambattur, Anna Nagar, Ayanavaram, Kilpauk, Porur and Vadapalani. Its proximity to major automobile manufacturing units has led to increase in residential property development. Upcoming Electronic Hardware corridor is also fuelling land prices in this region.

Upcoming projects: ETA Starat Sriperumbadur and Ceebros, township project by Ceebros Property Development in Saligramam, Duplex Villas at Porur - Fairy Land

Residential Property Capital Values (Rs. Per sq. ft.)

Location
Oct 2008
June 2008
Jan 2007
% Q-o-Q
% Y-o-Y

Central – High End
17,000-24,000
17,000-24,000
14,000-20,000
1%
20%

Central – Mid End
7,000-9,500
7,000-9,500
6,000-8,000
0%
15%

South – High End
6,000-10,000
6,000-10,000
5,000-8,500
0%
15%

South – Mid End
4,500-6,500
4,800-7,000
4,000-6,000
-5%
10%

West – High End
6,000-9,500
6,200-9,500
5,500-8,500
-2%
10%

West – Mid End
5,000-7,000
5,500-7,000
4,500-6,500
-5%
10%

Chennai Office sector
There has been high construction activity in Suburban as well as Peripheral regions of Chennai due to the presence of big IT majors. Chennai added over 3 Million square feet of office space in the last three months. Out of this, 58% was consumed by IT Parks, 40% by SEZs and the remaining 2% by other industries. There is a genuine over supply of office space in Chennai. With the economic slowdown across the world, IT sector has taken a severe beating. Unlike Bangalore, Chennai has relatively balanced demand for office space. IT accounts for almost 80% of office space consumption in Bangalore. We have classified Chennai’s office market as following:

Central Business District (CBD)
It includes areas such as Anna Salai, RK Salai. CBD remains the most attractive and suitable micro-markets for new corporate entering Chennai. The central locations offer ease of accessibility and visibility for these new companies and allow established companies to retain brand equity by being in the heart of the city. There is less supply of office space due to shortage of affordable and high quality land. Supply in the Central Business District (CBD) remains constrained with only small land parcels (in the range of 30,000 sq.ft. to 40,000 sq.ft.) available for development in Thyagaraya Road (T. Nagar micro market) and Radhakrishnan Salai.

Non-CBD areas or Secondary Business District (SBD)It includes areas such as T.Nagar, Guindy and Alwarpet. Supply in the Secondary Business District (SBD) was added in the rapidly growing business district of Guindy. It is evident from the office supply and demand activity that apart from the rapid growth of the peripheral district of Old Mahabalipuram Road, the emergence of secondary business districts in the city is the most striking development. The areas in the SBD that are expected to witness office construction activity in future include locations around the inner ring road like Ekkaduthangal, Mount Poonamallee Road, GST Road, Guindy and MRC Nagar. Many leading developers from across the country such as DLF, Hiranandani and K. Raheja have either launched or are expected to launch their IT Park projects in Chennai.

Suburban and peripheral areas
Chennai\'s office building market is now second only to Bangalore\'s, thanks to the growing population of IT and BPO outfits. Though absorption of space was the highest on Old Mahabalipuram Road, secondary areas such as Guindy and the Mount-Poonamallee Road are fast catching up and will be the ones to watch for. New office supply was added in the Peripheral Business District (PBD) comprising areas like Old Mahabalipuram Road (IT Highway), Taramani and the Perungudi Byepass Road

Commercial Property Rental Values (Rs. Per sq. ft. per month)

Location
Oct 2008
June 2008
Jan 2007
% Q-o-Q
% Y-o-Y

CBD
70-85
75-95
65-78
-10%
10%

SBD
60-75
65-80
55-70
-5%
8%

Suburbs
35-55
35-55
25-45
0%
5%

Peripheral
20-25
20-25
30-35
0%
-15%

Chennai Retail Sector
There is no mall frenzy in Chennai when compared to Gurgaon and Bangalore. Only three major malls are present in Chennai. There has been no new addition of malls since a long time. Indi Mall, constructed by…, would be completed and opened to public in May 2009. With the global slowdown and recessionary fears, people are avoiding or delaying their purchase plans. This has put pressure on mall owners as sale-per-store is down.

Almost all regions except T. Nagar, Mylapore, Khadar Nawaz Khan Road and Nungambakkam High Road are witnessing dip in retail values. These areas still remain famous among shoppers and will continue to remain so in near future due to their location. Prominent retailers such as Future Group want to use this slowdown as an opportunity to sign long term contracts with developers and grow significantly. Retail development per 100,000 people is low in Chennai as compared to Gurgaon, Bangalore and Mumbai. There is an upside potential to this underdeveloped state of organized retail sector in Chennai especially in Suburbs and Peripheral areas. About 9 million square feet mall space is under construction and is expected to complete in the next 2-3 years.

Retail Property Rental Values (Rs. Per sq. ft. per month)

Location
Oct 2008
June 2008
Jan 2007
% Q-o-Q
% Y-o-Y

CBD
220-260
210-250
175-220
-4%
30%

SBD
180-225
170-220
150-185
-5%
15%

Suburbs
150-200
150-210
130-180
0%
5%

Sector Outlook
The real estate sector is under pressure across the country, less so in Chennai due to absence of speculators. However, it may not be so forever. High returns and massive expansion always attracts speculators and push prices upwards. Apart from this, there is a genuine over supply of properties especially office space in suburbs and peripherals. This has worsened more after the global slowdown. This would last for another 1 year or so which would put pressure in property rates. There would be huge addition of residential as well as office properties due to upcoming OMR IT corridor and other SEZs. Capital and rental values for lower as well as middle income housing properties have come down and may stabilize in few months. However, ultra luxurious properties especially in CBD will continue to see more increase in prices due to shortages in space. In the longer run demand should be able to match supply of properties.

Reality Investment in Hyderabad

2009-01-06T22:41:00.001-08:00

By Ram Kumar

Hyderabad is India's 6th largest metropolis and the 40th largest metropolitan area in the world, with more than 6.1 million people making it a happening place. The IT sector of Hyderabad had spelled bound investors and realtors and not for nothing, the 1500 acre IT Park at Secunderabad has made almost 50% IT buyers in the real estate boom.

Recently, when a six acre land in the very famous Jubilee Hills area of the city was sold at an exorbitant price of Rs.1.18 lakh per square yard, which amounts phantom Rs.333.70crore, the highest ever paid price in realty sector in the history of Hyderabad properties . A city which was alien to the mall culture a decade ago has merged as home to swanky malls and multiplexes.

Real Estate Hyderabad has gained the momentum in realty sector and the Hyderabad real estate seems to have an ever enlightened future. Hyderabad Metropolitan Development Authority (HMDA) which would exercise a higher authorization than the present Hyderabad Urban Development Authority (HUDA). The HMDA is going to cover 6,852 sq km with respect to the current 2197 sq km. HUDA and the municipal corporations have already started working on the forthcoming problem such as congested roads for which flyovers and subways has been undertaken.

Real estate prices in Hyderabad have doubled and tripled in past few months. Still no one is complaining. According to Director, Investments, ICICI Venture, Kishore Goeti, “Hyderabad is emerging as a key market in India’s growth story and land is worth the price we are paying.” Let it be residential properties in Hyderabad or may it be commercial properties, both sectors are attracting the investors to play the realty game.

Private companies, foreign investors, domestic investors and even the state government are all realizing the immense potential in Hyderabad’s real estate market. Thanks to the state government, the city has become a favored destination for foreign investors and large corporate houses. The Hyderabad realty market has never been so good in Hyderabad for real estate investors The state government must step in to check such cases so that the benefits of the real estate market can be shared by all.

B’lore may House 100-floor Tower, India’s Tallest

2009-01-03T01:03:00.000-08:00

By Sameer Lakwan

Here’s some scintillating news that’s sure to cheer Bangaloreans as they welcome 2009. The city will soon be home to India’s tallest tower. The Karnataka government proposes to construct a 100-storeyed trade centre on the lines of New York’s erstwhile World Trade Center. Proposed locations are either the Race Course or the Karnataka Soaps and Detergents Ltd (KSDL) land at Rajajinagar.

Conceived and promoted by large and medium industries minister Murugesh R Nirani, an industrialist himself, the project is envisaged as a public-private partnership. “Nearly 10 investors have evinced interest in partnering with the government to build this skyscraper,’’ Nirani said. Chief minister B S Yeddyurappa is said to have given consent to the idea.

Nirani said financials of this venture have not been worked out, especially revenue-sharing with the private developer.

“Very soon, an expert agency will be involved to give a feasibility report,’’ Nirani said. Project work is expected to commence by March. The tower will offer office space, observation decks, restaurants, clubs, public parks, jogging tracks, multi-level shopping and parking areas.

According to the plan, a small portion—less than six acres—of the 64-acre Race Course would be used for the tower. Race Course is being considered for two reasons:it’s in the heart of the city and also because Bangalore Turf Club has been asked to shift to the outskirts by December 2009.

Large and medium industries minister Murugesh R Nirani said, “Even if this skyscraper takes less than six acres, rest of the Race Course area will be reserved for lung space.’’ But BTC officials have no knowledge of the move.

As for KSDL—which sits on 35 acres of prime land in Rajajinagar —the logic is the same. As the company is using only a few acres, the government might move KSDL to Dobbspet, near Tumkur. In both cases, Nirani said, land ownership will remain with the government.

The project will need multiple approvals: from the Airports Authority of India (AAI) to ensure it doesn’t interfere with air-traffic routes; no-objection certificates from fire force, telecom, BWSSB, Bescom and pollution control boards.

According to a senior BBMP town planning official, “Bangalore earth capacity will support a 100-storeyed tower. Availability of road width, floor area ratio and sital area are vital components for any tall towers.’’

The official further said both identified locations fulfil these norms and they will try to work out how to progress.

2009 will be the Year of Affordable Housing?

2008-12-29T22:57:00.000-08:00

By M H Ahssan

A combination of fall in house prices and interest rate cut could put the house in order for the realty sector

National Housing Bank (NHB) — a subsidiary of the Reserve Bank of India (RBI) — was created two decades ago to regulate and promote housing finance institutions in India. Given the current economic environment, home finance has gained centrestage, with housing construction being the largest employment generator with linkages to 250 ancillary industries. As the apex housing finance institution, NHB has taken several initiatives to promote affordable housing. In an interview with HNN, NHB chairman and managing director S Sridharspeaks on why he expects 2009 to be the year of affordable housing.

