Real Estate Intelligence Service, Monday, January 18, 2010

Economists want fiscal stimulus to stay

Economists want fiscal stimulus to stay
The Hindu Business Line, January 16, 2010, Page 17

Our Bureau, New Delhi

The Government must continue with the fiscal stimulus for another year. This was suggested by top notch economists at a pre-Budget meeting with the Union Finance Minister, Mr Pranab Mukherjee, here today.

“We said that it is not yet time to withdraw stimulus,” Mr Nitin Desai, a former Chief Economic Advisor in the Finance Ministry, told reporters after the meeting. Most economists felt that time is not ripe for withdrawal of the stimulus.

“My suggestion was that stimulus should continue. It would be better to broaden the tax base rather than increase rates,” Dr M Govinda Rao, Director, NIPFP, said. He said the Centre should look at merging the Cenvat and service tax to say 9 per cent level in the upcoming Budget.

Other issues

The other issues that came up for discussion included the trade-off between growth and inflation, need to check unbridled capital flows and fiscal consolidation. On capital flows, the views were mixed, with some making a case for a tobin tax and many opposed to any form of tariffs at this juncture.

“Some felt that the US carry trade could play havoc on developing countries like India and advised caution. My view was that Indian capital account has been too open. Unbridled capital flows should be checked. But I am opposed to tobin tax. One has to take a call on capital inflows from a long-term perspective,” Dr Partha Sen from Delhi School of Economics, said.

Economists want stimulus to continue

Economists want stimulus to continue
Business Standard, January 16, 2010, Page 5

BS Reporter / New Delhi

Economists on Friday said stimulus should continue until the economy had firmly recovered. In a pre-Budget meeting with Finance Minister Pranab Mukherjee, economists said stimulus was required, but at the same time the government should not drift away from the path of fiscal consolidation.

“The general feeling of economists is that it is not the time to withdraw the stimulus,” former chief economic advisor Nitin Desai told reporters after meeting the finance minister.

Govinda Rao, director of National Institute of Public Finance and Policy and member of Prime Minister’s Economic Advisory Council, said the government may have to continue stimulus while at the same time it should control the fiscal deficit by taxing services.

Fiscal deficit is expected to widen to 6.8 per cent this financial year. The government is targeting a fiscal deficit of 5.5 per cent of GDP in 2010-11 and 4 per cent in 2011-12. FRBM Act required the government to bring down the fiscal deficit to 2.5 per cent of GDP by 2008-09.

Rao said the government would be able to bring down fiscal deficit to 5.5 per cent of GDP without any difficulty next year as arrears on account of Sixth Pay Commission report would not be there and the outgo on account of farm loan waiver would be less.
Asked whether there is a room for hike in excise duty, Rao said any change in excise duty should bring the rate on par with that of service tax. He said service tax should be brought down from 10 to 9 per cent and the excise duty be increased to 9 per cent from 8 per cent.

Partha Sen of the Delhi University’s School of Economics said the stimulus measures should not be withdrawn hastily as India was still not out of the woods.

The government gave 6 per cent reduction in excise duty and 2 per cent cut in service tax to help the industry deal with the slowdown. The measures have helped the economy grow by 7.9 per cent in July-September quarter this financial year.

Industry chambers have already urged the government not to withdraw the stimulus for next six months.

Stimulus helped industry add capacity worth $30bn

Stimulus helped industry add capacity worth $30bn
Times of India, January 17, 2010, Page 21

TIMES NEWS NETWORK

New Delhi: The fiscal stimulus seems to have worked wonders for the industry which has added an additional capacity worth $30 billion in 2008-09 by importing capital goods taking advantage of the zero per cent import duty.

A Federation of Indian Chamber of Commerce and Industry (FICCI) survey reveals that capital goods imports increased five times to $30 billion in 2008-09 as compared to $6.5 billion in 2003-04; provoking, in fact, complaints from the domestic manufacturers against cheaper imports putting them at a disadvantage of at least 10%-20 %.

