Thursday, October 29, 2009

City growth:When big is not beautiful

City growth:When big is not beautiful
The Economic Times, October 29, 2009, Page 13

INCREASING CITY SIZE COMES WITH ITS PITFALLS — HIGH COST OF LIVING, CRIME, POLLUTION & CONGESTION

KALA SEETHARAM SRIDHAR

INDIA has 35 cities with million-plus population, with Mumbai leading the pack with a population of about 17 million. The question arises —can individual cities grow forever and whether there is an optimum city size? This is an important question as development plans of cities frequently follow the direction of development rather than guiding them. Is the current size of cities justifiable in terms of greater efficiencies in the production of goods, services and amenities offered to their residents? General equilibrium models of city growth refer to the drawbacks of increasing city size — high cost of living, crime, pollution and congestion costs. For example, in Bangalore, the one-way commute time to work increased from about 24 minutes in 1991 to 40 minutes in 2001. Thus, city population can grow, but the city may or may not grow economically. This happens as a city will experience congestion and decline in its economic output if its population grows beyond a certain limit.

One manifestation of excessive city growth is the suburbanisation and urban sprawl we see in India’s cities. With decentralisation of population and jobs from the dense core of cities to less densely developed suburbs, monocentric cities have evolved into polycentric cities. While such decentralisation is caused by rising incomes, rising land costs at the city centre and problems with the central city (high taxes, poor public services, high crime rates), recent research also attributes urban sprawl to strong land use controls in India’s cities. A research shows that the maximum floor area ratio (FAR) — which refers to the ratio of built area to plot area — permissible in India’s cities is not even five whereas cities across the world have FARs ranging from well above 10. A higher FAR implies vertical city growth. Vertical city growth is more efficient if the infrastructure necessary to support it is in place — it would be poor public economics not to use fully-serviced plots of land with water and sewer networks, roads in the centre of the city. Low FARs lead to inefficient cities.

Efficiency of cities is partly determined by the mobility and access needs of the population as it has a direct relationship with the city’s economic activity such as commute to school, jobs and shopping trips. While Indian cities’ decentralisation has been caused by rising incomes and the use of the automobile, one direct outcome of the urban sprawl has been that Indian cities have become automobileoriented with little space for pedestrians and cyclists. For instance, Indians bought 1.5 million cars in 2007, more than double than that in 2003.

Delhi, Mumbai, Kolkata and Bangalore have 5% of India’s population but 14% of its registered vehicles. Pedestrians and cyclists account for a substantial part of urban population. In Delhi, pedestrians and cyclists account for around 55% of the population. Pedestrian accessibility in Indian cities is poor – there are no sidewalks, and where they exist, they are taken over by parked vehicles, uncollected garbage, or encroachment by local businesses.

Rightly, a recent research points out that policymaking related to urban transport has focused predominantly on road infrastructure development such as the construction of flyovers. However, given the fact that pedestrians and cyclists are the most vulnerable road users, budgets for the provision of infrastructure for them have been minuscule. This is not consistent with their number. A 3.5 metre lane has a carrying capacity of 1,800 cars per hour while it can carry 5,400 bicycles per hour. Providing segregated infrastructure for pedestrians and cyclists would not cost much, but would greatly improve the efficiency of cities by facilitating the mobility of masses.

The above does not imply that we do not need highways or expressways of international standards. We need them for long distances and for facilitating movement of public transport that is affordable, convenient and safe to use. Highways are efficient if they are used for high occupancy vehicles such as public transport as compared to cars.

What the above implies is that decentralisation and sprawl have occurred in India’s cities, with economic growth, rising incomes, rising land costs, and land use regulation playing a role. With rising incomes, the sprawl has also brought about increased usage of cars with poor access for pedestrians and cyclists. We have to consciously decide what kind of cities we want. Only innovative city planning and better infrastructure to support them, better space and planning for pedestrians, cyclists and public transport will ensure that we have efficient and equitable cities whose costs do not outweigh their benefits.