House prices have crashed in the West. There is an expectation among buyers that prices will decline in India as well. How do you see the situation?
The situation in India is quite different from that of the West. In India, the conduct of the monetary policy and regulation over banks and housing finance companies ensured that the housing bubble did not develop. Further, the actual equity component in housing is much higher than in the West. Thus, housing prices in India have fallen a bit and may fall further, but unlikely to get into a free-fall situation.

What needs to be done to reduce housing shortage?
I expect 2009 to be the ‘year of affordable houses’, when affordable houses will be available to the middle and lower income groups in sufficient volumes. This will happen mainly through a combination of fall in house prices and reduction in home loan interest rates. The latter has happened. I hope developers reduce prices to stimulate demand and public housing agencies will take up affordable housing in a big scale. Additional hygiene factors are reduction in transaction cost in home purchases through reduction in stamp duty and registration charges and the availability of risk mitigants such as mortgage guarantee, title insurance, credit guarantee for lower income houses.

Where do you see interest rates on home loans? Is the NHB refinance rate likely to come down further?
Interest rates are headed southward. Public sector banks (PSU banks) have set the pace. Others, including housing finance companies, are following suit. NHB’s refinance rates have also come down to single digit. Refinance for rural housing at concessional rate of 8% per annum for seven years has also been provided. Our PLR has been reduced to 10.75% per annum.

NHB has announced a package for the housing sector. At what interest rate will you lend to HFCs?
The refinance facility of Rs 4,000 crore extended by RBI to NHB will be on-lent by NHB to housing finance companies with the following major conditions. It will be available at an interest rate of 8%, and will be available only for loans below Rs 20 lakh. The facility is available up to March 31, 2010.

You have launched an index of home prices. How is the index doing?
NHB’s RESIDEX, which is India’s first official property index, was launched in July 2007 for five cities — Bengaluru, Bhopal, Delhi, Kolkata and Mumbai — covering the period 2001-2005. It has since been updated to December 2007. The property index has been well received. It is being expanded to cover 15 cities and up to December 2008 which will be ready by March 2009. In another year, it will cover all cities with population above 10 lakh.

What are the trends in housing finance. Do you expect the market to shift to banks?
Housing finance growth rate in 2007-08 was lower at about 19% compared with the previous year. During the first half of the current year, the growth rate was marginally lower reflecting the lower growth in the housing sector. I am confident with the measures announced by the government to stimulate the economy in general and housing in particular, housing finance growth rate will revive. I expect the market share of banks and housing finance companies to remain broadly at the existing level.

NHB has been in the market to raise funds. What are your fund-raising plans and how do you plan to deploy the funds?
NHB has already raised Rs 7,800 crore in the first half of current year July 2008 onwards against Rs 12,100 crore in 2007-08 and Rs 13,200 crore in 2006-07. We expect to raise another Rs 3,000 crore, excluding the Rs 4,000-crore refinance facility from RBI.

How do you plan to tie up life insurance with reverse mortgage?
We have been in discussions with insurance companies for over a year to develop a Reverse Mortgage Lifetime Annuity Product, which enables senior citizens to a monthly annuity for life unlike the present product which is available for 20 years. LIC particularly has shown keen interest and a lot of product development work has been done.

NHB was planning to float a mortgage guarantee. What is the status of the company and how will it help the mortgage business?
Mortgage guarantee or insurance is a key component of a well functioning mortgage finance system and is available practically in all developed and middle income country. Mortgage guarantee provides market-based default risk protection to lenders and could thus enhance the flow of housing finance, particularly to lower income groups. NHB will be introducing the product in the country through a separate joint venture company. The preparation work is on.

Do you see a rise in bad loans in housing finance because of the slowdown?
No. So far, we have not seen any significant deterioration in asset quality of housing finance companies. Interestingly, the asset quality of loans of lower value i.e. less than Rs 5 lakh is better than the portfolio as a whole.

Do a Realty Check Before Investing

2008-12-29T22:12:00.000-08:00

By Sohaib Razdan

Falling Interest Rates & Attractive Schemes Are Set To Change The Property Scene In ’09

Is this the right time to buy a house? Besides ones personal situation, the external factors that influence this decision are real estate prices and interest rates.

On the interest rate front, market signals are positive. Most public sector banks have cut their benchmark prime lending rates by 0.75% to 12.5% effective January 1, 2009. The country’s largest mortgage finance company HDFC has also cut its lending rates by 0.5%. Even lending rate for loans below Rs 20 lakh for both from stateowned banks and HDFC are cheaper. However, there is still an uncertainty over the real estate prices. Builders are doling out freebies such as free registration, stamp duty waiver, free parking area or even a flat in another locality. But the rack rates have not come down.

“If there is indeed a genuine need for a home and the current market changes have resulted in the required affordability, one should go ahead and buy now. If the interest is more investment oriented, waiting till March 2009 might bring some better deals — however, this is a risk, since many add-on offers may no longer exist by then.” says Anuj Puri, chairman & country head, Jones Lang Lasalle Meghraj. A couple of years ago buyers were scrambling to buy a house as prices rose every month. Now, the tide has turned. Buyers are waiting in the sidelines expecting the real estate prices to fall. “Prices will fall further in historically over-priced pockets until demand picks up. The rationalisation process should reach a peak towards mid-2009.” Mr Puri says.

So either the same house will be cheaper tomorrow or you can step up your budget so as to afford a bigger house. For those buying a house on borrowed money, it would be difficult to reconcile to a fall in real estate prices.

“For example, if the property value drops to Rs 75,00,000 from Rs 1 crore (at the time of purchase) then you have to pay a difference in the home equity to the bank. Otherwise the bank has a right to take the possession of your house,” says Swapnil Pawar a financial advisor and director Park Financial Advisors.

At the same time, lenders are now demanding that home buyers come up with a higher margin if they want a loan. “Property prices have been overpriced in the recent times. So there is scope for significant correction. Similarly, even the pay cuts and the prevailing uncertainty over jobs and pay hikes have necessitated extreme prudence in the lending business,” says a private sector banker.

Taking a speculative wait-andwatch stance should be a game of experts, who are also willing to risk a loss if they time their move wrongly. Genuine buyers should buy as soon as prices are affordable. After a particular phase in a career, the growth in income stabilises at 10-15%. That’s the best time to gauge the borrower’s affordability to buy a house. At times, couples often miscalculate their affordability.

Realty cos Diversifying into Education

2008-12-26T23:16:00.000-08:00

By M H Ahssan

Education is proving to be quite a draw with a new breed of entrepreneurs in Kolkata. A bunch of real estate developers are diversifying into education and looking at rolling out schools, management institutes and engineering colleges, most of them as a notfor-profit or CSR activity.

The likes of the Ambuja Group, South City, PS Group, among others are all looking at education, drawn by the sheer longterm opportunities which the sector offers. Though realtors have been setting up schools as part of large integrated projects, which also boast of amenities like shopping areas and medical facilities, these players are different in the sense that they are looking at these educational ventures as independent projects in themselves.

PS Group CMD Pradip Kumar Chopra said around 80-85% of the initial investment in setting up an education project goes towards infrastructure and land cost. “Since we are already experts in real estate, we can then save nearly 30% of the initial cost. Hence, this would make such projects more viable,” said Mr Chopra. PS Group has already acquired two 25-acre plots in Rajarhat and Bantala for their proposed education ventures. This includes a B-school and an integrated education hub, which will offer everything from school to doctoral-level education.

South City Projects is also aggressively promoting its South City International School within its residential complex, conceptualised by educational consultant Shomie Das, ex-principal, Doon School and supposedly tutor to none other than Prince Charles! The school will offer five certificates including ICSE, ISC, IBO, Geneva, IGCSE (‘O’ and ‘A’ levels). South City director Pradeep Sureka claimed, “Many people have actually bought flats just to avail of the school, which starts operations in April 2009. It may also prove to be an employment avenue to some of our residents.”

Harshavardhan Neotia, chairman, Ambuja Realty told ET, “As part of our CSR activities, our foundation has recently taken over the Institute of Technology and Marine Engineering on Diamond Harbour Road from its earlier promoters. Right now, it has 1,200 students and six streams of engineering. In due course, we intend to add management and hospitality education.”

Thwarting Terror Attacks in Reality

2008-12-26T22:41:00.000-08:00

By M H Ahssan

What happened in Mumbai on November 26 will always remain etched in the minds of every Indian. The terrorists' attack on iconic buildings and elsewhere has definitely raised the issue of security aspect of high-rise buildings, both commercial and residential, in our country. The gory images of those three days when India was put to ransom are terrible to say the least. With these attacks, those associated with the security aspects feel that it is time the security of buildings, irrespective of their nature, is reviewed thoroughly.

An expert on security matters and chairman of the SIS Security agency R K Sinha says that it is a wake up call for all of us.As we are living in potentially dangerous times, we have to give enough attention to security aspect of our buildings and big houses too.Sinha is of the opinion that buildings must have fullfledged security measures - CCTVs, doorframe and handheld metal detectors. "Many buildings have formed quick reaction teams (QRTs) on every floor. Every hour, there should be thorough checking of buildings, including toilets and dustbins, and random checking of visitors. The activities in car parking should be closely monitored. Naturally, such a tight security arrangement can make buildings far safer," says Sinha.

SVP Group director Sunil Jindal says that as terrorists' strikes are becoming extremely regular in our country, they can't ignore the importance of security of buildings. "What happened in both Oberoi and Taj hotels is a clear-cut case of security lapse. And, such incidents can happen anywhere, unless we wake up - sooner rather than later," Says Jindal.

Talking about the buildings they have constructed and the security measures they have taken for them, Jindal says: "We have made fool-proof arrangement in our buildings so that such incident can be avoided. We have put CCTV cameras on every floor, in order to monitor the movement within and outside the building,and also on its periphery. It also helps in alerting the security manager, in case of violation of preset norms. As this is not always adequate, we have installed office automation systems like the UPS, EPABX and the public address system in our buildings. The public address system is also used in case of fire, to facilitate faster evacuation."

CMD of real estate advisory, Century 21 India, Dr Devender Gupta says that after the recent spate of bomb blasts in Delhi,those who look for either office space or flats, start enquiring very closely regarding the security arrangements in the buildings. "Earlier, people used to ask only about firefighting measures. But, queries on security aspects are a new trend. It was not there earlier," says Gupta.

Experts say that as independent houses in posh areas are dwindling very fast and builders are making floors there, one cannot live there without guards. On any visit to a posh colony in the capital, one will find security guards dealing with visitors, from courier boy to plumbers, and other such people, apart from guarding their posts. They also park the car for you when you return from work at night and cannot find even an inch to park your costly car.

