Real Estate Intelligence Report, Thursday, June 25, 2009

Met confirms below normal rainfall fears

Met confirms below normal rainfall fears
The Economic Times, June 25, 2009, Page 1

Our Bureau NEW DELHI

FINALLY, the met department has changed its mind on the rains: this year’s south-west monsoon would be below normal for the country as a whole—for the first time in four years—and not normal as forecast earlier.

The silver lining is that there is little chance of a drought, with rains in July-August expected to make up for the initial deficit in the north-west, the main grain-growing regions of Punjab and Haryana.

Still, the latest official prognosis of the rains, a lifeline to many a sector, spells grief for the economy trying to recover from the fallout of the slowdown. Analysts and industry captains voiced the same concern: poor rains could lower farm output, raise prices and dent rural demand and have a spiralling effect on corporate profitability and market sentiment.

An anxious industry is not pushing the panic button yet, preferring to watch the rains progress. “If the delay in monsoon is for some days, it may not be an issue of concern. However, if the agricultural season misses the monsoon by a considerable time frame, we may have a problem at hand. In both the cases, the government should be prepared to take corrective action in order to ensure that food prices are kept in check,” said Ficci president Harsh Pati Singhania.

The Centre too is keeping a close eye on the progress of the rains. It will meet state agriculture ministers on Thursday in the Capital.

Some states are taking proactive steps to make use of available water via irrigation. The Punjab government has, in this sweltering heat, banned the use of air conditioners in all government offices, boards and corporations with immediate effect till June 30, 2009. This is to ensure 8 hours of uninterrupted power supply in the farm sector for planting paddy.

“Quantitatively, monsoon season rainfall for the country as a whole is likely to be 93% of the long period average (LPA) with a model error of +/- 4%,” the India Meteorological Department’s (IMD) long-range forecast update for the 2009 south-west monsoon said on Wednesday.

Minister of state for science and technology Prithviraj Chavan confirmed the development. “South-west monsoon from June to September is likely to be below normal.”

Both the north-eastern and the peninsular regions of the country are likely to get below normal rains while the north-west would have deficient rains. Central India, which is yet to receive rains, is expected to have a normal monsoon.

The IMD, meanwhile, sought to underplay the role of El Nino in the poor monsoon progress thus far, going to the extent of vehemently denying that any “droughtlike” situation prevailed currently.

SBI cuts BPLR by 50 bps to 11.75%

SBI cuts BPLR by 50 bps to 11.75%
The Financial Express, June 25, 2009, page 1

BS Reporter / Mumbai

State Bank of India, the country’s largest lender, today announced a 50 basis point reduction in its benchmark prime lending rate (BPLR) to 11.75 per cent.

The rate cut would be effective from Monday, the bank said in a statement this evening. With the latest reduction, SBI has lowered its BPLR by 200 basis points since last November when the Reserve Bank of India signaled a soft interest rate regime. In contrast, players such as Punjab National Bank have lowered their BPLR by 300 basis points.

SBI’s move comes within a fortnight Finance Minister Pranab Mukherjee asked public sector banks to lower interest rates. Other players such as Union Bank of India and United Bank of India have also announced rate cuts. United Bank also announced today that it would reduce the BPLR by 25 basis points to 12 per cent with effect from July 1.

By staggering the rate cut decision to the end of the first quarter of the current financial year, banks would be able to show a healthy net interest margin for April-June, an executive with a private bank said.

While SBI had lowered deposit rates on four occasions during the first quarter of the current financial year, it had not reduced the BPLR fearing an adverse impact on the net interest margin (NIM). The BPLR was last lowered in January and since then SBI had been lowering lending rates on certain products such as home and auto loans and loans to small and medium enterprises.

The public sector players is seeing rigidity in its cost of funds as it had mopped up retail deposits by offering rates of 10.5 per a year for 1,000 days. While it is unable to reset interest rates on these deposits up to October 2011, its earnings from advances would drop immediately after the rate cut. As a result, SBI’s NIM fell by 14 basis points to 2.93 per cent at the end of March 2009, as against 3.07 per cent a year ago. During the fourth quarter, NIM fell by 22 basis points as the bank had raised around Rs 1,000 crore a day through retail deposits in the third quarter and the early part of the fourth quarter.