(The author is senior research fellow, Public Affairs Centre. Views are personal)

India moves up, turns world’s third-largest steel producer

India moves up, turns world’s third-largest steel producer
Hindustan Times, October 29, 2009, Page 25

The country has consolidated its position as the third-largest steelmaker in the world behind Asian rivals China and Japan, jumping three spots in the pecking order for steel producers in the first nine months of this year.

With the global downturn still impacting the steel industry worldwide, United States and Germany are the two biggest victims of the downturn, with the former slipping two positions.

China and India were the only two countries to report growth in the sector this year so far. All others — including developing countries like Brazil and Ukraine — have declined in high double digits. The extent of the downturn is such that of the 66 countries that together make up for over 98 per cent of world's steel production and consumption, only 8 have been able to grow.

"It shows the strength of the economy that we are now the third largest steelmaker in the world even as most other countries are still fighting the downturn," said steel minister Virbhadra Singh. "Our per capita consumption of steel is still very low and vast chunks of rural market is still untapped. It is my endeavour to increase the penetration of steel in rural markets and have urged the private sector to open up more steel processing units in those areas."

Further, this may not be the end of the Indian fairytale as industry experts are of the opinion that India would overtake Japan eventually.

"There are clear indications that China and India are the countries that have come out of the recession the fastest and there is an uptake in demand in construction related industries and automobiles in India," said Bishwanath Bhattacharya, Associate Director (KPMG Advisory). "Though Japan is still ahead of India, there is no disputing the fact that it is not likely to grow much further while India is definitely on an upward trajectory. In around 6-7 years time India would be only behind China."

Realty back in reckoning as FIIs cut blue-chip stake

Realty back in reckoning as FIIs cut blue-chip stake
The Economic Times, October 29, 2009, Page 15

Attractive Valuations A Big Pull Factor; Agrochem, Breweries & Mining Also Shine

Vijay Gurav MUMBAI

DLF, Unitech and HDIL are the latest darlings of foreign funds expecting a quick buck, even as they slash holdings in companies such as Infosys Technologies and infrastructure builders due to concerns about order flows and high valuations, a study of latest filings shows.

The sudden fancy for real estate among those overseas funds were probably due to the surge in fund raisings by those debt-ridden companies in the recent bull run when most of them sold shares at less than a third of their peak 2007-08 valuations which overseas investors found attractive. “With interest rates expected to remain benign and stable, some dedicated funds might have bought on hopes of a significant upswing in high-beta sectors like realty,” said Tata Asset Management CEO Ved Prakash Chaturvedi. High beta stocks are those which rise or fall more than the benchmark indexes.

As of September 30, 2009, FIIs owned 25% of the aggregate equity capital of 36 realty companies, including industry leaders like DLF, Unitech, Indiabulls Real Estate and HDIL. That is higher than the previous year’s 9.6% and the year before’s 10.3%. Indian companies, including Unitech and DLF, have so far raised $12.3 billion through share sale this year and another $17.4 billion may be raised by fiscal year-end exploiting a record stock market rally which saw the benchmark indices more than double from their troughs earlier this year.

It was not just one sector that foreign funds who have invested $14.4 billion in the current calendar year so far have favoured, but also raised stakes in sectors such as agrochemical, a key beneficiary in an agrarian economy like India, breweries which benefit from rising incomes in urban centres, and mining. Last year they pulled out $12 billion.

Overseas funds own 25.6%, 18.6% and 17.9%, respectively, in agrochemical, breweries and mining sectors. Companies such as United Phosphorus, United Spirits, Gujarat NRE Coke and Sesa Goa have large foreign holdings.

But the once that were favoured in the last bull rally — technology, capital goods, cement and retail — aren’t lucky this time. Combined FII holdings in all the listed IT companies fell to 12.1% as on September 30, 2009, compared to 15.6% as on September 30, 2008. Their exposure in capital good sector fell to 9.9% from 12.1% and to 15.1% from 18.5% in retail space. “FIIs have been underweight on IT companies due to outsourcing concerns,” said Centrum Broking MD Devesh Kumar. “Cement companies are adding new capacities and investors would wait for demand to pick up, which would also depend on the pace of infrastructure development in the country.”