Till recently, security agencies used to supply trained guards only to diplomats, big-time businessmen and toplevel executives of companies.As terrorist activities see a spurt, security agencies also supply their trained guards to all those who deal in huge cash like jewellers and grain merchants. Guards provide security to them both at offices and their houses.

Pawanjit Ahluwalia of Premiershield Risk Management services says that as families started disintegrating and whole society became very money-minded, incidents of robbery and killings are on the rise.The worst hit are old people. Due to all these factors, rich and famous people have started engaging trained guards. Security agencies are also providing even those guards who can work like companions to their masters - playing chess, going out for a walk.Moreover, the guards can also drive and give an insulin injection as and when required. "But, we tell clients in no uncertain terms that they should not send these guards for their bank-related work like checking the balance position or bringing cash from there," discloses Ahluwalia.

The last word came from Sanjeev Shrivastava of Assotech Group on the changed scenario. According to him, the world of realty will change according to needs of the times: "As threat to security is definitely there, not only from terrorists but also from enemies within,those who give 100% to security of their buildings, will score over others."

Quality Does Matter?

2008-12-26T22:38:00.000-08:00

Developers have realised that ensuring quality is the best means to boost sales, says Deepika Mital

Recession or no recession, home buyers today have become increasingly quality conscious and are ready to scout around endlessly till they find the projects which measure up to their expectations. Every consumer today is extremely aware that what goes into the construction in terms of materials and processes will reflect in the finish and longevity of the product. Mumbai's developers are doing their bit to differentiate and improve their product as they realise that ensuring quality is the best selling proposition and any compromise on this count is fool-hardy.

Architect Bobby Mukherjee says, "Wherever I have taken a stand and enforced quality in design and construction,such projects have reaped big rewards." He goes on to recount, "We did a project for a big developer in Thane, which became the most sought after complex in the area, it had really good design and quality club facilities, lighting, landscaping. When these are provided it is greatly appreciated by the end user and it helps in selling the product much faster. It was priced over the market rate by a few thousands, but still went on to sell very fast. Better pricing in the end product can be achieved thanks to better R&D and better sourcing of materials of better quality from across the world. This matters even more when it is a medium range of project, in terms of lighting fixtures,and other materials used in a planned manner which can achieve cost efficiencies."

Mayur Shah of Akruti City says, "The ISO certification basically indicates that whatever we promise, we deliver. Quality checks are conducted at all our sites. R&D is conducted at the head office, but in terms of cost - bringing down the construction costs without compromising on quality. We test different materials to check if the price points can be reduced by using cheaper materials, thus reducing overall costs. We don't have too much of choice in terms of the materials - those are the same for everybody. Quality also lies in the simple things like a perfect slab, good drainage slopes - after all the building cannot be re done at any point after it is made. We also have our own institute where we send our engineers and workers for regular updation for two or three-day programmes.

Explains Bobby Mukherjee, the stress should be laid at the planning stage itself when all the specialised consultants like the architect, interior designer, landscape architect and lighting and service consultant should work together. Only if they are brought on board at an early stage can one realise international standards of design. It is the mind set and knowledge of the subject that is very important to fulfil the quality criteria and achieving good sales. The savings via this can translate into a better sale price, especially in this market. For instance, in the project Kalpataru Horizon, the professionalism with which the project was executed to the last detail helped in getting it very good prices and making it the most sought after address in South Mumbai.

In ordinary middle income projects one needs to focus on the quality of the compound wall, flooring, paving of the driveway with tiles rather than cement and concrete, lighting, greenery, a sophisticated entrance lobby, good elevators, doors, bathroom fittings. Cheap fittings are counter productive. It is better to reduce specifications rather than to compromise on quality.

Speaking to Kaizad Hateria, GM, sales, marketing and customer relations of Keystone Group is an eye opener. He says, "We have a system of conducting spot checks through our mobile vans which can be seen at one or other of our construction sites. We employ 12 to 14 'concrete boys' on each site, whose only job is to check the quality of the concrete, which is vital to the construction. We also have a quality manual for customers,which explains the 300+ quality checks that our projects undergo. Internally to keep up with trends and best practices, our managers, architects and engineers are updated through exposure to foreign exhibitions, manuals and seminars. Our monthly review meetings are specifically meant to address any lapses that might occur at the initial stages as this business is an ongoing process.”

Surendra Hiranandani,MD,Hiranandani Constructions says, "Quality assurance is fundamental to our business. We were the first to introduce voluntary quality checks and better materials. We introduced the concept of copper plumbing in 1992, much before it was required. We also introduced recycling of water in the late 80's and the use of fly ash and high performance concrete in residential and commercial buildings, much before the BIS laid it down in 2000.

“More than 50% of the management's time and effort is directed toward training and R&D, it has always been a focus area for Hiranandani Group."

Answering queries on whether this pushes up the costs for the end user, he says, "Cost is always an issue, we would like to balance out the costs and call it value for money. Lifecycle costs and a low maintenance regime balance out this whole expenditure, which is a definite advantage to the end user.We have always focused on design, materials, planning and construction - all the crucial stages in the sector."

Having worked on projects across the country, architect Bobby Mukherjee says, "Quality in Mumbai is given a special emphasis and effort. Interestingly, second and third generation developers are more quality conscious than those who are first generation - this also I have experienced across the country. R & D mainly needs to be done to improve the quality of the product, be it commercial, retail, residential or hospitality. Good product, good quality design, once both these parameters are satisfied you have the recipe for success. Whether it is Thane or the heart of Mumbai city, these will be the hottest properties."

Boon for Small Cities

2008-12-26T22:37:00.000-08:00

With PSU banks cutting home loan rate, all those planning to buy a house in small towns will benefit, although those in metro cities have been left high and dry, says Rubina Shaikh

Even though public sector banks led by State Bank of India announced a reduction in interest rates on new home loans, the dejected faces of many among the world of realty tells its own story. On the flip side, some argue, and convincingly, that as India does not live in big metros and other big cities, the latest move would benefit those who live in Tier II and Tier III cities who plan to buy homes there. Both have some really solid arguments.

As for those who are not happy with the rate cuts, they are of the opinion that the efforts of banks to revive the realty sector by reduction in home loan rates would not make any worthwhile change in either Delhi or NCR region. They argue that prices of houses from the known builders are in the range of Rs 30 lakh and above. Naturally, those who are looking for houses need more than Rs 20 lakh in order to buy that dream house. For them, the banks have not done any great service. They also point out, rightly, that houses in the price range of Rs 5 lakh to Rs 20 lakh are few and far between in metros and important cities of NCR like Gurgaon, Faridabad, Ghaziabad and Noida. The demand-supply mismatch in the 'affordable housing category' defined as homes costing not more than Rs 25 lakh, leaves little to celebrate for people living in Indian's key metros and nearby towns. Will the recent cut in bank rates make any worthwhile impact on the sagging spirits of realty sector? P K Jain, executive vice president of PNB housing finance,says that it is true that reduction in home loan rates would not benefit all those who are planning to buy homes in big cities. He, however, says that there is an India, which lives outside metros and other big cities.

"The new rates would go a long way in helping all those home seekers who live in cities like Meerut, Amritsar, Karnal, Rohtak and Patna. There are many developers building houses in these places for those who can afford a house worth Rs 20 to Rs 25 lakh," he says.

Another banker says that apart from reduced loan rates, homebuyers have other reasons to cheer as well. As part of the total package, banks will provide free life insurance cover and waive processing and prepayment charges.These freebies should be availed.

However, all these arguments hardly impress Sunil Jindal of SVP group, which has many residential and commercial projects in the NCR. According to Jindal, the low interest rate that PSUs have declared for the loans of Rs 5 lakh to Rs 20 lakh means nothing for homebuyers. "We all know that rates in Delhi and NCR towns are much higher. And if anyone wants to buy a house he or she should have a lot more money than that. For a decent two-bedroom accommodation, a homebuyer might need to avail a loan above Rs 20 lakh, and that too when the prices of real estate have come down. If Government actually wants to address the real estate problem than the banks have to raise the cap to Rs 35 lakh."

"The limit of Rs 20 lakh is not enough and it must be revived to at least Rs 30 lakh. With skyrocketing land prices in all the key cities of the country, I don't think many people will rush to buy their homes. But, at this juncture anything is welcome for the realty sector," said Sanjeev Shrivastava, MD of Assotech.

Pumping Adrenaline

2008-12-26T22:35:00.000-08:00

Government is considering another round of home loan package targeting middle class homebuyers in large cities, which could add momentum to the realty sector, says Prabhakar Sinha

There is good news for homebuyers. Government is considering another round of home loan package to make purchase of a house within the reach of middle class end users. This time, it is learnt, the package will include both the monetary as well as fiscal incentives to make home loan cheap.

Recently, public sector banks announced a home loan sweetener for the homebuyers.But,it was found the package was far short of expectations of both the public and developers. According to the package, home loan up to Rs 5 lakh will attract an interest rate of 8.5%. Loan beyond Rs 5 lakh and up to Rs 20 lakh will be available from public sector banks at 9.25%. That means one can avail the concessional rate home loan if one buys a property of Rs 25 lakh. Out of this, a person can arrange Rs 5 lakh from internal resources and the rest Rs 20 lakh may be borrowed from banks at a concessional rate.

But, there is hardly any house available for up to Rs 25 lakh in large cities, which are badly affected because of the slowdown. Builders and developers feel the scheme would not fetch the desired result in fighting the slowdown.

The country is facing one of the worst industrial slowdowns in the last 15 years. If effective measures are not taken soon, it is felt in the power corridors that the economy might get affected badly. To avoid such a situation, government is planning to adopt concerted strategies to arrest the slowdown.

The good news for real estate sector is the government feels it can play a vital role in turning around the sentiment. A senior officer said there is a huge shortage in housing sector. A measure to revive the housing sector will not only lead to creating assets but also help in reviving a large number of related sectors.

It is felt that making funds cheaper for end users could play an important role in this regard. Therefore,it is learnt the government is planning to increase the present ceiling of Rs 20 lakh for the concessional rate to Rs 30 lakh.This will meet the requirements of a large number of homebuyers in the cities of National Capital Region, in Mumbai, Bangalore, Pune, Chennai and Hyderabad.If the ceiling is raised to Rs 30 lakh, one can buy a house up to Rs 35 lakh with the cheap loan.

Besides, it is learnt the government is also planning to increase the tax rebate on payment of interest on home loan. At present, an interest amount up to Rs 1.50 lakh paid on the home loan taken to buy a house for self-use is deducted from the taxable income. The ceiling is likely to be increased to Rs 2 lakh.