But bank executives said that the impact of the BPLR reduction on NIM would be 5-6 basis points. “The effect on NIM is limited as the bank has aggressively reduced its deposit rates,” said a senior SBI executive.

Land, food bills to be placed in Budget session

Land, food bills to be placed in Budget session
The Financial Express, June 25, 2009, Page 1

Economy Bureau, New Delhi

With only a few days to go for the Budget session of the Lok Sabha to begin, parliamentary affairs minister Pawan Kumar Bansal is scheduled to meet top officials of government departments and ministries on Thursday to draw up a list of bills to be introduced in the session.

The government’s top priority in the session, however, will be to re-introduce the amendment bills to the Land Acquisition Act of 1894 and the Rehabilitation & Resettlement Bill, Bansal said on Wednesday, speaking at the Idea Exchange programme of the Indian Express group.

Bansal also indicated that the Congress party’s election promise of a National Food Security Act will find a place in the session, although a decision is yet to be taken on introducing key financial sector bills. “Our flagship programmes will be given top priority. Road connectivity and telephone connectivity in the rural areas across the country will be on the agenda and the food security bill will also be considered,” he said.

When asked about financial sector reforms, including the insurance laws amendment bill, Bansal said, “The decision is entirely vested with the finance ministry, but we wish to bring reform in the insurance sector and reduce foreign direct investment caps. The hike in voting rights in banks, which was not passed by the 14 th Lok Sabha, will also be considered,” the minister said.

The UPA has promised to carry forward its agenda of financial sector reforms in insurance, pensions and banking this term. While the Insurance Laws (Amendment) Bill to raise the FDI cap in the sector to 49% was introduced in the Rajya Sabha — making it non-lapsable —the other seven bills will have to be introduced afresh in the Lok Sabha.

Although the bills on land acquisition & resettlement were passed by the 14 th Lok Sabha, they were ‘obstructed’ in the Rajya Sabha and have lapsed. The Resettlement & Rehabilitation and Land Acquisition Amendment Bills, aimed at preventing large-scale displacement of people during land acquisitions for projects like special economic zones, allow states to acquire 30% of land for private developers only after the developers had acquired 70% directly from farmers.

OECD upgrades India growth to 5.9% for ’09

OECD upgrades India growth to 5.9% for ’09
The Financial Express, June 25, 2009, page 2

Press Trust of India

Paris, New Delhi: The OECD, a club of rich nations, on Wednesday raised India’s growth forecast to 5.9% for the current year and urged the new government to restore fiscal discipline and move ahead with disinvestment.

“With the gradual recovery of the global economy and easier financial conditions, growth is projected to gradually regain momentum,” said Organisation for Economic Cooperation and Development (OECD), a group of 30 developed nations.

The OECD, in March, projected 4.3% economic expansion for India in 2009. “In India, growth is predicted to slow to 5.9% in 2009 before accelerating to 7.2% in 2010 (March forecast was 4.3% and 5.8%),” the OECD said in its latest Economic Outlook report.

Pointing out that combined fiscal deficit of the Centre and state governments would go up to 11% of the GDP during 2009, the report said, adding, “The new government will face the need to restore fiscal discipline, speed up structural reform and increase sales of public sector assets.

“Any further easing in policy should be achieved through lower interest rates, rather than discretionary fiscal expansion.”

The report further said the extent of the deterioration in the fiscal position prior to the slowdown has reduced the scope for “discretionary fiscal policy action”.

The fiscal deficit of the central government, according to the interim budget data, went up to over 6 per cent during 2008-09 against the original estimate of 2.5%. Taking into account expenses on off-budget items like oil and fertiliser bonds, the total fiscal deficit on the centre has been estimated at around 8%.