International companies stung by the economic slowdown have been cutting their spend on technology which the Indian companies depend upon. SAP, Europe’s biggest business software producer, on Wednesday cut revenue forecast for the year as companies held on to purse strings.

Indian infrastructure companies are also showing delays in executing orders and their valuations at more than 25 times in some cases such as Larsen & Toubro, seem to have run ahead of themselves.

Commercial real estate loans may cost more

Commercial real estate loans may cost more
The Hindu Business Line, October 29, 2009, Page 7

Provisioning norms for advances raised to prevent NPAs.

Our Bureau, Mumbai

Interest rates on loans to commercial real estate sector may move up with the Reserve Bank of India increasing the provisioning requirement for advances to this sector from the present level of 0.4 per cent to 1 per cent.

The RBI has expressed concern that loans to commercial real estate sector have the potential to become NPAs as this sector has witnessed large-scale restructuring of advances.

In its Second Quarter Review of Monetary Policy 2009-10, the central bank said, “In view of the large increase in credit to the commercial real estate sector over the last one year and the extent of restructured advances in this sector, it would be prudent to build cushion against likely non-performing assets (NPAs).”

In his address, the RBI Governor, Dr D. Subbarao, said while at an aggregate level, the amount of non-food bank credit going to the commercial real estate is small, at about 3.7 per cent, the rate of credit growth has been accelerating.

Second, the restructuring proportion of bank loans to this sector is 14 per cent, against 4 per cent at an aggregate level. These were the reasons that prompted the RBI to increase the provisioning requirement.

Asked about the impact of this move on lending by banks to this sector, Dr Subbarao said: “I am sure that banks are going to make judgements in their best interests. This (increasing the provisioning) will certainly make banks to look at or revisit their lending to the real estate sector. It will also drive the necessary correction in prices.” When asked if banks will pass on the increase in provisioning to their customers, the Chairman and Managing Director, Canara Bank, Mr A .C. Mahajan, said that when pricing products, banks do not pass all the expenditure incurred. The loan is related to the benchmark prime lending rate and the move will not have much impact.

The State Bank of India Chairman, Mr O. P. Bhatt, said that the move could push up the rates on loans to the commercial real estate sector by 2-3 basis points.

However, according to the Bank of Baroda Chairman and Managing Director, Mr M. D. Mallya, the 0.6 per cent increase in standard provisioning does not amount to much and is unlikely to have an impact on interest rates. In the case of Bank of Baroda, the total exposure to commercial real estate is around Rs 4,000 crore, he added.

By restoring the provisioning for commercial real estate to old levels, the RBI is indicating that it is happy with the recovery. But the step will make banks more cautious while lending to realty sector, said the UCO Bank Chairman and Managing Director, Mr S. K. Goel,

No asset bubble issue

The ICICI Bank Managing Director and CEO, Ms Chanda Kochhar, said it is not an issue of asset bubble.

“In between, there was not much credit flow to the commercial real estate sector. So the relaxation in the provisioning norms was to increase the flow of credit to the sector. Now that there is sufficient credit flow to the sector and activity has picked up , the standard asset provisioning has been restored,” she said.

Puravankara Projects net up at Rs 60 cr

Puravankara Projects net up at Rs 60 cr
The Hindu Business Line, October 29, 2009, Page 17

Our Bureau, Bangalore

Puravankara Projects has posted a net profit to Rs 60.86 crore during the second quarter of the fiscal, against Rs 50.47 crore recorded during the corresponding period last year.

The company attributed the improved performance to the good response to projects launched by subsidiary Provident Housing, sale of land and available flats.

Revenues increased 62 per cent to Rs 226.39 crore (Rs 139.37 crore).

During the quarter, the company sold about eight acres in Kochi for about Rs 145 crore, “as this land was not intended to be developed in the near term,” said Mr Ravi Ramu, Director, Puravankara Projects. The company also acquired 27.7 acres in Coimbatore, though plans for its use have not been finalised.

Mr Ramu said Provident Housing projects at Chennai and Bangalore have received a good response. These projects have units in the price range of Rs 15 lakh to Rs 20 lakh. “During the recession, we neither increased nor decreased our prices. But don’t expect this to continue,” said Mr Ramu.