This will help reduce the cost of fund further. At present, if one takes a loan of Rs 30 lakh at the concessional rate of 9.25%, the interest payment in the first year comes to around Rs 2,77,500. Out of this, you can take a tax benefit on Rs 1.50 lakh only, which will be deducted from your income, enabling you to save a tax outgo of Rs 45,000. Which means, net interest one pays in the first year is only Rs 2,32,500.This brings down one’s net interest rate on loan to 7.75% from 9.25%.

But, if the tax benefit is increased to Rs 2,00,000 from Rs 1,50,000, the net interest outgo will be reduced by Rs 60,000 to Rs 2,17,500 on a loan of Rs 30 lakh at 9.25%. That means, the net interest rate on one’s home loan comes to 7.25%. If the interest rate on home loan comes down to 8%, the net effective interest rate will come down to 6% if the deduction against the interest amount paid on home loan is increased to Rs 2 lakh.

Besides this, other measures that government is actively considering are the increase in the limit on tax-exempt amount from rental income from existing 30% to 50%. In a meeting with the top government officials, developers demanded an increase in the proportion of taxexempt amount as an incentive for large net worth individuals to invest in the housing sector. This will also bring in a large number of houses in to the rental market, which will go a long way in solving the housing problem in the cities.

Saving Capital Gains Tax

2008-12-26T22:33:00.000-08:00

By M H Ahssan

How you can avoid paying capital gains tax

There are some provisions in the Income Tax Act that make it possible for you to reduce your capital gains tax liability.The Act contains provisions regarding tax of capital gains arising out of transfer of a residential property. Capital gains tax is leviable on sale or transfer of a house.What constitutes a sale and transfer has been specified under the Income Tax Act.

Capital gains tax is computed on the indexed cost of the asset purchased, which is deducted from the sale amount received by the assessee. The indexed cost is computed according to the indexation rates notified by the Income Tax Department for each year. The income from the house should be chargeable to tax under the head 'Income from House Property'. Other immovable properties, although owned by an individual, are not eligible for this exemption. The capital gains should arise from the transfer of a longterm capital asset. The house must be held for a period of more than 36 months before the date of sale or transfer.The house may be self-occupied or rented out.

In order to avoid the capital gains tax, an assessee can either purchase a house within a period of two years after the date on which the transfer took place, construct a house within a period of three years after the date of transfer, or should have purchased a house one year before date of transfer.In these cases,instead of the capital gains being charged to income tax as income of the previous year in which the transfer took place, will be dealt with in accordance with two provisions.

One, in case the capital gains is more than the cost of the house purchased or constructed, the difference will be charged as income of the previous year. In case the new house is sold within a period of three years of its purchase or construction, for the purpose of computing capital gains in respect of the new asset, the cost will be zero.

Two, in case the capital gains is equal to or less than the cost of the new asset, it is not charged to tax at all. In case the new house is sold within a period of three years of its purchase or construction, for the purpose of computing capital gains in respect of the new asset, the cost will be reduced by the amount of the capital gains.

The part of capital gains not appropriated by the assessee towards the purchase of a new house made within one year before the date of transfer of the original asset, or which is not used by him for purchase or construction of a new house before the date of furnishing the returns of income, should be deposited by him in specified bank. The amount should be deposited before the due date for filing income tax returns.

The proof of this deposit should be attached with the income tax return. The amount used by the assessee to purchase or construct a new house together with the amount deposited will be deemed to be the cost of the new house. In case the amount deposited is not used in full for the purchase or construction of the new house within the period specified, the unused amount is charged as income of the previous year in which the period of three years from the date of the transfer of the original house expires.

The assessee will be entitled to withdraw the amount in accordance with the provisions of the scheme.This benefit is available only for individuals and Hindu Undivided Families.

Capital Gains on Transfer of Property

2008-12-26T22:32:00.000-08:00

Ashish Gupta explains what capital gains is and how it becomes taxable

Any gain or loss arising on transfer of property is subject to the tax provisions under the head 'capital gains'. Under the provisions of Section 2 (14) of the Income Tax Act 1961, 'capital asset' means property of any kind held by an assessee.It does not include certain items like stock-in-trade, consumables or raw materials for business, and personal effects and certain agricultural categories of land. Any real estate, including a flat, building, site, farm house, and commercial property is subject to capital gains on sale or transfer.

It is not only sale of property which triggers off capital gains. Even certain specified forms of transfers are deemed as sale, and any gain is subject to capital gains tax.

Transfer of property means a person conveying property, in the present or future,to one or more other persons, or to himself. Any income arising on transfer of a capital asset is subject to capital gains tax. Transfer is deemed to have taken place on the date on which possession of the property has been given. In case payment is received but the transfer has not been effected, it is not treated as a sale transaction.

Under the income tax laws, capital assets may be either long-term capital assets or sshort-term capital assets. In case a property is held for more than 36 months, the capital gain arising from it is treated as long-term capital gains. In case the property is transferred or sold after holding it for less than 36 months, the income would be treated as short-term capital gains (and vice versa for the capital loss). This is different from the provisions applicable to securities - equity shares or mutual fund units, where the qualifying period for longterm capital gains is anything over 12 months.

The period for which the capital asset was held determines its taxability - whether it is a long-term capital asset or a short-term capital asset and accordingly whether the assessee has incurred a long-term or short-term capital gain.

The amount of capital gains is arrived at by applying the concept of cost inflation index (CII). The index is published by the IT Department. The present worth of a property is arrived at by applying the CII to the cost of the property and to any improvements made. This is deducted from the sale amount received by the transferor, to arrive at the capital gains. The longterm capital gains are charged to tax at the rate of 20 percent.

Capital loss, whether short-term or long-term, can be carried forward and set off for the next eight years. After eight years, it get lapsed and cannot be carried forward.

An assessee may plan tax and save it under Section 54EC in respect of long-term capital gains by investing in a residential property or in capital gains bonds. It needs to be ensured that the conditions prescribed under the section are strictly complied with, or else the amount claimed for exemption becomes subject to tax.

It's Just the Beginning

2008-12-26T22:30:00.001-08:00

While the government’s stimulus package for the housing industry is welcome, more initiatives are required, says Archana Sinha

Home buyers have something to smile about as middle-income groups looking for smaller homes can now buy without burning a hole in their pockets. All public sector banks will now offer loans at 8.5 to 9.5 per cent for homes costing between Rs 5 lakh to Rs 20 lakh.According to the banks this will help mobilise the housing industry, as nearly 80 per cent of their portfolio consists of this segment.

Nayan Shah, managing director, Mayfair says, "Home loans have come back to 2007 rates and will give a big fillip to buyers in the middle class segments who were holding back.” While industry experts have hailed this as a positive step they also feel that more is required to be done. Sanjay Verma, executive managing director, South Asia and Australia, Cushman and Wakefield Says, "The decision to rationalise home loan rates for the priority sector by public sector banks is a positive move and will trigger demand. The concern of lack of credit for developers remains despite the announcement and till the time a feasible solution is found, it may cause inflationary pressure if we end up with a demand-supply mismatch."

Harsh Roongta, chairman, Apna Loan also echoes similar sentiments when he says, "This will boost the housing segment more towards the outskirts, but not in the city or even in the western suburbs, where land prices are high and developers have built at exorbitant prices. Of course in tier 2 and tier 3 cities this will give a small fillip. One needs to remember that in the bigger cities there is no supply in this category, so there is no scope to buy."

Renu Sud Karnad, joint managing director, HDFC Ltd, feels that while interest rates are important, "Higher interest rate is not a big determinant in the buying decision of the end user because housing is a real need and during a tenure of 15- 20 years the interest rates will continue to vary as per market conditions. Interest rates although very important, only affects his affordability that is, his capacity to borrow in terms of the absolute loan amount.So cutting of rates will help. But for the end user the price of the property matters more as once he decides to buy at a particular price, the price stays forever. He is not going to sell if tomorrow the prices rise as his need for a roof is not going disappear."

Most feel that in metros where the capital values are high, this move will only help recently announced affordable housing projects or development for the economically weaker sections.

Kumar Gera, chairman, Confederation of Real Estate Developers Association of India, says, “Flats costing between Rs 5- 20 lakh would be available way beyond municipal limits and commuting hassles and resultant costs would mean people will be hesitant .”

He adds, "I think the government has made moves to stimulate the market, but it should have spread it across segments. For example, for metro cities they should have come out with schemes for homes up to Rs 40 lakh, which would have really seen activity even among buyers from the corporate sector, especially now when some builders are also softening their prices to some extent. This would have enthused the entire industry, across segments, seeing more production and consumption of cement, steel, paint and other collaterals,in turn generating employment and boosting the economy."

The other deterrent is the deadline of June 30, 2009. Asks Roongta, "Is this meant to rush the buyer? He feels the buyer will also want to factor in other considerations, like quality of construction and other amenities. "Moreover it also creates a suspicion, whether the loans will go up later, whether the government's intention is right," he says.

On the other hand, it is not realistic for developers either, says Gera. "Even if they redesign their new projects they cannot complete them before 18 months. That much time will be required for land acquisition, clearance and finishing one phase of construction," he adds.

What is required of the government is to increase liquidity, to lend to banks at lower rates so that there is money in the market, feel experts. The government also has to make land available at lower price.

Kumar Gera says, "This is a welcome move, but a very meek step. Bolder steps are required. There is a reserve of more than 250 billion dollars of foreign exchange. If one compares our spending with Japan and China, where they are operating under similar economic condition,ours is just a speck.Being too cautious will not help."

Says Abhinandan Lodha of Lodha group, "More incentives are of course required from the government but developers should bear in mind that buyers are sensitive to pricing and have to launch their projects accordingly.Housing from Rs 35-45 lakh should be available in good locations."

EDITOR'S NOTE: Real Estate Bubbles

2008-12-24T01:40:00.000-08:00

By M H Ahssan

When reporting on multifamily finance in the 2000s, I came across a common refrain from desperate mortgage bankers again and again: “There is a surplus of money chasing a limited amount of product.” This intensely competitive environment—for lenders, that is—went on for years, seemingly never-ending. But the capital “surplus” environment did come to an end.

What Sam Chandan, chief economist of Reis, said recently at the company’s third quarter briefing throws light on the situation. He cited an essay about banking crises. Such a crisis happened, famously, in Japan in the 1980s. The cycle begins thus: There is some sort of initial loosening of credit in the economy. The subsequent great abundance of credit brings about a real estate bubble. Eventually, that bubble bursts and asset prices deflate. The banks' asset values also fall, they cannot lend as much, and a recession occurs.