The OECD’s forecast is much more optimistic than World Bank, which on Monday projected the Indian economy to expand just 5.1%. Prime Minister Manmohan Singh had recently said that he expects the country’s economy to grow by 7% in the current fiscal year (2009-10). Meanwhile, the Reserve Bank of India estimates the GDP to expand at a rate of 6% this fiscal year.

Demand in residential market to turn positive: Crisil

Demand in residential market to turn positive: Crisil
The Financial Express, June 25, 2009, Page 4

fe Bureau, Mumbai

A recent 10-city Crisil Research report on the real estate market indicates that demand in the residential market is expected to turn positive in 2010 owing to improvement in affordability, steady economic growth and greater liquidity. However a decline in the currently over-priced capital values of all the three real estate segments—residential, commercial and retail—will persist through 2009. Further the commercial and retail markets will continue to witness erosion in lease rentals through the next two years.

The report provides comprehensive information and analysis of more than 400 areas across 88 micro markets in 10 cities—Ahmedabad, Bengaluru, Chandigarh, Chennai, Hyderabad, Kochi, Kolkata, Mumbai-MMR, NCR and Pune.

Crisil Research head Sudhir Nair said, “Accelerated growth of Indian economy, recovery of global economy, improved liquidity and expected fall in interest rates are key factors that will signal demand revival in the residential segment. This segment is likely to see a much faster revival due to strong underlying demand for housing and supply coming at attractive price points.” He added demand in the commercial and retail segment is likely to remain under stress for the next two years owing to excess supply and weak off-take.

Further, the report indicates that capital values for residential sector and lease rentals for commercial and retail properties have substantially corrected till March 2009 due to a slowdown in both the domestic and global economies, and also due to real estate becoming unaffordable. Cities such as Kochi, Chandigarh and Pune, which have greater investor presence as against end-users, witnessed a greater fall in capital values compared to other cities.

The situation is expected to continue through 2009 and 2010, particularly so for the commercial and retail segments. However, the report said demand for houses will improve in 2010, backed by lower home loan interest rates as well as better job security owing to higher growth in the economy. Hence, capital values are likely to stabilise in the first half of 2010, and increase during the second half of the year.

Real estate stocks: Hardly affordable

Real estate stocks: Hardly affordable
Business Standard, Money & Markets, Section II, Page 1

Shobhana Subramanian / Mumbai

The reality on the ground doesn’t seem to be in keeping with the sharp run-up in stock prices.

Crisil says capital values for residential real estate could fall another 8-10 per cent in 2009 before stabilising next year. This is somewhat in contrast to what developers have been indicating about property prices. In a study on the real estate market, Crisil says that even investors, looking for capital appreciation, are likely to remain cautious until prices stabilise. Another key point that Crisil makes is that the so-called ‘affordable housing’ that developers are talking about are unlikely to get a strong response. That’s because many of these projects are coming up on the outskirts of cities, very distant from the business districts, and in locations where there are few amentities.

Affordable properties, it points out, are those that come up within city limits and are within the reach of 60 per cent of the population in that area, so that there is a meaningful demand. As for commercial property, Crisil expects lease rentals to fall even next year on the back of a 30-40 per cent fall from the peaks that they hit sometime in the first half of 2008. The news is not much better for the retail segment, where Crisil expects a 16-18 per cent fall in rentals this year and some fall next year too. IDFC SSKI points out that genuine buyers are returning to the market only in the residential segment.

Given this backdrop, the doubling of real estate stock prices in the past three months seems out of place. It is true that many property firms have been bailed out by banks with their loans having been restructured and a couple of them have managed to pick up equity money through placements.

However, at the end of the day, they need to be able to sell properties to generate cash flows. Of course, companies are attempting to stimulate demand by bringing down prices, but that means they need to sell larger volumes because the rate per sq ft is now down at least 30 per cent from peak levels. That doesn’t seem to be happening — even for bigger companies, the gap between the number of apartments sold and those actually delivered is large.

Also, while offering construction-linked payment plans as opposed to time-linked plans is fine, it only results in cash flows becoming back-ended.