There were possibilities of real estate prices in Bangalore going up in the next two quarters, he said. “There is a lot of demand for good-quality products that are correctly priced.”

The company, Mr Ramu said, was looking at new launches. “This is an opportune time to actively look at new launches.”

On the company’s plans to raise funds, he said, “We have kept our plans to dilute shareholding at bay. We will go to the market when valuations improve.”

The company said that joint developments would be the way forward for Provident Housing. “We used the slowdown period to seal deals,” said Mr Ramu.

Provident Housing has put its hospitality plans on the back-burner, though it has identified land for the projects from its land bank and tied up with hospitality partners.

Wednesday, October 28, 2009

Real Estate Intelligence Service, Wednesday, October 28, 2009


Curtains for easy monetary policy

Curtains for easy monetary policy
The Economic Times, October 28, 2009, Page 1

No Change In Key Rates, But SLR Increased By 1%

Our Bureau MUMBAI

RBI governor Duvvuri Subbarao on Tuesday ended his soft monetary policyaimed at easing the credit crisis last yearby withdrawing liquidity-boosting measures, becoming the third central banker in the world to do so after Israel and Australia. An increase in lending rates is now imminent next quarter if consumer and asset prices remain high. Benchmark rates were, however, kept unchanged.

Mr Subbarao withdrew a special facility that made funds available from banks to mutual funds and finance companies; made loans to commercial real estate more expensive; forced banks to invest more in government bonds; and asked lenders to set aside more funds for bad loans. The special facility was introduced last year to boost liquidity to financial sector firms after the credit markets froze.

RBI maintained the repurchase rate, or repo ratethe rate at which it provides funds to banksat 4.75%; reverse repo ratethe rate at which it accepts deposits from banksat 3.25%; and the cash reserve ratiothe slice of deposits banks have to mandatorily park with the central bankat 5%.

But the central bank surprised the market in its choice of instruments to announce the exit of an easy money policy. The statutory liquidity ratio (SLR), which prescribes the percentage of deposits that banks are required to invest in government debt, has been raised from 24% to 25%, which Mr Subbarao said was a reversal of an exceptional measure. Last year, at the height of the global credit crisis, RBI had lowered the SLR to ease credit flow to industry.

The apex bank also raised its forecast for inflation as measured by the Wholesale Price Index to 6.5% by March 2010, from 5% earlier, as food prices continue to rise on short supply due to the worst monsoon rains in more than a quarter of a century.

We could see stronger action in the coming quarters, StanChart India CEO Neeraj Swaroop said. RBI will wait for stronger data before taking more aggressive measures, he said.
JPMorgan India chief economist Jahangir Aziz also foresees a sharp rise in lending rates if RBI were to hike interest rates later. The Indian Banks Association (IBA)the lobbying arm of commercial bankssaid it expects interest rates to remain stable for a while.

Despite fiscal policy managers saying they want to ensure that there is a solid rebound in growth before interest rates are hiked, the Centre and Reserve Bank governor have chosen a policy that leads rather than follows the market.

HOLDING TIGHT

A non-event

Not really. Without hiking interest rates, the Guv has done enough to hint that rates will harden in a few months. Lending rules have been tightened and a few fire-fighting measures taken during the October '08 crisis have been withdrawn

Whom will it hurt?

Builders and banks. Loans to builders, particularly those setting up office buildings, malls and multiplexes, will become more expensive. Banks will have to provide more, or set aside a bigger slice of their earnings, for such loans, even if the borrower does not default

So, what happens to loans that have turned sticky

Banks will have to step up their provisioning for bad loans. If a loan outstanding is Rs100 crore, a bank will have to provide a minimum 70% (or, Rs 70 cr). This will impact profits of many big banks. Bankers feel RBI should take a relook at this

Has RBI made things difficult for the consumer

No. Banks are not expected to hike interest rates on home, auto and personal loans immediately. But they may in Jan. That's when RBI may hike CRRthe slice of customer deposit that banks set aside as cash with RBIto reduce surplus money with banks