Indeed, there was much abundance of capital in the multifamily sector during that period, and it was driven in large part by CMBS financing. The point is that multifamily asset values may also have been pushed up by the great availability of credit. There was much talk then of cap rates being squeezed down to ridiculous levels by highly leveraged buyers. The question is, was there also a bubble in multifamily asset prices, and if so, what was the magnitude?

This issue’s report “Apartment Property Prices Have Fallen by 17% Since Last Year” suggests that the numbers at least do not show severe distress yet. Prices per unit/square foot for apartments in the third quarter of 2008 was 17 percent below its peak in the third quarter of 2007, according to Reis. Chandan says that transaction cap rates for apartments in the third quarter have increased by just under 40 basis points, to 5.7 percent. Apartment cap rates had hit a low of 5.4 percent, in the third quarter of 2007. That is the latest report.

Market Report: India Residential Sector Gears Up for an Overhaul

2008-12-24T01:31:00.000-08:00

By M H Ahssan

The residential sector in India has undergone a far-reaching metamorphosis in the last decade. After years of unplanned and haphazard development, the sector is now marked by enhanced product offering, heightened investment including foreign capital, and augmentation of the national footprint of some prominent Indian developers. Modern apartments and villa and township projects have come up across the country and new city master plans have been drawn to include a number of suburban and peripheral locations within the city’s folds.

The Indian economy has been growing at an average rate of 8.8% in the last four fiscal years, with the 2006-07 growth rate clocking an impressive 9.6%. This stellar growth, augmented by the unmatched fundamentals that the country enjoys, has given strong impetus to the real estate sector in India. The residential segment leads the growth trajectory—nearly 75-80% of the total real estate space development across India is in the residential segment. Rapid urbanization, increase in number of households, rising income levels, and easy availability of housing finance are among the chief reasons cited for this trend.

According to United Nations Population Fund (UNFPA), India’s urbanization rate is higher than the world average, and by 2030 more than 40% of the country’s population will be living in urban areas. This, together with the fact that the average household size in India is fast decreasing, has fostered residential demand in recent times.

Also, salaries in India have been rising at the rate of 10-15% per year and the per capita disposable income that has increased manifold in the past decade is expected to further grow by 8-13% in the next five years. Thus, improved affordability and the increased penetration of housing mortgage finance have led to the unprecedented housing acquisition drive both by end-users and investors. Over the last few years, unabated demand and supply-demand gap has led to spiraling of capital values across locations and cities.

Dealing with a slowdown
However, after a dream run of close to 36 months, the residential sector has been exhibiting signs of slowing down in the last few quarters. In response to the Reserve Bank of India’s measures to control credit growth and liquidity in the economy, interest rates on home loans have increased by several basis points in the last year. This came at a time when the rising residential values and compounding inflation had started to negatively impact the affordability of many end-users. Shrinkage of demand and retreating of end-users and investors from the market had closed the gap between demand and supply, resulting in correction in values. On the other hand, developers are facing a cash crunch due to diminishing sales, expensive credit and drying up of private equity funding as a result of the current global investment conditions. New project launches have been put on hold and under-construction projects are facing delays.

Within such a scenario, developers and stakeholders in this sector are looking at optimizing their resources and employing befitting strategies to tide over the current times. With buyers adopting a wait-and-watch stance, developers are taking various steps to bolster sales. These range from giving early-bird discounts on bookings to freebies such as semi-furnished homes and cars. Apart from the above, in line with quickly changing external conditions, some structural changes are also underway in the residential sector, with affordable housing or mid-end becoming the new mantra. Until now, most of the developers focused on constructing high-end housing, and there has been a dearth of mid-priced, affordable units.

Temporarily reduced buying power due to high inflation rates and stock market fluctuations—combined with the hike in interest rates—have impacted the demand for high-end residences. As such, venturing into affordable or mid-priced housing seems to be the appropriate recourse, as developers are realizing that the segment offers maximum opportunity and prospects on account of two key factors. First, the total estimated shortage of 26 million dwelling units, the maximum shortage is in the mid and low segment, and the demand here is relatively inflexible. Second, this segment will entail a volume game rather than value, and will serve to boost the topline.

With the builder fraternity moving in to fill the existing gap in affordable housing, some constructive steps need to be (or are being) taken by the government to facilitate this movement. These would primarily include introducing progressive reforms like repealing the Urban Land Ceiling Regulation Act (ULCRA limits land holding quantum at a single entity level); and, increasing Floor Space Index (FSI restricts the built-up potential on a plot of land), micro-financing and removing restrictions on credit availability for such kinds of projects. Also, mobilizing funds from various agencies, encouraging private-public partnership, subsidization of construction inputs, and above all developing land and providing infrastructure facilities in locations feasible for affordable housing projects, will give it the required boost. A number of prominent developers are in the process of shifting focus to mid-end and affordable housing. Apart from affordable housing, integrated township developments are also increasingly gaining momentum.

Price corrections are inevitable
The Indian real estate market, including the residential sector, has traditionally been an under-supplied market. On the demand side, Indian consumers are informed, discerning and demand value. Corollary to the current economic conditions, demand has been compressed but is expected to spring back with interest rates softening, price reduction and property market sentiment improving. Price corrections are inevitable, particularly in markets where a demand-supply mismatch has been built up.

Under the current scenario, it is imperative that residential supply and demand are coordinated and that gaps, wherever existing, are filled. In the long term, current churn and shakeout in the Indian real estate sector is expected to lead to market consolidation, making it more attractive for foreign investors and PE funds, as the valuations will be more realistic.

With India’s strong economic and demographic fundamentals, real estate will remain a long-term attractive proposition. Hopefully, the next cycle we witness after the current slow down will be the one that is more efficient and self-sustaining.

Hyderabad Reality Scouts Landlords

2008-12-23T23:00:00.000-08:00

By Ayaan Khan

Agents Seek Business With Assured Returns As House Owners Too Scout For Tenants

As people are getting cautious about investing in property, real estate agents are turning to rental deals in the hope of earning some money. Despite rents seeing a good 15-20 per cent dip in the last three months, agents feel it is comparatively more stable business and assures some returns.

Imtiyaz Ahmed Khan, an agent, who had not managed to sell many properties of late is glad about the money he is making through rental deals. “Commissions on sale of properties is anyway not great. We charge only 2 per cent for a property valued at less than one crore and one per cent if it is more than one crore. But people are not ready to pay even that now. Anyway sales have dipped hugely and even prospective buyers are only using us to get introduced to the owner. After that they are directly negotiating with the owner in order to save on our commission,” he says. Agents like Khan also cash in on the desperation of house owners. Aware of the poor market condition, owners are now ready to pay agents extra commission to get tenants. “What seemed like a waste of money earlier has now become a preferred choice of owners,” says a brokerage manager.

However, not many agents in the city share the same view. The dip in rents have reduced their commissions drastically. With people opting for cheaper places, their monthly income has come down by almost 35-40 per cent.

“Houses that were earlier rented out for Rs 25,000 per month are now being given for as low as Rs 18,000. Duplexes in the Malaysian township that fetched at least Rs 45,000 as rent per month is now on offer for just Rs 25,000 per month. With owners settling for such low rents, our commissions are suffering. As against one month’s rent for these deals we are now charging something between Rs 5,000 and Rs 10,000,” says Asim Khan an agent adding that furnished houses with the latest amenities situated in posh localities, which in better times would have owners demanding Rs 35,000 to Rs 40,000, are going for an unbelievable Rs 20,000 only.

Real estate experts point out that the dip in rentals is also a much needed correction. In the last few years, house owners, buoyed by the rising property prices in the city, had been quoting astronomical rents. Builder P Srinivas, whose residential complex in Banjara Hills has several flats lying vacant for long is hard selling them to any customer who looks even remotely interested. He is not only renting out two-bedroom flats, that would have fetched him anything between Rs 12,000 to Rs 15,000, for just Rs 8,500 but is also relaxing the deposit amount for his tenants.

Instead of the usual three months advance money, he is settling for only two months deposit. The fact that people are now ready to compromise on certain grounds is also affecting agents.

While some are moving to the outskirts of the city in search of cheaper accommodation, others are settling for apartments without high-end provisions like a centralised gas connection or wifienabled zone. “People are not hesitating to take up residence even beyond Hi-Tec city. The rents there are comparatively lower and so is our commission,” says an agent wryly.

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2008-12-19T23:29:00.000-08:00

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2008-12-19T23:19:00.000-08:00

Zero Sum Proposal

2008-12-19T23:15:00.001-08:00

The reduction in home loan rate will not boost realty sector as there are no houses available in large cities for less than Rs 30 lakh, while the cap for this lower interest rate is for loans up to Rs 20 lakh, says Prabhakar Sinha

The scheme of government to make available lower home loan rate to end-users remain a nonstarter. It will not help in reviving the sector, which is facing the worst downturn in the last 10 years, because of high interest rates.The small-ticket size of the loan that qualifies for the proposed low interest rate is the reason that will sink the proposed scheme.

Under the proposed scheme, government has asked banks to prepare a package to make home loan up to Rs 20 lakh available in the range of 7-8 per cent. According to banking sources, the banks are planning to offer home loan up to Rs 5 lakh at around 7 per cent and that of between Rs 5 lakh and Rs 20 lakh at around 8%. The present interest rate on home loan offered by public sector banks is around 10%.

But, the scheme is unlikely to benefit homebuyers in most cities in the country.This is mainly because there are hardly any apartments or houses available for up to Rs 25 lakh.Most of the properties available in the cities of National Capital Region, Mumbai, Chennai, Pune, Bangalore, Kolkata and Hyderabad are in the range of Rs 40 lakh to Rs 50 lakh.

Managing director of Unitech, Sanjay Chandra, said instead to fixing the cap at Rs 20 lakh across the country, the government should have fixed a different ceiling for different cities.He says a Rs 20-lakh-loan would be sufficient for small district towns,where land is not very costly.But in cities like National Capital Region of Delhi, land price is so high that even a 1,000 sq ft, 2-bedroom apartment cannot be sold at less that Rs 30 lakh in far flung areas. A threebedroom apartment in these areas will cost around Rs 35 lakh.

Thus, if one wants to take the benefit of low interest rate package of the government to buy a house, he will have to pay an upfront amount of Rs 10 lakh to 15 lakh from his own pocket. But, it has been found that most of the salaried people buying a house are unable to contribute more than 15 per cent of the total amount from their savings. That means, one can benefit from the government’s new package only if one were to buy a house costing around Rs 25 lakh. Even for this,one will have to dip into savings to make a Rs 5-lakh-payment upfront,and borrow the remaining Rs 20 lakh at special interest rates offered by the public sector banks.