Home prices to fall 10%: Study

Home prices to fall 10%: Study
Business Standard, June 25, 2009, page 4

BS Reporter / Mumbai

Home prices are likely to fall another 10 per cent in the second half of 2009, as demand remains subdued, says a research report from Crisil Research.

Faridabad in the NCR, Zirakpur and Derabassi in Mohali, High-Tech city in Hyderabad and Rajiv Gandhi Salai in Chennai may see a further drop due to oversupply of residential properties, the report says.

According to Crisil, home prices had fallen by 18 to 20 per cent in March 2009 from the highs seen in the first half of 2008, due to global slowdown, fears of job security and slowing growth in the domestic economy, the report said.

‘’However, despite this drop in capital values, home buyers have adopted a ‘wait and watch’ policy’,’’ the report added.

But property developers contested Crisil’s opinion, saying prices have already bottomed out. “We do not agree that prices will come down further. It becomes totally unviable to cut prices in the ongoing projects,’’ said Ravi Ramu, director, Puravankara Projects, a Bangalore-based developer.

Adds a Unitech spokesperson from Delhi: “Prices have bottomed out in most of the markets. We do not see prices going down further. We are getting enormous response in our recently launched projects, hence there is no need for further cuts,’’ the spokesperson said.

The report said cities such as Kochi, Chandigarh and Pune witnessed sharp decline in values and fall in transactions, as these cities had higher concentration of investors. Once values eroded, investors’ exodus started, it said.

Home prices had more than doubled in many cities such as Mumbai, Delhi and others in the past four years upto the first half of 2008, as incomes rose sharply, investors’ base expanded and credit flowed easily in property. But as growth slowed, demand for homes collapsed.

However, home prices are expected to stabilise in the first half of 2010 and go up marginally in the second half of the year, backed by lower home loan interest rates and better job security due to improvement in global and domestic economy, Crisil said.

“But prices will not increase the way they shot up in 2006 and 2007. Investors will not come back to the market unless they see prices going up in a sustained manner,’’ said Sudhir Nair, head of Crisil Research, in a teleconference today.

Oversupply
Though a total supply of 1,202 million sq ft of residential property is estimated during 2009-11, as against the demand of 506 million sq ft, Crisil expects all of that may not materialise. ‘’The planned supply is unlikely to materialise in full, due to the credit crunch and relatively sluggish demand; hence, a majority of these projects may get delayed by 1-2 years and a few projects that are still in the planning stage are likely to be shelved,’’ Crisil said.

Hence, Crisil said it expects actual supply of around 700 million sq ft, indicating oversupply of 28 per cent in the next three years.

Commercial spaces
According to Crisil, average lease rentals in the commercial spaces are expected to correct by about 38 per cent in 2009 from the peaks seen in the first six months of 2008, due to a weak demand from IT and ITeS firms and financial institutions. The areas catering to ITeS and banking, financial services and insurance, like Gurgaon in NCR, Central Mumbai and Hinjewadi in Pune, which saw a sharp drop in rentals between 2005 and 2008, are expected to see further decline of 47-59 per cent due to the slowdown in these sectors, the report said.

Crisil sees house market recovery in 2010

Crisil sees house market recovery in 2010
The Hindu Business Line, June 25, 2009, page 5

Our Bureau, Mumbai

Demand in the Indian residential market is expected to turn positive in 2010 due to improvement in affordability, steady economic growth and greater liquidity, says a Crisil research report on the real estate sector.

However, the decline in the currently overpriced capital values of all three real estate segments of residential, commercial and retail will persist through 2009. Commercial and retail markets will continue to see erosion of lease rentals in the next two years, it says.

The report is an analysis of over 400 areas across 88 micro-markets in Ahmedabad, Bangalore, Chandigarh, Chennai, Hyderabad, Kochi, Kolkata, Mumbai-MMR, National Capital Region and Pune.