Their loss has meant gain for China which overtook Germany as the largest exporter of capital goods. Till 2006-07, Germany had the largest share in Indias total imports of capital goods. It was disloged by China in 2008-09 which accounted for 23% of the imports. Germanys share fell to 16%.

The worst affected domestic industries include manufacturers of construction equipment, machine tools, turbines and transformers. Taking up cudgels for them, the industry body FICCI wants the government to reverse the fiscal stimuli by proposing preference policy, correction in inverted duty structure and capital goods parks.

These imports are now hurting the domestic industry and have captured a significant market share in the country, the study notes. The construction equipment imports account for 112% of domestic production; imports of transformers are 50% of domestic output while that of turbines constitute 70%. Imports of generators and machine tools are 330% of domestic production.

The study says zero duty imports have resulted in various projects in power, oil and gas, fertilizer, mining on their increased dependence on imports while restraining the growth of domestic industry.

Arguing in favour of a more level-playing field for the domestic industry, the report says the cost disadvantage of domestic industry visa-vis foreign suppliers comes in the range of 11% to 22%.

While the imported capital goods face no custom duty, CVD (countervailing duty), SAD (special additional duty) or any other local tax for supply to mega power plants and other projects, the domestic industry has to bear all of them, added with higher cost of financing and infrastructure deficiencies which makes them uncompetitive, the study noted.

Commercial realty back in business in Mumbai

Commercial realty back in business in Mumbai
The Hindu Business Line, January 17, 2010, Page 13

Developers are going the extra mile to showcase their projects.

S. Shanker

Commercial real estate may not have got over the slowdown blues, but it has not stopped developers from showcasing innovative designs to draw their clientele.

Kanakia Spaces, which has just about completed its 1.2 million sq.ft project costing Rs 380 crore in Andheri, Mumbai, claims to have the largest single floor plate of 1.60 lakh sq.ft (0.7 km long; and more than 3.5 acres) in the country.

The eight-floor complex shaped like a boomerang on about 10 acres also boasts of a 3,500 sq.ft vertical garden at its 40 ft tall entrance lobby. A 1,000 sq.m pond is being created close to the gate to match the lush walled green inside.

Of a total plot area of 32,481 sq.m, the garden area (outside) is 4,693 sq.m along with a paved spread of 6,620 sq.m. The building expanse covers 5,231 sq.m. Two floors of basement parking are for 1,200 cars.

“We are planning to get golf-carts to ferry people inside the campus, said Mr Vishal Doshi, AGM, Marketing and Business Development. Kanakia has sold close to 40 per cent of office space at around Rs 10,000 a sq.ft. The company also offers space on lease at Rs 100 a sq.ft.

VERTICAL GARDEN

The vertical garden looks ‘pinned up' displaying 12,320 exotic plants with a drip irrigation system to water the plants twice a week. The commercial space comes with a bundle of add-ons such as a 616 sq.m club house, gymnasium and cafeteria, exclusively for the inmates.

DEMAND UP

“It is after a long gap that we see demand picking up in office spaces in various locations, thanks to the rapid infrastructure development happening in Mumbai, such as the Bandra-Worli sealink. We are experiencing good demand for small business spaces from the banking, financial services and insurance companies as well as shipping and logistic units, said Mr Mayur Shah, Managing Director, Marathon Group.

With the economy looking up and encouraging financial performance across sectors in the third quarter, the demand for office space is expected to increase in a big way. Upcoming development such as the Metro and Mono rail is expected to further boost commercial spaces demand.

Among various locations, Lower Parel is fast emerging as a hot destination for commercial spaces. BFSI companies are looking for great ambience, hospitality, facility of best restaurants, safety and security measures and unique designs, while buying spaces in Lower Parel, he felt.

Mr Abhishek Kiran Gupta, Head-Research, Jones Lang LaSalle Meghraj, said Mumbai saw the completion of about nine million sq.ft every year in 2008 and 2009, whereas the average annual absorption was six million sq.ft for the two years.

The overall vacancy level across Mumbai is about 14 per cent. Prices, both in the city and micro-markets, had corrected 35-50 per cent in 2008-09.