It is learnt that a delegation of developers from NCR met government official recently to convince government to increase the ceiling of loan to qualify under the concessional rate of interest up to 8 per cent from the present Rs 20 lakh to Rs 40 lakh. They argued that this would help drive the demand in the sector.

Assotech CMD Sanjiv Srivastava said government is of the firm opinion that most of the loan seekers will be covered under the scheme. Finance secretary Arun Ramanathan has said that around 75 per cent of the loan is of less than Rs 7.5 lakh.

However, consultants say that most of these loans were taken before 2003, when the market was subdued. Besides, these loans were taken to buy houses in the small towns. In most of the large cities, prices of apartment and independent houses in the authorized areas are more than Rs 30 lakh. Srivastava says that if government increases the ticket size to Rs 40 lakh, the present scheme will help revive the sector. It will go a long way in arresting the slowdown in the economy.That fall in the interest rate from the present 10 per cent to 8 per cent and 7 per cent will go a long way in making the purchase of house affordable.

The fall in the interest rate by 3 percentage points on home loan up to Rs 5 lakh for 20 years will lead to reduction in EMI by 20 per cent from Rs 4,825 to Rs 3,876. However, on 10-year loan, the fall in EMI of Rs 5 lakh loan will be 12 per cent from Rs 6,608 to Rs 5,805.

But, if the loan amount goes up to Rs 20 lakh, the fall in the interest rate on 20-year loan by 2 percentage points will lead to reduction in the EMI by 13 percentage points from Rs 19,300 to Rs 16,729. In case of the repayment period of 10-year, the EMI will fall by 8 percentage points to Rs 24,265 from Rs 26,430.

In the case of Rs 40 lakh for 20 years loan also, the fall in the interest rate by 2 percentage points from 10 per cent to 8 per cent will lead to decline in the EMI by 13 per cent to Rs 33,458 from Rs 38,600. But, if loan tenure is reduced to 10 years, the EMI will fall by 8 per cent to Rs 48,531 from Rs 52,860.Therefore,the fall in the interest rates leads to fall in the EMI substantially, which will help drive the demand in the sector. This will increase the fund flow of in the sector, leading to rise in economic activities also.

Home Loan Interest: Still a Distantdream

2008-12-19T23:13:00.000-08:00

The present reduction in the home loan interest rates is not enough to boost sales as it has to be matched with a correction in prices and rational pricing, says Shri Ram Shaw

The financial world may be facing uncertain times, much speculation could be going on over the rise and fall of real estate prices, but one fact cannot be ignored - land and property continue to be hot investment favourites.With banks decreasing their interest rates marginally on home loans and the real estate developers yet to oblige the appeals made by the former finance minister P Chidambaram (now home minister),NAREDCO and CREDAI to cut prices, a stalemate seems inevitable. Under the current scenario, consumers (home seekers) are in a fix.Several realty experts opine that the present reduction in the home loan interest rates is not enough to boost sales. It has to be matched with a correction in prices and rational pricing.

The move by the finance ministry and the Reserve Bank of India (RBI) to beat the slowdown and boost demand in real estate sector does not seem have borne any fruit, thus far.

The much-hyped cut in interest rate in home loan has not created any loan rush - for one single reason - it was inadequate. “It’s too less. Buying a house is still not affordable. Like inflation, rate of interest also should be brought down to the single digit level,” says Sunit Haldar, a resident of Mayur Vihar who is looking for a flat to accommodate his growing family.

The home-seeker takes a decision of buying a house, usually once in a lifetime. He thinks a hundred times before committing to a long-term liability of loan repayment, before approaching the bank, or negotiating with the developer. He knows his math better than anyone else. For him the real push to go for the flat would be if it were within his affordable bracket. But, in the case of recent rate cut, the reduction was lacklustre.

For example, the EMI for the loan amount of Rs 20 lakh for a 15-year-tenure at the earlier rate of interest of say 13.5% was around Rs 26,000. If the rate of interest is reduced by only 0.75% to the level of 12.75%, then the effective EMI would be around Rs 25,000. The recent reduction in rate of interest by 0.75% would reduce the monthly burden only by Rs 1,000. Now consider the same case from a different angle. If EMI is Rs 26,000, the monthly income of this person would have to be a t least Rs 60,000 to Rs 70,000. Will reduction of Rs 1,000 matter to this person? Will he be rushing to raise a loan to save just Rs 1,000?

Thus, one could not see a rush at the home loan counters as a result of banks lowering the interest rates. “High interest rates are choking the demand” turned out to be a weak argument as lower rates did not trigger any demand from the home seekers. RBI could pump in the liquidity but the affordability couldn’t be increased. Initiatives fell flat in pushing the home seekers to the site as they are still sitting on the fence, with no home, worth the value, in sight.

As far as developers are concerned, they have relented to the appeals of Chidambaram. National Real Estate Development Council (NAREDCO) and Confederation of Real Estate Developers Association of India (CREDAI) have asked their member developers to cut the prices in the range of 5% to 10%.

Rohtas Goel, chairman of NAREDCO, says that price cuts will help escalate real estate demand and reduce the burden on customers. According to Kumar Gera, chairman, CREDAI: “ We are advising the members across the country to make every effort in lowering prices to the levels possible.This will have a desirable impact and cascading effect on employment in the industry, as well as on more than 170 other industries. It will also have a telling impact on the economy and country as a whole.”

Addressing corporate heads and business leaders at the India Economic Summit in Delhi (organized by the World Economic Forum and the Confederation of Indian Industries), P Chidambaram said: “ Hotels must cut tariffs, airlines must cut prices, real estate must cut rates of apartments and homes they sell, car makers and two wheeler makers must cut prices.”

But the real estate developers have their own view. They say this won’t work until lending rates are also slashed. Whatever correction was to happen has already taken place. Today there is no cushion or margin for developers to further reduce prices.

“We have already cut prices, which has brought our margin down to 15% from 30% last year.If we cut prices further,our margin will get wiped out,” said Emaar MGF, MD, Shravan Gupta.

“Prices are a function of demand and supply. Today supply is far ahead of demand,” says DLF chairman K P Singh. A Unitech spokesperson said price cut was a “good idea”. The group has launched a number of affordable housing projects in NCR. Parsvnath Developers’ chairman Pradeep Jain says price cut is unlikely even though builders may focus on smaller size homes to bring down overall cost.

Quality Matters in Reality

2008-12-19T23:08:00.001-08:00

Developers have realised that ensuring quality is the best means to boost sales, says Deepika Mital

Recession or no recession, home buyers today have become increasingly quality conscious and are ready to scout around endlessly till they find the projects which measure up to their expectations. Every consumer today is extremely aware that what goes into the construction in terms of materials and processes will reflect in the finish and longevity of the product. Mumbai's developers are doing their bit to differentiate and improve their product as they realise that ensuring quality is the best selling proposition and any compromise on this count is fool-hardy.

Architect Bobby Mukherjee says, "Wherever I have taken a stand and enforced quality in design and construction, such projects have reaped big rewards." He goes on to recount, "We did a project for a big developer in Thane, which became the most sought after complex in the area, it had really good design and quality club facilities, lighting, landscaping. When these are provided it is greatly appreciated by the end user and it helps in selling the product much faster. It was priced over the market rate by a few thousands, but still went on to sell very fast. Better pricing in the end product can be achieved thanks to better R&D and better sourcing of materials of better quality from across the world. This matters even more when it is a medium range of project, in terms of lighting fixtures, and other materials used in a planned manner which can achieve cost efficiencies."

Mayur Shah of Akruti City says, "The ISO certification basically indicates that whatever we promise, we deliver. Quality checks are conducted at all our sites. R&D is conducted at the head office, but in terms of cost - bringing down the construction costs without compromising on quality. We test different materials to check if the price points can be reduced by using cheaper materials, thus reducing overall costs. We don't have too much of choice in terms of the materials - those are the same for everybody. Quality also lies in the simple things like a perfect slab, good drainage slopes - after all the building cannot be re done at any point after it is made. We also have our own institute where we send our engineers and workers for regular updation for two or three-day programmes.

Explains Bobby Mukherjee, the stress should be laid at the planning stage itself when all the specialised consultants like the architect, interior designer, landscape architect and lighting and service consultant should work together. Only if they are brought on board at an early stage can one realise international standards of design. It is the mind set and knowledge of the subject that is very important to fulfil the quality criteria and achieving good sales. The savings via this can translate into a better sale price, especially in this market. For instance, in the project Kalpataru Horizon, the professionalism with which the project was executed to the last detail helped in getting it very good prices and making it the most sought after address in South Mumbai.

In ordinary middle income projects one needs to focus on the quality of the compound wall, flooring, paving of the driveway with tiles rather than cement and concrete, lighting, greenery, a sophisticated entrance lobby, good elevators, doors, bathroom fittings. Cheap fittings are counter productive. It is better to reduce specifications rather than to compromise on quality.

Speaking to Kaizad Hateria, GM, sales, marketing and customer relations of Keystone Group is an eye opener. He says, "We have a system of conducting spot checks through our mobile vans which can be seen at one or other of our construction sites. We employ 12 to 14 'concrete boys' on each site, whose only job is to check the quality of the concrete, which is vital to the construction. We also have a quality manual for customers, which explains the 300+ quality checks that our projects undergo. Internally to keep up with trends and best practices, our managers, architects and engineers are updated through exposure to foreign exhibitions, manuals and seminars. Our monthly review meetings are specifically meant to address any lapses that might occur at the initial stages as this business is an ongoing process.”

Surendra Hiranandani, MD, Hiranandani Constructions says, "Quality assurance is fundamental to our business. We were the first to introduce voluntary quality checks and better materials. We introduced the concept of copper plumbing in 1992, much before it was required. We also introduced recycling of water in the late 80's and the use of fly ash and high performance concrete in residential and commercial buildings, much before the BIS laid it down in 2000.

“More than 50% of the management's time and effort is directed toward training and R&D, it has always been a focus area for Hiranandani Group."

Answering queries on whether this pushes up the costs for the end user, he says, "Cost is always an issue, we would like to balance out the costs and call it value for money. Lifecycle costs and a low maintenance regime balance out this whole expenditure, which is a definite advantage to the end user. We have always focused on design, materials, planning and construction - all the crucial stages in the sector."

Having worked on projects across the country, architect Bobby Mukherjee says, "Quality in Mumbai is given a special emphasis and effort. Interestingly, second and third generation developers are more quality conscious than those who are first generation - this also I have experienced across the country. R & D mainly needs to be done to improve the quality of the product, be it commercial, retail, residential or hospitality. Good product, good quality design, once both these parameters are satisfied you have the recipe for success. Whether it is Thane or the heart of Mumbai city, these will be the hottest properties."