Mr Sudhir Nair, Head, Crisil Research, said: “Accelerated growth of Indian economy, recovery of global economy, improved liquidity and expected fall in interest rates are key factors that will signal demand revival in the residential segment. This segment is likely to see a much faster revival due to a strong underlying demand for housing and supply coming at attractive price points.”

The demand in the commercial and retail segments is likely to remain under stress the next two years owing to excess supply and weak offtake, he added.

The report says capital values for residential sector and lease rentals for commercial and retail properties had substantially corrected till March due to a slowdown in both the domestic and global economies, and also due to real estate becoming unaffordable.

Kochi, Chandigarh and Pune, which have greater investor presence as against end-users, saw a greater fall in capital values compared to other cities. The situation is expected to continue through 2009 and 2010, particularly in the commercial and retail segments.

However, Crisil Research believes that demand for houses will improve in 2010, backed by lower home loan interest rates as well as better job security owing to higher growth in the economy.

Denotified SEZs to refund sops

Denotified SEZs to refund sops
The Economic Times, June 25, 2009, Page 9

Amiti Sen NEW DELHI

DEVELOPERS of denotified special economic zones (SEZs) will have to refund tax sops given by the government, according to new rules on the anvil, a government official said. The government has found it necessary to draw up rules for denotification of SEZs after some developers recently sought permission to close projects due to the economic slowdown and contraction in demand.

The new rules are likely to disallow denotification if a considerable amount of construction has happened in the zone or if units have come up there. Denotification would be voluntary.

A SEZ developer gets a number of tax sops, including exemption from customs duties and excise on goods used in the project and from payment of income tax. “All the sops enjoyed by the developer have to be necessarily paid back with interest before the denotification is allowed. This will be a prominent part of the rules,” the official said.

The rules will be kept flexible to deal with fresh issues raised by new cases, the official said, on the condition of anonymity. “Once the rules are framed by the government, they would act as a guide for the board of approval (BoA) for SEZs to deal with denotification applications. As and when the board feels the need, appropriate changes or additions could be made to the rules,” he added.

The BoA for SEZs, which is chaired by the commerce secretary and includes members from finance, revenue, home and agriculture departments, decides on all applications related to SEZs, including approval, notification as well as denotification.

There would also be no denotification if the developer does not want it. “There would be no coercion. If developers are law-abiding and have not broken any rules, then the government cannot denotify their zones,” the official added.
Earlier this month, real estate major DLF got inprincipal approval to denotify four of its IT/ITES SEZs. The government will formally denotify the zones once DLF pays back all the tax saved, pegged at Rs 6-7 crore, through exemption from customs, excise, service tax and income tax. The amount is being verified by the commerce department.

Raheja Universal has also applied for denotifying its IT/ITES SEZ in Navi Mumbai, and reducing by half the size of its second SEZ in the region.

“Once we have the denotification rules in place, it will be easier for the BoA to decide on cases of denotification as they will have set rules to follow. We would also be adhering to the law ministry’s view that if something can be legally notified, there should also be provisions for its denotification,” the official added.

As of March 31 2009, the government has formally approved 568 SEZs in the country, of which 311 have been notified and ready to start operations, with 90 already operative.

Commercial realty gets new lease of life

Commercial realty gets new lease of life
The Economic Times, June 25, 2009, Page 5

Ravi Teja Sharma NEW DELHI

AFTER months of inactivity, the commercial office space market is starting to stir. A number of larger leases are happening across the major cities. Last few months have seen demand for small office spaces in the 5,000-15,000 sqft range. But May onwards, lease deals of the larger kind have started to happen. In Gurgaon, new telecom player Telenor recently closed a deal for 50,000 sq ft on Golf Course Road. Samsung has signed up for 66,000 sq ft in Noida while KPMG has closed a deal for 100,000 sq ft in Mumbai’s Lower Parel area and Wipro has leased similar space in Powai. In Hyderabad, GE has closed a deal for 60,000 sq ft in Gachibowli. “A healthy commercial office sector is an indicator for jobs getting created which in-turn facilitates growth of other segments of real estate,” says Vivek Dahiya, CEO of property consultancy GenReal.