To keep real estate costs down tenants had moved from the central business district (CBD) to secondary business districts (SBDs) such as Andheri and suburbs such as Malad, Powai, Thane and Navi Mumbai.

Standard Chartered, UBS, Ernst & Young and JP Morgan are among those who chose to shift from Nariman Point (CBD), he said.

Financial centre

A Religare report said BKC had gradually transformed itself from a secondary district to the city's second business district (after Nariman Point) and is set to become India's international financial centre.

BKC's G block, housing leading banks and financial institutions, had secured the Maharashtra Government's nod to increase its floor space index (FSI) from two to four.

However, development in the block was likely to be spaced out due to the high realty prices stemming from the strong, continued demand and improving connectivity to the centrally located business hub.

Malaysia as a second home, anyone?

Malaysia as a second home, anyone?
The Hindu Business Line, January 17, 2010, Page 13

The number of foreign buyers has quadrupled since 2004.

Malaysia is a “hidden real estate paradise” with affordable commercial space and choice of a home-away-from-home, says Mr Kumar Tharmalingam, Member, Board of Governors, Malaysia Property Incorporated.

Mr Tharmalingam is in India promoting Malaysia as an option for those looking at investing in real estate overseas. Whether it is a company expanding its operations or someone on the lookout for quality living space Malaysia can cater to their needs, he says.

Selling in India

Malaysia has so far promoted real estate investments opportunities in markets in South East Asia, Australia, the UK and the Middle East and is now promoting itself in India. Increasingly Indian companies are looking at Malaysia — costs are growing for them in Singapore and other South East Asian countries — for its lower land cost, he says.

MPI, a Malaysian Government initiative, is organising a property expo in Chennai from January 22 to 24 featuring ‘the best of Malaysian Real Estate' which coincides with the CII's partnership summit 2010.

Real estate business contributes to about a third of Malaysia's GDP. In 2008 it accounted for about RM 1 billion in revenue, about 10 per cent more than it contributed in the previous year. Persons of Indian origin contribute a significant portion , says Mr Tharmalingam whose family migrated from India to Malaysia four generations back. Indians are also among the leading property investors in Malaysia after Singapore, the UK and Korea.

Malaysian real estate has weathered the downturn of 2008 better than most other countries in the South East and market sentiments have been on the upswing from the end of 2009. This year “a flurry of launches” is anticipated for both commercial and residential space in major cities such as KL, Penang, Johor and Kota Kinabalu which is a reflection of the market demand. Depending on the location, properties in Kuala Lumpur, Penang and Johor could range from $150,000 to $300,000.

Govt policy

Foreign investments in Malaysian real estate are driven by the Government policy. Foreigners can own freehold property in Malaysia unlike elsewhere in the South East; and property values are among the lowest in the region with capital appreciation at 5-6 per cent, a reason why the downturn in 2008 was not a major shock to investors in Malaysian real-estate. Malaysia-My-Second-Home encourages overseas pensioners and expatriates who have worked in Malaysia to buy property. They can stretch there pension funds more in Malaysia, he says.

Most important, the Torrens land law system is transparent and title disputes are avoided. “If your name is on the title you are the owner,” says Mr Tharmalingam. The number of transactions by foreign buyers has increased four-fold to more than 5,000 in 2008 from 1,275 in 2004. . These do not include those of foreign companies that set up shop in Malaysia. Typically, companies first lease property and after consolidation begin to own property.

Over 120,000 residential units are built every year in Malaysia and 90 per cent of them are sold leaving a small surplus. Home loan rates are around 7 per cent with a buyers' margin around 15 per cent. Commercial property supply matches demand with 1.8-2 million sq.ft built every year, he said.

OUR CHENNAI BUREAU

Finmin may not tinker with corp tax rate

Finmin may not tinker with corp tax rate
The Economic Times, January 18, 2010, Page 9

Deepshikha Sikarwar, ET Bureau

NEW DELHI: The finance ministry is likely to keep the corporate tax rate unchanged at 30%, as it faces stiff resistance from companies to the draft direct tax code's proposal to cut the rate to 25% and remove all exemptions.