Housing Industry - Just the Beginning

2008-12-19T23:00:00.000-08:00

While the government’s stimulus package for the housing industry is welcome, more initiatives are required, says Archana Sinha

Home buyers have something to smile about as middle-income groups looking for smaller homes can now buy without burning a hole in their pockets. All public sector banks will now offer loans at 8.5 to 9.5 per cent for homes costing between Rs 5 lakh to Rs 20 lakh. According to the banks this will help mobilise the housing industry, as nearly 80 per cent of their portfolio consists of this segment.

Nayan Shah, managing director, Mayfair, who has many projects in Virar, Nala Sopara and areas around, says, " Home loans have come back to 2007 rates and will give a big fillip to buyers in the middle class segments. Our project at Virar, Mayfair Virar Garden, with two bedroom flats between Rs 14 to 19 lakh in a well laid out township, good roads, good supply of water and connectivity to the station, will see more enthusiastic enquiries from buyers who were holding back.”

Anil Mittal, director, Mittal Builders, too has expressed happiness saying, "We have a low-cost housing project called Mittal Enclave at Naigaon east where we
are selling 450-500 sq.ft. for Rs. 2000-2100 per sq ft. With home loans being slashed, we expect more customers to turn up. Private banks should also reduce rates for the momentum to continue."

While industry experts have hailed this as a positive step they also feel that more is required to be done.

Says Sanjay Verma, executive managing director, South Asia and Australia, Cushman and Wakefield, "The decision to rationalise home loan rates for the priority sector by public sector banks is a positive move and will trigger demand. The concern of lack of credit for developers remains despite the announcement and till the time a feasible solution is found, it may cause inflationary pressure if we end up with a demand-supply mis-match."

Harsh Roongta, chairman, Apna Loan also echoes similar sentiments when he says, "This will boost the housing segment more towards the outskirts, but not in the city or even in the western suburbs, where land prices are high and developers have built at exorbitant prices. Of course in tier 2 and tier 3 cities this will give a small fillip. One needs to remember that in the bigger cities there is no supply in this category, so there is no scope to buy."

Renu Sud Karnad, joint managing director, HDFC Ltd, feels that while interest rates are important, "Higher interest rate is not a big determinant in the buying decision of the end user because housing is a real need and during a tenure of 15- 20 years the interest rates will continue to vary as per market conditions. Interest rates although very important, only affects his affordability that is, his capacity to borrow in terms of the absolute loan amount. So cutting of rates will help. But for the end user the price of the property matters more as once he decides to buy at a particular price, the price stays forever. He is not going to sell if tomorrow the prices rise as his need for a roof is not going disappear."

Most feel that in metros where the capital values are high, this move will only help recently announced affordable housing projects or development for the economically weaker sections.

Kumar Gera, chairman, Confederation of Real Estate Developers Association of India, says, “Flats costing between Rs 5- 20 lakh would be available way beyond municipal limits and commuting hassles and resultant costs would mean people will be hesitant .”

He adds, "I think the government has made moves to stimulate the market, but it should have spread it across segments. For example, for metro cities they should have come out with schemes for homes up to Rs 40 lakh, which would have really seen activity even among buyers from the corporate sector, especially now when
some builders are also softening their prices to some extent. This would have enthused the entire industry, across segments, seeing more production and consumption of cement, steel, paint and other collaterals, in turn generating employment and boosting the economy."

The other deterrent is the deadline of June 30, 2009. Asks Roongta, "Is this meant to rush the buyer? He feels the buyer will also want to factor in other considerations, like quality of construction and other amenities. "Moreover it also creates a suspicion, whether the loans will go up later, whether the government's intention is right," he says.

On the other hand, it is not realistic for developers either, says Gera. "Even if they redesign their new projects they cannot complete them before 18 months. That much time will be required for land acquisition, clearance and finishing one phase of construction," he adds.

What is required of the government is to increase liquidity, to lend to banks at lower rates so that there is money in the market, feel experts. The government also has to make land available at lower price.

Kumar Gera says, "This is a welcome move, but a very meek step. Bolder steps are required. There is a reserve of more than 250 billion dollars of foreign exchange. If one compares our spending with Japan and China, where they are operating under similar economic condition, ours is just a speck. Being too cautious will not help."

Says Abhinandan Lodha, of Lodha group, "More incentives are of course required from the government but developers should bear in mind that buyers are sensitive to pricing and have to launch their projects accordingly. Housing from Rs 35-45 lakh should be available in good locations."

WIDER OPTION IN REALITY

2008-12-19T22:58:00.000-08:00

Developers are looking to aggressively market housing projects for the mid-income group, where the demand is huge, says Padma Ramakrishnan

The Indian real estate sector is going through interesting times, with developers increasingly looking at projects for mid and low income housing segments as well as value for money projects, catering to those who can afford slightly more.

Housing, say experts, should be viewed as any other industry where options have to exist at all possible price points. Currently, there is a dearth of housing options at the lower end of the spectrum and this situation should change. Affordable housing projects have become the high focus area as builders have realised that therein lies the largest market, with the fastest absorption rates.

The Reserve Bank of India's recent rate cuts, which are expected to make home loans easier and cheaper are aimed at easing the interest burden in the Rs. 20 lakh category of housing loans and is expected to give a boost to the affordable housing market.

Reputed builders who concentrated largely on mid-toupper end homes are now launching budget home schemes in the western suburbs beyond Borivali,in central areas like Thane and Kalyan and in the nodes of Navi Mumbai. While such projects are not coming up in prime locations, many of these are being developed within a radius of five to six kms from the nearest suburban station like Thane,Vasai-Virar, Kalyan,Panvel,and Kalamboli.Developers like Rustomjee Group,Lodha Group, Akruti City, Neptune Group, Acme Group, Nirmal Lifestyle, Puranik, Prajapati Constructions, Godrej Properties are actively launching projects catering to the affordable segment.

Affordable housing, says architect Ramakrishnan Iyer, can be categorised into various segments where affordable can be purely in the sense of absolute terms, and the cost criteria comes into play. There could also be projects above Rs 30 lakh, affordable in term of value for money which incorporate features like green building criteria. These factors are cost saving in the long run and would strive to bring down maintenance costs and transport costs. The Lodha Group's Casa Univis project launched this week at Ghodbunder Road,Thane, seeks to target the midincome professional. Spanning across a sprawling 55 acres of land, the project, under the new Casa sub-brand, will feature 26 towers of 18-27 storeys; offering multiple residential configurations - 2 BHK, 3 BHK Optima, 3 BHK Ultima and 3 BHK Luxe apartments. The apartments will have fully air-conditioned residences, video door phones, and even walk-in wardrobes, in a project that will have several amenities including a school and clubhouse, at a value-for-money price. At an invitation price of Rs 2997, a luxurious air-conditioned 2BHK residence would work out to just Rs 30 lakh.

According to Abhisheck Lodha, director, Lodha Group, with the Casa subbrand,the Group looks forward to making available valuable and premium quality lifestyle residential offerings. "We believe there is a substantial market of opportunities and the key is to offer differentiated products and patterns," he adds.

Players like Rustomjee Group are planning 5,000 homes in the next two or three years, all in the affordable segment. Boman Irani, director, Rustomjee Group, says there is a huge need for affordable housing and no recession can halt a person who is providing what the market wants.

According to property consultants, Jones LangLaSalle Meghraj, the government should release land held by its various agencies for development which would help ease the rates on what is currently available. It should also offer to put in place baseline infrastructure to increase accessibility to underdeveloped and neglected areas to make them attractive.

Experts also point out that it is important to tie up funding with banking institutions before marketing low income projects.

Urban planner R K Jha explains that while constructing in peripheral areas, it is important to ensure that there is good transport system to the nearest station, and other essential facilities. If this does not happen simultaneously along with real estate development, both customers and developers will lose interest.The momentum has to be kept alive through better facilities in these locations.

Indian Real Estate Sector – Will the Phoenix Rise Again?

2008-12-16T23:27:00.000-08:00

By M H Ahssan

Indian real estate industry has witnessed a huge swing in its fortune in recent time. Till December last year it was a darling of both domestic and foreign investors. It received around $10 Billion in funding through FDI, Private Equity and JVs. Everything was looking rosy and developers were busy acquiring lands at exorbitant rates and launching new projects. Economy was growing at 9.5% and corporate were looking for new real estate space to either expand or begin new businesses. However, with the bust of real estate sector in the US, things turned from good to worst. Investment Banks in the US crumbled and created a mess called “Sub-prime crisis”.

Sub-prime crisis is the current financial crisis (considered as the worst ever since World War II) characterized by acute credit crunch in the global capital markets. At the core of this crisis lies “sub-prime housing loan market.”

How sub-prime crisis started?
The crisis began with the bursting of the United States housing bubble. A slowing US economy, high interest rates, unrealistic real estate prices, high inflation and rising oil tags together led to a fall in stock markets, growth stagnation, job losses, lack of consumer spending, a virtual halt to new jobs, and foreclosures and defaults. The sub-prime loans were given by FIIs at floating rates. With rising interest rates in the US, EMIs for these individuals also started increasing (what we see today in Indian market) and sub-prime homeowners began to default as they could no longer afford to pay their EMIs. A deluge of such defaults inundated these institutions and banks, wiping out their net worth. Their mortgage-backed securities were almost worthless as real estate prices crashed.

The moment it was found out that these institutions had failed to manage the risk, panic spread. Investors realized that they could hardly put any value on the securities that these institutions were selling. This caused many a Wall Street pillar to crumble. As defaults kept rising, these institutions could not service their loans that they had taken from banks. So they turned to other financial firms to help them out, but after a while these firms too stopped extending credit realizing that the collateral backing this credit would soon lose value in the falling real estate market, resulting in this big “Sub-prime” mess.

Why did India market fall?
Once investments by the FIIs in the US turned bad, more money had to be invested back, to maintain that fixed proportion i.e. to match assets and liabilities on their books. In order to invest more money in the US, money had to come in from somewhere. To make up their losses in the sub-prime market in the US, they went out to sell their investments in emerging markets like India where their investments have been doing well.

So they started selling their investments in India and other markets around the world to maintain enough liquidity in the US economy and for their own operation. Since the amount of selling in the market was much higher than the amount of buying, the Sensex began to tumble. Additionally, crude prices were in the range of $120-150 which caused inflation to rise in double digit forcing banks to raise their interest rates. Thus, higher rates seriously affected real estate, automobile and banking firms’ operations and their stock crashed. Moreover, there were some rumors that even Indians banks had some exposure to these risky MBS and hence, banking stocks were among the worst hits. The flight of capital from the Indian markets also led to a fall in the value of the rupee against the US dollar. The stock market will continue to tumble as long as there is huge selling pressure from these FIIs.

