Monday, February 16, 2009
Second COMING
Second COMING
The Economic Times, February 15, 2009, Page 10
Second home buys have dropped 30%, but for those who already possess one this is not the best time to sell off. Neha Dewan finds out why
THE LOW sentiments in the real estate market may be preventing you from buying a second home in the current scenario. But if you already have one, should you consider selling it off right now? While second home buys have dropped by about 30% in the first quarter of 2009, most investors feel that holding on to their ‘second home’ will prove to be a wise decision in the times to come.
Take the case of 42-year-old architect Joseph George (name changed) and his wife who have a second home in Dwarka in the capital and have no plans of selling it off. Despite average rental returns, they feel that it’s better to hold on to their second home investment. In fact, they even purchased a third house in 2008 in Cochin. And the reason is simple: they feel the price of the properties will appreciate and will eventually give them attractive returns. Ditto for businessman Mr Sehgal who had invested in properties in Delhi and Mumbai. He feels that the current market scenario is too dismal for a sell off. Renting it out, according to him, makes better sense. In fact, many feel that selling off their second home right now is not a suitable proposition due to the market dynamics. Sixty-one-year-old Pradeep Bhagat, who has a second property in Gurgaon, too feels that even though rental rates are seeing a 20-30% dip, it is best to hold on to the property as a viable investment.
Rajiv Sahni, partner (real estate practice) at Ernst & Young, says while the decision to sell a second home varies on a case-to-case basis, it is a better option to hold on to the
asset till the market stabilises in case the seller is not in urgent need of cash. “The overall economic scenario has affected the real estate market both for new and second home purchases. Reduced interest shown by NRIs, who are predominant buyers of second homes, is a significant factor.”
Anuj Puri, chairman and country head of global real estate consultancy Jones Lang LaSalle Meghraj (JLLM), feels that with the economic downturn, second homes as an investment option have currently taken a backseat for most buyers. “The demand for second homes has dropped by about 30% in the first quarter of 2009. The once flourishing investor market for this segment, which represented almost 50% of the whole second home market, has largely dried up. However, there still remains a component of genuine buyers who have the necessary cash reserves to act on a second home investment. This segment represents about 5% of the overall market, and it continues to buy. Also, recent figures show a slight increase of 5-6% in overall demand on the heels of a drop in lending rates,” he says.
But how badly has this segment been impacted considering that the real estate market is yet to gain momentum? R K Mittal, CMD of CHD Developers, feels that just like first-time home buyers, this segment too saw a decline during the last few months but was not affected as sharply due to the difference in the basic demographic profile of buyers. “This segment primarily includes NRIs, businessmen, top and middlelevel management executives in large MNCs and in many cases, they are successful professionals with a high disposable income. As such, the demand for a second home is able to sustain itself even during the current slowdown in the global economy,” he says.
Mittal adds that only those who bought second homes to earn quick profits will look at an early exit to cut losses. Other buyers, he says, will hold on before they can get a better return on investments. Agrees Navin Raheja, MD, Raheja Developers, “No, they are not selling their second home right now as the property prices are at an all-time low. They are in the wait-and-watch mode as prices in the future, say six to eight months from now are expected to appreciate. It is the time to buy. It is better to hold on for some time till the market sentiments improve upon and return to normalcy.”
However, if you are one of those who is looking to buy a second home right now, ensure that you choose the location carefully. Location wise, there are many areas that can offer lucrative returns on your investment. However, the choice of a location will depend largely also on whether one wants to buy for personal use, an investment or as a rental generating asset. JLLM highlights some key locations that can be attractive destinations.
In Maharashtra, buying into some of the well-placed schemes on the outskirts of Mumbai such as the Vasai-Virar region makes sense, as does Pune. Goa is preferable for South Maharashtrians who have roots there. In Madhya Pradesh, Bhopal works well because it has excellent healthcare facilities and environmentally serene surroundings such as lakes and a salubrious climate. In Gujarat, most enduser second home buyers gravitate towards Rajkot because many from the small merchant segment who have pursued business in larger cities already have investments and emotional roots there. Towards Delhi, Indirapuram is suitable. Developed for the middle-income group, there are many good projects coming up here. It also holds good appreciation potential in the medium to long term, just like Faridabad and Ghaziabad in Delhi NCR. Chandigarh is a favourite as it is a planned city with excellent infrastructure and therefore has high aspirational value.