"Corporates are resisting the phasing out of exemptions even with a lower tax rate," said a senior government official.

The industry prefers the current system where the effective corporate tax rate is only about 20% due to various exemptions, he said requesting anonymity.

The Central Board of Direct Taxes, the key government body that formulates and administers tax policy, is not willing to cut rates, as any reduction in statutory rate will further reduce the effective rate and dent the government's revenues.

The government is already struggling with a 16-year high fiscal deficit, equivalent to 6.8% of the gross domestic product for the 2009-10 fiscal year.

The finance ministry is also likely to retain the tax exemption given to retirement savings at the time of withdrawal in the draft direct taxes legislation.

The tax code has also suggested and exempt-exempt-tax (EET) taxation regime for existing schemes such as provident fund. Under an EET arrangement, investments in savings schemes and the returns earned on them are exempt from tax, but the entire corpus is subject to tax at the time of withdrawal. The proposal has received flak from financial experts.

The government seems to be in favour of continuing the existing regime that is a mix of EEE (exempt-exempt-exempt ), EET and ETE (exempt-tax- exempt).

The draft direct taxes code, unveiled in August 2009, seeks to replace the decades old Income Tax Act, 1961. The code is proposed to come into effect from April 1, next year.

These changes along with a proposal to levy a minimum alternate tax (MAT) on gross assets figured in the discussions at a meeting between Prime Minister Manmohan Singh and finance minister Pranab Mukherjee, said the official quoted earlier.

The review exercise is now aimed at bringing a new law that will further the objective of reform , yet be acceptable to 'aam aadmi'. The official said the key policymakers are keen to continue with the proposed MAT on gross assets. But the definition of gross assets could be changed to give some relief to asset heavy infrastructure companies.

The draft code has proposed a levy of 2.0% MAT on the value of gross assets of all non-banking companies and 0.25% on banking companies.

The value of gross assets is the aggregate value of fixed assets of a company, capital works in progress and the book value of other assets, after taking out the accumulated depreciation on fixed assets and the debit balance of the profit and loss account, if included in the book value.

The finance ministry is looking to keep capital works in progress out of this definition to give relief to infrastructure companies.

"The industry's reservations on asset-based MAT is on the very principle of it and hence does not get adequately addressed by exempting elements like work-in-progress . While the infrastructure sector, with its long gestation periods, will get relief for the initial period, what constitutes work-in-progress will become a bone of contention with the revenue authorities. I still believe that the MAT provisions existing in the current Act should be continued with minor tweaks, if necessary" said Amitabh Singh, partner, Ernst &Young.

Indian infra cos are ahead of China's in returns race: Nomura MD

Indian infra cos are ahead of China's in returns race: Nomura MD
The Economic Times, January 18, 2010, Page 14

Deeptha Rajkumar, ET Bureau

He feels bank and real estate stocks in India could suffer if inflation continues to rise at the current rate. Meet Paul Schulte, managing director & head of multi-strategy research, Asia (ex-Japan) at Nomura, who believes Indian shares have had a great run, but are expensive at these levels. In an e-mail interview with Deeptha Rajkumar, he talks of his outlook for Asian markets, and how there is a stronger case for emerging market equities than developed market equities.

Going forward, what is your outlook on Asian equities, emerging markets in particular?

The outlook remains very bright. Leverage levels in Asia are among the lowest in the world. Banks are flush with cash. Loan-to-deposit ratios are low. Government budgets are under control. Contrast with the West where we should see significant increases in tax rates over the coming years. The problem in Asia is inflation.

How do you view the liquidity scenario near term? Are people still chasing assets in emerging markets or are valuations likely to temper the mood?

Many western governments will be very busy trying to get out-of-control-budgets back in line. This will involve tax increases and budget cuts. They will do this to avoid being downgraded by ratings agencies, whose credibility is in tatters anyway. But markets must obey the ratings agencies, because the Basel II Accords unfortunately organise themselves around these organisations. So, central banks will be forced to leave ‘policy-loose’ to counter tightening fiscal policy. If central banks raise rates while governments are tightening at the same time, we will have a policy disaster on our hands. But I think, this has a small chance of happening.

