Demand from IT sector gets back some sizzle for SEZs

Demand from IT sector gets back some sizzle for SEZs
Business Standard, April 15, 2009, Page 2

Rituparna Bhuyan / New Delhi

Demand for special economic zones (SEZs) appears to be reviving even as realty developers are shying away from developing these tax-free enclaves due to liquidity crunch, according to experts who are tracking SEZs.

Recently, DLF requested the commerce ministry to derecognise at least five of its nine notified information technology SEZs. Parsvnath, another real estate developer, put its plans for developing 12 SEZs on hold and stopped land procurement for most of them.

However, market experts say that this does not mean that demand for such SEZs, especially aimed at the IT sector, has crashed. “In the past two weeks, I have got many queries on IT related SEZs as well as some engineering zones,” said Tapan Sangal, Senior Manager, PricewaterhouseCoopers, an audit and consulting firm.

Simultaneously, investors are also doing some due diligence on SEZ projects to see whether some projects are bankable, Sangal added.

According to the data available with the commerce ministry, there are 274 notified SEZs in the country which are eligible for tax benefits under the SEZ Act of 2005. However, many of these notified SEZs have been witnessing muted development activity, due to lack of funds as well as absence of interest from prospective clients.

Experts say they have also come across some immediate demand for the SEZ space in the National Capital Region in the past few days.

“We see a demand and supply mismatch for SEZs, at least in North India. While demand is there, developers are now looking at bridging their present cash flow requirements and have put SEZ projects on hold,” said Rajiv Chugh, partner, Ernst and Young.

Analysts feel that good infrastructure and talent pool in North India could be a possible reason for the immediate requirement of certain foreign companies in setting up base in SEZs.

Overall, the new queries, as well as the demand for space, experts feel, has resulted out of the new business strategies that are looking at cost effective business locations.

“Companies abroad, especially in the US, are undertaking cost benefit analysis of outsourcing in the wake of the local tax benefits offered to them to retain jobs in the US. However, the cost arbitrage would still make these companies realise that it is still economical to outsource certain processes to India,” added Chugh.

In a region like Chennai, of the 5.8 million square feet of SEZ space available, only 0.6 million square feet is vacant. “This is not a bad vacancy. Developers have put SEZ projects on hold. Hence, existing players, with ready available space, should do well,” said Ramesh Nair, Managing Director, Jones Lang LaSalle Meghraj.

SEZ denotification to improve cash flow management: While experts see some renewed interest in the SEZs, real estate developers are tuning their business interests to suit their immediate cash flow requirements. Analysts point out that a SEZ project means back-ended revenues.

According to government officials, the Board of Approvals on SEZs under the commerce ministry will take a look at DLF’s plea for denotification, once the model code of conduct is lifted after elections. Notification is the final clearance, after which a developer starts enjoying tax benefits while developing SEZs.

“The Board will look if there has been any development at the sites where the notified zones are located,” the official added. A DLF spokesperson said the company would not comment on the issue.

Experts say liquidity crunch combined with low demand for developed projects leads to cash management problems for realtors. “Therefore, developers may be inclined to free up the SEZ land and use the same for other projects or purposes,” said Vikram Doshi, Executive Director, KPMG.

In this scenario, options for real estate companies include shifting focus to residential projects, where time to develop and realise the money is less.

“Residential projects do not have such cash flow challenges since the classic model prevalent in India matches the development of the project with the cash collected from the customers to some extent. But of course, there is always the challenge of finding the customers,” he added.

Moreover, plots that have been derecognised as SEZs can be used by developers as collateral to get the required funds. “These are business decisions and does not reflect on all SEZs. In fact, if companies are getting buyers for freed-up SEZ plots, it is a good sign that there are buyers,” said Sangal.