Besides location, there are other dos and don’ts of investing in a second home. Debating upon appreciation, demographics, affordability and demand while investing in a second home is crucial. Being clear about the purpose of second buy on whether it is from a pure investment view or whether one wants to stay there is also necessary. “When one compares investment choices, one must compare the total return not just of the so-called average rate of appreciation. One must also compare the time, trouble and energy that one will put forth to oversee and look after the investment. It is good to invest in societies or condos as one gets good returns through rents,” adds Mr Raheja.
neha.dewan@timesgroup.com
Government ready with first bailout for realty firm
Government ready with first bailout for realty firm
The Economic Times, February 15, 2009, Page 1
Neha Dewan & Shantanu Nandan Sharma, ET Bureau
The Economic Times, February 15, 2009, Page 1
Neha Dewan & Shantanu Nandan Sharma, ET Bureau
Cash-strapped realty major Emaar MGF may turn out to be the first major beneficiary of a government package in the real estate sector,thanks to its partnership with Delhi Development Authority (DDA) for the 2010 Commonwealth Games village project in east Delhi. The government had already facilitated a nine-month deferment of its Rs 50-crore instalment to State Bank of India (SBI), and has now further asked DDA to prepare a report on buying out flats at a negotiated price, a government official told SundayET.
In fact, Emaar MGF could turn out to be the lone beneficiary in a downturn where all major real estate companies, including DLF and Unitech, are affected and witnessing a sharp erosion of their bottomlines. The government has so far refused to give any concession to the real estate sector and is asking for a price correction.
While talking to SundayET, urban development secretary M Ramanchandran said he had asked DDA to prepare a report on the issue and suggest possible solutions. “Emaar MGF has already got nine months extra to repay its Rs 50-crore instalment to SBI. We are assessing the situation. If the need arises DDA would either give them a loan or buy flats at a negotiated price. Also, PSUs may buy in bulk,” he said.
Apartments at Commonwealth Games Village were originally priced at Rs 12,500 per sq ft and today they range between Rs 12,750 and Rs 15,000 per sq ft. This means, prices of flats in the project, close to the Akshardham Temple in east Delhi, start at Rs 1.7 crore. Mr Ramachandran, however, said the government would not be able to pay the market price.
“Till January 31, the progress of the village is 40% against the targeted 41%. So, things are very much under control so far. But work can’t wait because of liquidity issues. So, flats have to be purchased, but it will have to be a justified price in case DDA buys those,” he added. When contacted, the Emaar spokesperson confirmed the rescheduling of the SBI loan repayment without furnishing any details. “We had availed ourselves of a loan from SBI in 2007. We will begin servicing this loan from September 2009,” the company spokesperson said.
The developer also confirmed that DDA, as a project partner, was discussing the appropriate funding options.
PEs exiting realty mkt
PEs exiting realty mkt
The Economic Times, February 14, 2009, Page 5
Cite ‘Condition Precedents’ To Get Out Of Deals
Ravi Teja Sharma NEW DELHI
PRIVATE equity (PE) firms are learnt to be pulling out of real estate deals citing condition precedents (CPs), which are part of the deal document. CPs are conditions which are required to be satisfied after signing of a deal, without which the deal cannot close. Conditions include getting permission in a specified time period, timeline guarantees. An overseas PE firm based in Mumbai is trying to get out of a deal it had signed with a Delhibased real estate developer in the third quarter of 2008. It is invoking the ‘no material adverse change’ clause which is part of the CPs in the contract. “PE firms are looking at various exit options to get out of partly completed deals. In transactions where the promoters have agreed that they will cause the company to effect a buyback, funds are assessing the exercise of such a provision,” said Akil Hirani, managing partner at law firm Majmudar & Co
The last six months has seen a slow down in the real estate market and with valuations dropping, many private equity firms are trying to find ways and means to get out. In some cases, valuations have dropped to almost 50% of the original valuation at which the deal was decided. “The only way to get out for a PE firm is if either there is a breach of contract or CPs have not been fulfilled. Citing material adverse change is the most common in this scenario,” said a senior lawyer at a Delhibased law firm, who did not wish to be quoted. The law firm is working on a few such cases where PEs are trying to pull out.