Do you see a bubble formation in emerging markets due to access to cheap money and how is this likely to impact other markets?

The liquidity in bubbly markets like China has nothing to do with large increases in lending. It has everything to do with an undervalued currency. China may be doing itself a large disservice in the longer run by leaving the currency undervalued, because this forces central bank intervention and causes a surge in liquidity.

If you were to pick an asset class or market for this calendar?

We are looking at China and India and see a very important development. Indian infrastructure companies (hard infrastructure) are beating Chinese firms in terms of returns on equity. Companies like Reliance and GAIL are interesting. But financials and other services in China are beating Indian players in terms of RoE. This is the soft infrastructure. So, we would prefer stocks in China like CITIC Bank and CITIC Securities.

Will this be another weak year for the dollar? What does it mean in terms of fund flows or fund interest to a market like India?

Japan has done an about face in mid-December and has made a loud and unequivocal commitment to inflation targeting. A strong yen is a classic signal of deflation. The yen should continue on a weaker trajectory for 2010, offering a reprieve to the dollar. But the problems with Greece and Ireland remain an albatross for the euro in the long term.

Do you believe that there is still a leg of momentum left in global markets? And when that occurs, will it drive high beta sectors even higher?

The high beta rally may be waning. As inflation moves up, stocks like property counters and banks may suffer, especially in India. We would switch from Indian banks to Chinese banks now.

What is your outlook for the Indian market? The market had witnessed $17 billion of FII flows in 2009, do you foresee the same amount of appetite this year?

The Indian market is a bit expensive. It has had a great run. Indian banks have outperformed their Chinese counterparts over the past few months by a wide margin. It is the number one “inflation problem” country in the region in 2010. We believe the Reserve Bank of India (RBI) could tighten more aggressively than many think. It is already tightening by letting the currency strengthen.

What are the instruments drawing money this year? Last year, it was all about exchange-traded funds (ETFs).

Investors are focusing on Japanese financials and other Japanese equities, because no one owns them anymore. Investors threw in the towel on Japan. So, Japan is now draining money from Asia for the first time in years. Soft commodities like food are also getting the limelight. Look at India last week. It became the largest importer of palm oil.

UBS to focus on India business

UBS to focus on India business
The Economic Times, January 18, 2010, Page 15

George Smith, ET Bureau

UBS started its banking operations in India last year at the height of the global crisis. ET’s George Smith Alexander met Alexander Wilmot-Sitwell, CEO of UBS Investment Bank and chairman & CEO, UBS Group EMEA. Mr Wilmot-Sitwell says, that after China, India is the new focus area for the group and the bank will be increasing its present headcount of 150 here by another 40-50% in the next 12 to 18 months. Excerpts:

What are the plans for UBS on the business front and hiring in India?

For us, India is a strategic priority for continued investment and growth. We have a full banking licence and need to build our business around that. We will focus on high networth private markets with our wealth management platform and corporate institutional franchise in the securities and investment banking platform. We will grow our headcount by 40-50% in the next 12-18 months. The new hires will be in fixed income and equities and in other areas like foreign exchange and debt capital market. We are also building our operations, technology, back office and will be hiring in these divisions too.

How do you see Swiss banks looking at changing regulations, specially on higher disclosure?

I don’t think Swiss banks will be regulated fundamentally differently from other international banks. The Swiss regulator is likely to adopt the same types of requirements and regulations that will be adopted around the world. I hope that the regulatory landscape will be a much more consistent one. The difficulty and challenge that we have at the moment is the very uneven playing field between the different interpretations and engagements with regulation in different jurisdictions. I think it will be a lot better for the banking industry as a whole for a much more consistent approach taken by different regulators around the world so that the levels of disclosure, capital and transparency of regulation and of operation are consistent right across the world.

The Swiss banking regulator had said last year that large banks like UBS and Credit Suisse should be broken up. Your comments.