Then, why's Dalal Street nervous

The market was set for a correction and took the hawkish policy as a trigger. Realty stocks plunged & biggies like SBI and ICICI slipped. Besides higher provisioning , RBI said it will not relax the mark-to-market accounting norm on g-sec holdings of banks. So, banks will have to take m-t-m hits as interest rates rise

Is RBI trying to discipline banks

In a way. Besides new loan rules, it will also outline broad rules on the salaries banks pay to their CEOs and senior managers. While RBI today has the last word on CEO pay, there are no guidelines like the ones applicable for bonus payments

H I G H LI G HTS

Keeps benchmark interest rates unchanged

Hikes SLR by 100 bps to 25%

Retains GDP forecast for FY10 at 6%

Says industrial output may revive in the near term

Cuts money supply growth target a hint that CRR may rise

Funds just got costlier for builders

Funds just got costlier for builders
The Economic Times, October 28, 2009, Page 13

RBI move to hike provisioning for realty loans aims to avoid creation of another bubble

Pallavi Mulay & Supriya Verma Mishra ET INTELLIGENCE GROUP

THE RBIs credit policy announced on Tuesday appears intended to rein an incipient bubble in the real estate sector. The provisioning requirement for loans to commercial real estate has been increased from 0.40% to 1%, implying costlier bank loans for the sector. As most of the realty companies rely on bank funding, especially in times of financial crisis, this move could have an impact on the sector.

As banks often keep a cushion for any regulatory changes in provisioning, this measure is more for bringing moderation in the realty sector. Since necessary reduction in prices has still not taken place and there is fair amount of money available for the sector, this step is to avoid creation of another asset bubble , says M Narendra, executive director of Bank of India.

Not unexpectedly, industry officials differ. According to Rajeev Talwar, executive director of DLF, Stability in major parameters is a good sign, but increasing the risk weightage for commercial real estate is a negative signal, which is perhaps not required so early in the economic revival process. It remains to be seen whether this latest measure has the desired impact of curbing any further rise in property prices. Since there is a huge latent demand to be fulfilled, some builders are confident of sales being unaffected by any increase in prices. Indeed, in some cities property prices have gone up by 5-15 % in past two-three months.

But other industry official doubt whether any price increase can be passed on. Property prices are a function of demand and supply and it will not be easy for developers to pass this extra cost to the buyers as many places, especially in central Mumbai and parts of Delhi, have already seen a significant price run-up , says Keki Mistry, vice-chairman and managing director of HDFC.

Sudhir Reddy, managing director of IVR Prime, a southbased builder, says: It is easier said than done that companies will pass on the incremental cost of funds to homebuyers. One must not forget that increase in market price will result in additional construction costs for builders. This will not be possible when places like Hyderabad, Chennai and Pune are still facing a glut in demand. Sunil Malhotra, CFO of Delhi-based Omaxe, says: As demand is still price-sensitive , it will not be easy for developers to pass that extra cost to consumers.

In short, the current measures may not have significant impact on the financials of real estate companies or prices. Tuesdays policy pronouncements shows that the apex bank has become vigilant . Hari Pandey, VP-finance , HDIL, says the increased provisioning will not cost more than 30-50 bps at present.

Provisioning norm to raise commercial realty prices

Provisioning norm to raise commercial realty prices
Business Standard, October 28, 2009, Page 12

Raghavendra Kamath / Mumbai

Developers expect up to 75 bps increase in cost of funds

Developers said property prices were likely to go up after the Reserve Bank of India (RBI) increased the provisioning for commercial real estate. This, they said, would increase the cost of funds.

Developers expect up to 75 basis points rise in cost of funds after the central bank increased banks’ provisioning requirement for commercial real estate from 0.40 per cent to 1 per cent.

“I think affordable housing will become more expensive as banks will raise rates and credit offtake will slow. Availability of bank funds will become a big issue for developers now. We will bank more on our sales and instead of raising additional funds. We will focus more on internal accruals,” said Sarang Wadhawan, managing director of HDIL, a Mumbai-based developer. “Execution of projects will suffer due to lack of bank funds,” said Wadhawan.