Many entities are citing material adverse change as a reason to get out of deals, but whether an economic recession can be classified as a material adverse change is debatable. “Such cases are new for Indian courts, and this may be a case of first instance for the courts,” says Hirani.
But on the positive side, where relationships are important, PE and the real estate company, are sitting down to reconsider the deal. “Where PE commitments have happened or deal closures are in the last leg, investors and investees are not being averse to taking a relook at the project plans to assess whether project size or mix needs to be pruned or phased out to protect their IRRs. Original project plans might not be completely viable in the current environment,” says Rajiv Sahni, partner, real estate practice at Ernst & Young.
If the excuse that the PE is making is not justified, experts say, the real estate company can take them to court or take them for arbitration, as provided in the contract. “Considering that most private equity contracts provide for offshore arbitration, these issues will, first, end up being arbitrated upon outside India, and will come to Indian courts in the form of proceedings to enforce arbitral awards,” explains Hirani.
The Economic Times, February 14, 2009, Page 5
Cite ‘Condition Precedents’ To Get Out Of Deals
Ravi Teja Sharma NEW DELHI
PRIVATE equity (PE) firms are learnt to be pulling out of real estate deals citing condition precedents (CPs), which are part of the deal document. CPs are conditions which are required to be satisfied after signing of a deal, without which the deal cannot close. Conditions include getting permission in a specified time period, timeline guarantees. An overseas PE firm based in Mumbai is trying to get out of a deal it had signed with a Delhibased real estate developer in the third quarter of 2008. It is invoking the ‘no material adverse change’ clause which is part of the CPs in the contract. “PE firms are looking at various exit options to get out of partly completed deals. In transactions where the promoters have agreed that they will cause the company to effect a buyback, funds are assessing the exercise of such a provision,” said Akil Hirani, managing partner at law firm Majmudar & Co
The last six months has seen a slow down in the real estate market and with valuations dropping, many private equity firms are trying to find ways and means to get out. In some cases, valuations have dropped to almost 50% of the original valuation at which the deal was decided. “The only way to get out for a PE firm is if either there is a breach of contract or CPs have not been fulfilled. Citing material adverse change is the most common in this scenario,” said a senior lawyer at a Delhibased law firm, who did not wish to be quoted. The law firm is working on a few such cases where PEs are trying to pull out.
Many entities are citing material adverse change as a reason to get out of deals, but whether an economic recession can be classified as a material adverse change is debatable. “Such cases are new for Indian courts, and this may be a case of first instance for the courts,” says Hirani.
But on the positive side, where relationships are important, PE and the real estate company, are sitting down to reconsider the deal. “Where PE commitments have happened or deal closures are in the last leg, investors and investees are not being averse to taking a relook at the project plans to assess whether project size or mix needs to be pruned or phased out to protect their IRRs. Original project plans might not be completely viable in the current environment,” says Rajiv Sahni, partner, real estate practice at Ernst & Young.
If the excuse that the PE is making is not justified, experts say, the real estate company can take them to court or take them for arbitration, as provided in the contract. “Considering that most private equity contracts provide for offshore arbitration, these issues will, first, end up being arbitrated upon outside India, and will come to Indian courts in the form of proceedings to enforce arbitral awards,” explains Hirani.