I don’t think that’s a sensible approach because I think the global economy needs to be serviced by banks that are able to operate on a global basis and with sufficient scale to have an impact. I think to fragment the banking industry will be a reversal of the globalisation trend and will result in banks of insufficient scale, knowledge and international capability to be able to service the needs of global industry. If banks were forced to break up, become smaller and less international, I don’t think that will be in the best interest of the global economy.

How is UBS taking advantage of the Chinese growth?

In China, we participated and put together a joint venture company with the Beijing Municipal Authority and that company trades under the name of UBS Securities. It gives us a licence to trade securities in the domestic market. We also have asset management, wealth management and an investment banking presence. Over the past three years, we have been the most successful international firm in China. To some extent, we probably focused more resources earlier over a long period of time on China within the Asia region and increasingly we are now turning our focus of growth to India, as it is the next area where we see growth opportunities for us.

How do you see regulations changing globally for banks and their impact?

We are beginning to see the impact of some of the new rules being drafted and applied. There is no doubt that banks will have to carry more capital and are going to be more regulated and more closely scrutinised than they have been in the past several years. The impact of regulatory supervision is probably going to be greater than many people have factored in. Whether it’s leverage ratios, capital ratios or liquidity — these are all measures that we are going to see fundamental changes in the way that banks are supervised. There are a lot of people who will suggest that banks are going to be significantly less profitable in the future, as they will have leverage ratios applied to them and as such they will not be able to drive the same returns on capital as we have seen in the past.

How much does Asia contribute to UBS revenues now? Will this proportion increase over the next 4-5 years?

Asia brings in 20% of our revenues. We have very explicity targeted Asia as a region where we are stronger and have above-average growth over the medium term. Therefore, we will continue to invest in the Asia region and grow at a fast rate than the other regions.

DLF to exit Prudential JV

DLF to exit Prudential JV
The Economic Times, January 18, 2010, Page 17

May Sell Its 39% Stake in DLF Pramerica To Prudential Financial

Dheeraj Tiwari NEW DELHI

INDIA’S largest realty firm is selling its entire stake in DLF Pramerica to overseas partner Prudential Financial, thus exiting the mutual funds altogether to focus on its core business.

Prudential Financial (PFI) is expected to buy DLF’s entire 39% stake in the asset management company that is yet to start operations. The move is in line with DLF’s decision to focus on its core assets and move out of its non-core business, a person close to the matter told ET.

Both DLF and PFI refused to comment on the development.

The PFI Group is likely to buy out DLF’s existing stake at par value to take full control of the asset management company. It is difficult to put a value to the transaction as the equity structure of the AMC is not known.

In 2008, the stock market regulator Securities and Exchange Board of India (Sebi) had granted ‘in-principle approval’ to PFI, to set up an asset management company.

Both the companies had indicated to invest $45 million over the next few years, and provide investment management operations for both retail and institutional clients.

The real estate major is looking at all avenues to reduce its debt, which at present is more than around Rs 12,000 crore.

DLF in the last one year has been exiting from all its non-core businesses. The company has already sold assets worth Rs 1,200 crore, including its stake in the joint venture with Ackruti City.

It is also said to be looking to exit from its international luxury hotel chain Aman resorts and its wind energy business. It is expected to raise around Rs 6,000 crore from sale of these assets and other non-core businesses.

However, an official from the Pramerica, the brand name used in India by Prudential Financial, told ET that DLF was exiting from the venture because of the new proposed regulatory changes under the new Sebi Mutual Fund Regulations.

“In the current structure, PFI is the sole sponsor and DLF is the finance partner. Under the new guidelines, DLF would require to apply for approval as sponsor, for which it is not eligible,” the official said requesting anonymity. As per the new mutual fund guidelines, any company that does not have a five year track record in financial services is not eligible to apply to Sebi as a sponsor for a mutual fund. However, the life insurance joint venture of the two groups, DLF Pramerica Life Insurance, will continue to operate as per plans. DLF holds 74% stake in the life insurance venture.