A number of property developers such as DLF, Unitech, HDIL and Lodha, among others, have ventured into affordable housing since the third quarter of the previous financial year to beat the slowdown in property sales. The projects are 25-40 per cent cheaper than market prices and carry margins of 15-20 per cent as against the luxury projects’ margins of over 50 per cent.

“It will certainly increase our cost of borrowing. We will consider this increase like any other increase in input cost,” said Bharat Mody, chief financial officer of Akruti City.

RBI increased provisioning as it felt that credit flow to commercial real estate had risen sharply and there had been large increases in restructuring of loans by developers. Some top developers of the country such as DLF, Unitech and HDIL have restructured loans worth Rs 10,000 crore after RBI allowed banks to do so.

“The amount of non-food bank credit going to commercial real estate is very small, I believe around 3.7 per cent. However, our decision was prompted by two considerations. First, the rate of growth of credit through CRE has been accelerating at one of the fast rates. Second, we looked at the restructuring done by banks. While the restructured portion at the aggregate level was 4 per cent, it was 14 per cent for the real estate sector. This prompted us to raise the provision requirement for the real estate sector,” RBI Governor D Subbarao said at a press conference in Mumbai today.

Loans to the real estate sector grew 41.5 per cent in the 12 months up to August 28, 2009, to Rs 96,701 crore. On the other hand, total non-bank food credit grew 13.3 per cent in the 12 months up to August 28, 2009, to a total outstanding of Rs 26,23,551 crore.

In November last year, RBI had reduced the risk weight on loans for the commercial real estate industry to 100 per cent from 150 per cent and reduced standard asset provisioning requirements to 0.40 per cent.

This was after the developers met the finance minister to express concerns over liquidity. Apart from drastic fall in property sales, developers were facing severe liquidity crunch as bank debt and foreign borrowings dried up and domestic stock markets fell sharply.

Analysts said developers would now find it difficult to raise funds. “It will be challenge for developers to get bank debt. Financial closure will become difficult for real estate projects,” said Ambar Maheshwari, director of investments at DTZ, an international property consultant.

However, developers say since many of them have restructured debt or reduced their debt levels, the RBI move will have less impact on their existing loan portfolio. “If we go for additional funding, the cost will be higher. It will not have much impact on our existing debt,” said Sunil Malhotra, vice-president, finance, at Omaxe, a New Delhi-based developer.

Bankers also say the RBI move will not lead to any drastic rise in rates. “This (increase in provisioning) may not translate into a sharp rise in lending rates. The interest rates are already low and any small increase can be absorbed,” said a head of treasury with a private bank.

A senior State Bank of India official said there could up to 40 basis point rise in interest rate on loans disbursed to builders. This would be done to offset the additional amount that banks would have to set aside for standard real estate assets.

Sensex tanks 387 points

Sensex tanks 387 points
The Hindu Business Line, October 28, 2009, Page 1

Our Bureau, Mumbai

The Monetary Policy seems to have disappointed the stock market. The bellwether Sensex shed 387 points on Tuesday to close at 16,353.4 points and the broader Nifty ended the day lower by 2.5 per cent at 4,846.7.

Though there was no rate hike, the RBI signalling the end of its easy money policy led to heavy selling in banking and realty stocks, brokers said.

The BSE Realty index fell by 6.24 per cent, the biggest loser among the sectoral indices, followed by Bankex by 3.82 per cent.

The RBI has made funds more expensive for some sectors. The feeling that inflation is weighing on the minds of policy-makers and a rate hike is likely in the near future unnerved investors. Global cues were also negative. All these pulled the market down sharply, said Mr Avinash Gupta, Assistant Vice-President for Research Equity at Bonanza Portfolio.

Traders booking profits ahead of this month’s Futures and Options’ expiry on Thursday also drove down the market further.

FII were net sellers of equity for Rs 548.7 crore, while domestic institutions were net buyers for Rs 141.5 crore.

The market breadth was negative as 2,287 scrips declined while 442 advanced. All sectoral indices on the BSE ended the day in the red.

Wipro, Tata Motors and Hindustan Unilever were among the few Sensex gainers. The biggest losers included Hindalco, Tata Steel, Bharti Airtel and Reliance Communications.