Since most of FIIs who invest in India are based in the US, the stock market in India generally closely follows the sentiments in the US economy compared to that of Japan or European economy.

Stock market and real estate
Let’s explore how stock market affects real estate industry. Most of the real estate developers are publicly listed companies and trade on these stock exchanges. This is because real estate development is capital intensive and developers need cash to develop properties which is then sold or rented to customers. Firms need to buy land, which is extremely expensive these days, raw materials such as cement and steel, and hire manpower for the construction activities. All of these require huge amount of money. Developers generally raise capital either by borrowing from banks or issuing stocks. RBI has made extremely difficult for the firms to raise debt in domestic market and through external commercial borrowing (ECB) in order to check the incessant rise in property prices. Hence, the best way for them is to issue stocks. The investors in the stock market provide these developers cash for their projects by taking some stake in the company or projects. Hence, the market to a large extent decides the fortune of these companies.

A large number of financial institutions (Banks, Mutual Funds and Hedge Funds) buy or sell these companies’ securities on the exchange. For the last few years these FIs were extremely optimistic about Indian economy and real estate sector. They made huge investments in these companies and got great returns. Hence, their stocks went up through the roof due to heavy demand. If these FIs start selling their investments heavily for one reason or other, it will negatively affect companies’ stock price. The stock is an attractive currency for the firms in the bull market. Firms may sell (issue) these stocks in the market to raise capital to fund their expansion plan without the headache of interest payments that accompany debt. So any downward movement in the stock market might decrease the stock price of these firms and hence reduce their ability to raise sufficient capital; thus, affecting their future plans.

Unfortunately, the global financial crisis has taken a heavy toll on the Indian stock market. In less than a year Sensex has gone down from 21,000 to 9,500 levels. Most of the real estate stocks are down by over 70% w.r.t to their 52-weeks high. This is because of higher interest rates, global slowdown and heavy selling by financial institutions, seriously cutting down these companies expansion plans. They are stuck with their existing projects while investors have pulled out. Lehman had around $1.3Billion of investments in Indian real estate market. Several developers such as Unitech had planned to raise money through Special Purpose Vehicle (SPV) to fund their projects. Now, after the bust of Lehman, firms may seek PEs help to raise capital.

Some macroeconomic factors such as inflation and economic growth also affect companies and their stock prices. As we know inflation in India was around 11.5% (October 2008) which was quite high compared to last year’s figure of 3-4%. Banks had to increase interest rates to counter high inflation. For real estate companies higher interest rates environment is not suitable because customers avoid taking home loans (due to higher EMI) which decreases the demand for properties. A bad prospect of growth in the earnings of the firms gets reflected in their stock prices.

Mega deals - are their days over?
Indian real estate sector was a hot cake for foreign investors a year ago. Everyone wanted a pie of it. Did you ever hear about mega real estate deals that happened in Mumbai in 2008? If not here they are: London-based banking major Barclays Bank created history in May when it took space at Cee Jay House, a landmark office complex in Worli, for Rs. 725 a square foot (sq ft) per month. Yesteryear movie star Vinod Khanna and his wife set a reality record in Mumbai by buying an apartment in Malabar Hills for Rs. 30 crore after paying a mindboggling Rs. 1,20,000 per square foot. But those days are over now. The sub-prime crisis and negative economy outlook have taken their heavy toll on the sector.

Outlook just after sub-prime crisis
We can see the outlook for these companies was not so good. Over 70% of their market value was wiped out in less than a year; thus, putting brakes on their expansion plans. They were looking for alternative sources of capital or delaying their projects. The global financial crisis and recession in the US severely affected a large number of industries such as IT/ITES and Financial Services. Both these industries were creating huge demand for A-grade commercial properties in Metros and Tier-1 cities. Now, that demand has reduced by over 50% which might decrease further if the US goes into deep and prolonged recession. So the next one year would not bring good news for the firms in the realty sector.

However, the consumers having cash have great opportunities in this bear market and high interest rate environment. With the decrease in demand for both commercial and residential properties, prices/rentals have come down. We have already seen a correction in the range of 5-10% across the properties and believe prices may go down further by another 3-5% in the next 2 to 3 months. Also, the prices in the secondary market have fallen more compared to that in the primary market. We believe inflation might cool off by June 2009 which might push the demand for residential properties. Though the long term outlook looks good, the short-term outlook is bad for the industry. So if you plan to buy a house, either buy now (only cash) or wait for couple of months but definitely before inflation falls below double digit and banks gradually start rolling off hike in rates.

What does 2009 holds for the sector?
Good news for both industry and buyers! Inflation has come down from its October high of 13% to 8%. RBI since then has announced a series of rates cut- Repo rate has been reduced by over 200bp, while Reverse repo rate saw a 100bp decrease. CRR too was reduced by 150bp to inject liquidity in the market.

Today, which is December 15th 2008, as I write this article, public sector banks hold a press conference to announce major rates cut and other measures to boost real estate sector. The highlights of today’s meeting were:
• Rate for home loans up to Rs 5 lakhs will not be more than 8.5%
• Five-year fixed rate terms on up to Rs 5 lakhs home loans
• Banks to take 10% margin on home loan of up to Rs 5 lakhs
• No process, prepayment fees for home loans
• Home loan rate under package can fall if rates fall more, which is likely to happen
• Home loan of Rs 5-20 lakhs for maximum 20 years at 9.25%
• India banks’ margin for Rs 5-20 lakhs loan will be 15%
• India state-run banks will offer free life insurance cover for home loans

These new home loan rates will be effective Monday, December 15, 2008 and expire on June 30, 2009. This has come as good news to some developers while rest felt disappointed. DLF and Unitech have good presence in sub-20 Lakhs housing segment, which is also called “Affordable Housing”. Those operating in “affordable housing” hailed these rates cuts. Sanjay Chandra, MD of Unitech, said “It is a big benefit — the rates coming down, no processing fees as well as the fixed nature of it because a lot of people didn’t like the uncertainty with the way interest rates were moving. So I think the fixed rate and also the only option possibility of downward revision is a good thing for the sector and for us in general.” This might force and encourage other developers to focus on affordable housing. But the existing home loan borrowers felt dejected because these rates are applicable to new loans only.

However, these measures may not revive the flagging sector conditions because a majority of residential projects cost above Rs. 40 Lakhs i.e. where loans are above Rs. 25-30 lakhs. Industry insiders say that unsold property to the tune of Rs 20,000–25,000 Crores remains stuck in the country. Unless these properties are sold first, developers may not launch new projects or finish the under construction ones. To give a boost to this, developers are demanding an interest rates in the range of 7-8% i.e. back to the days of 2005.

With falling crude prices and global recession, Inflation should come down to the level of 5-6% by June 2009 end. So expect RBI to cut rates further by 100-150bp which we will bring the interest rates in single digit. This will give the much needed boost to the industry. Buyers, who are right now playing wait and watch game, will go for cheaper home loans. Expect another cut in prices in the month of January or February by developers who desperately want to flush out their inventories. More so costs of construction have come down by 10-15% due to decrease in prices of cement and steel. This cost should be passed on the customers as well. I will surely bet my money on real estate companies, especially bigger ones like DLF, Brigade and Unitech.

You may see above that most of these stocks have recovered from their October lows and are moving north now. Thus, market too looks optimistic about these companies and the sector as a whole. I am confident that economy will improve next year and get back to 8-8.5% growth rate.

Smarter Home Loan Management

2008-12-15T03:57:00.000-08:00

By Sridhar Reddy

It is not the end of financial crisis management with just the banks lowering their interest rates for home loans. HNN explains how one can go about ironing out the wrinkles in the home finance kitty.

It is high time that you get over the doom and gloom set in by recent happenings in the financial world, and do some serious thinking towards putting your personal finance status in order.

Make a beginning by comprehensively reviewing your financial status. You must spell out your financial goals, obligations, holdings, assets, risks and insurance. Ideally, you should consult a personal finance consultant.|

If you are the ‘Do-It-Yourself’ types, the basic principles listed below should hold you in good stead.

nPay immediate attention to your insurance/ risk coverage. Stressful times like these, endanger your family’s and your health. Make sure your family and you are adequately covered by medical expense reimbursement policy (popularly known as mediclaim policy). All wage earners in your family should also have adequate critical illness and life insurance. It may sound a little contradictory to spend money on insurance premiums at a time like this, but be sure that every penny is well spent here. You cannot afford any financial distractions during these tough times, arising from illness/accident. Illness may be inevitable but if you are adequately insured, the financial burden will not worry you.

*Attend to your loans, particularly high cost ones like unsecured personal loans and credit card debts, on priority.

These loans tend to have low tenure, coupled with high rates, thus higher EMIs’. If you have relatively low yielding investments like fixed deposits, then you should consider breaking those deposits for clearing these debts. While on fixed deposits you may be earning only 10 -11%, on credit card debts you are paying somewhere in the range of 40 - 45% and 16 - 25% for unsecured personal loans. No amount of prepayment charge can justify continuing such loans. Just keep enough in your savings account or bank fixed deposits to meet your contingency needs. Use the balance to pay off these high cost debts.

*If you do not have fixed deposits, you can try moving to lower interest loan by taking loan on security of your existing house. You can take a loan/additional loan on your existing house property and pay up your personal loan/ credit card debts. This way you can use lower cost money to retire your high cost debt. In case additional loan on your existing house property is not available, then look for other cheap loans against surrender value of your insurance policy and/or loan against financial securities (mutual fund units, units in ULIP plans of insurance companies, equity shares, etc.)

*Shop for a deal on existing home loan for better rates or else, consider switching to lenders who offer best rate.

Approach various lenders with the intent of transferring the loan. The success of the deal or the lack of it will be dependant on your income and the repayment track record on your existing home loan. If you are getting at least half a percent lower interest rate then your existing loan, you should consider switching your loan.

*Do not discontinue your Systematic Investment Plan (SIP) as in the current market scenario, it will fetch you higher number of units and this brings into play the rupee cost averaging, that is so crucial for the success of SIP plan. If you have a lump sum which you need to invest, you can park your money in the debt plan which you can transfer into equity in a phased manner through a systematic investment plan. A lay consumer should ideally not make a lump sum equity investment but do so gradually.

*If bank deposits are something you like, you can take advantage of current high bank deposit rates by starting a recurring deposit. In recurring deposits you are locking in your money at the rate today but money will only be invested later. It is a good idea to consult a financial planner to get that peace of mind which you have been seeking to achieve.