There are many other large companies like Reckitt Benckiser and HP which are in the market at the moment looking for large spaces to lease. In the south, First Source and Amazon.com have both leased 100,000 sq ft of space each on Chennai’s OMR. Barclays Shared Services has leased 100,000 sq ft in Chennai’s Guindy area. “The last 2 months have seen quite a bit of activity,” says Kaustuv Roy, executive director at Cushman & Wakefield.

Jones Lang LaSalle Meghraj (JLLM) has seen a lot of movement at the HCC 247 Park building in Mumbai’s Vikhroli. “We are about to lease close to 200,000 sq ft of space in the 1.8 million sq ft complex to one tenant,” says Sanjay Dutt, CEO Business at JLLM.

As sentiments have started to improve in the Indian market, companies are coming out of their shell. “Many Indian corporates have been struggling with high rentals. Now, they are securing real estate space at lower cost,” says Dutt, emphasising that JLLM has seen a surge in transactions in the first 6 months of this year having done 40 transactions, though at comparatively lower rentals.

Most of the deals that have happened in the last 1-2 months are of the relocation and consolidation variety, says Dahiya. But now deals for fresh expansion too are starting to emerge. “Companies seem to be leasing additional space for expansion, which is a positive trend,” says Roy. Dutt explains that the fall in demand since late last year and the consequent increase in supply had put pressure on rentals. But in many places, supply is still limited.

US home sales rise

US home sales rise
The Economic Times, June 25, 2009, Page 4

Reuters WASHINGTON

SALES of previously owned US homes rose for a second straight month in May but were weaker than expected, adding to growing fears of an anemic economic recovery from a deep recession.

The chief economist of the National Association of Realtors, which released the data on Tuesday, said sales in some areas appeared to be slowing and warned of the danger of a “delayed” housing market recovery. The Realtors’ group said sales climbed 2.4% last month to an annual rate of 4.77 million units. While that pace was below market forecasts it was the second straight month sales had risen, for the first back-to-back gain since September 2005.

Despite signs the market is stabilizing, the NAR said the median national home price fell 16.8% in May from a year earlier, the third-largest drop on record.

DLF, Unitech to restart Mumbai projects

DLF, Unitech to restart Mumbai projects
The Economic Times, June 25, 2009, Page 4

Sachin Dave MUMBAI

MUMBAI seems to be the next destination for India’s biggest realty companies, Unitech and DLF, to restart some of their projects which were put on the backburner. Both these companies have been in the midst of overcoming some serious liquidity problems that they were confronted with.

Unitech, which recently raised $325 million through the qualified institutional placement (QIP), has restarted three of its residential projects in Dadar and Chembur. For DLF, which had bought 17.5 acres from NTC in central Mumbai’s Lower Parel for Rs 702 crore in 2005, construction has commenced again. It was here where it initially planned a retail-cum-entertainment centre. Now, the plan is to have commercial establishments — largely offices — apart from the possibility of some residential apartments.

An official spokesperson for DLF said, “Yes, it is true that the work at NTC mill had stopped for some time, but that was because we had some FSI related formalities which are now in place.” Meanwhile, R Nagaraju, head, corporate planning, Unitech, said, “We have a number of slum redevelopment projects in Mumbai. We also have a focus on affordable housing and some projects will be announced by the end of 2009.”

Industry trackers point out that Unitech has commenced the pre-sale process for its three projects. The company also has land banks in other parts of central and western Mumbai like Lower Parel, Worli, Dadar, Ghatkopar and Malad. A company official said that the focus would now be on residential projects and prices would be lower than the prevailing market rates. It is learnt that Unitech is considering building a commercial project in Lower Parel where the asking price will be Rs 7,000 per square foot. This compares with the current price range of Rs 12,000 to Rs 18,000 per square foot.

Together, Unitech and DLF have a combined debt of over Rs 20,000 crore. While Unitech raised funds through the QIP route, DLF brought in $800 million through a share sale. Both companies have also been selling their land parcels and some property as well to raise liquidity.