15-20 % correction needed in realty prices, says Kochhar
15-20 % correction needed in realty prices, says Kochhar
The Times of India, February 14, 2009, Page 25
The country’s largest private sector bank, ICICI Bank, will have a new MD & CEO in the corner office by May. Chanda Kochhar steps into a rather formidable pair of shoes left behind by her predecessor K V Kamath. But, she has been with the bank for over 25 years now and was part of the hand-picked team that was instrumental in re-formatting the bank’s genetic structure and imbuing it with a strong sense of competitive spirit. In an exclusive chat with TOI, Chanda Kochhar spoke about some of the challenges ahead and even provided a prescription for riding out the economic slowdown.
There have been two stimulus packages, CRR cuts, SLR cuts, repo and reverse repo rate cuts, and a host of other measures. But they don’t seem to have helped matters much.
There are two issues here. One, all these steps have definitely helped prevent destabilization. If these steps had not been taken , the liquidity in the rupee market would have tightened substantially. We were relying a lot on global inflow of funds which have now dried up. Second, these measures have resulted in substantial rate cuts, but I think their effect will be felt with a lag. In every system, every environment , the last to move is usually the lending rate.
First what moves is inflation . Once that’s under control , corrective policy measures are then taken. Then comes a correction in market benchmark rates, like government securities. Next, you look at market rates, which are related to the real world, like corporate bonds.
Then comes the correction in deposit rates and correction in lending rates. We have seen the correction in inflation, we have seen corrective policy measures, we have seen correction in government bond and corporate bond rates, we have also seen the correction in the wholesale deposit rates. There has been some correction in retail deposits too. I think we next need to see some more correction in retail deposit rates and finally the lending rates. I think the trend has started and I don’t think we can buck the trend now. It’s only a matter of time.
Do you think cutting rates alone is enough to trigger consumption-led growth?
Rates alone can’t do it. But I think it’s important, because it does impact affordability. But, what’s needed additionally is a correction in real estate prices. People must have the confidence that inflation has indeed corrected. Once your rate of inflation, real estate prices and interest rates are under control, I think the consumption cycle will start. But, for the investment cycle to start once again, we have to wait; companies have to finish going through their inventory adjustment.
Have they started building up fresh inventories from low material costs?
They have started, but that part of the inventory is still smaller compared to the old inventory. The old inventory has seen a dip in selling prices, but is based on the old raw material costs. Once that gets out fully, two things will happen. One, the capacity utilizations will improve from the current levels. They will never go back to the past 100% levels. But, they will come to 70-75 % levels from the current 30-40-50 % levels, because currently you are waiting for the inventory to wind down. So you will move to a more stable level of capacity utilizations
Second, they will move to a different cost structure. Their selling prices will be low, but raw material prices will also be low. And, they will have to improve their internal efficiencies enormously to force their cost struct u re s down. Corporates will have to settle at a different economic paradigm so that there is more stable capacity utilization, and more maintainable margins.
But, the real estate sector seems to be still in the denial mode, unwilling to bring the prices down.
For them it is not really the cost. They were operating on huge margins. So, real estate prices have to correct. Though, some correction has actually happened, some price adjustments have happened . But it’s not enough. It’s not enough to re-start demand , to bring back that confidence in the minds of the individuals. And, it is also still not enough to really impact the affordability in a positive manner. Some more correction has to take place. But, in other sectors, companies have started work on costs, on efficiencies and on productivities
What kind of correction is needed in real estate prices?
Maybe 15-20 %, or maybe more. Piecemeal corrections have already happened. But some more correction might be needed because pricing depends on location to location.
‘Maintainable margins’ is the operative phrase.
Because there may not be the euphoric margins of the past. Because, we all have to get used to the lower cost regime. Raw material costs are low, operating costs are low and selling prices are low. But, there is margin. But it’s a more maintainable margin rather than the euphoric margin. And, after that people will start rethinking of investments , of investing into new products. But the consumption cycle will depend on the other three factors we spoke about earlier—low inflation, realistic real estate prices and low interest rates.
Every organization makes some mistakes during its growth phase. And, there are lessons from those mistakes. What are your learnings?
It’s a fact that the environment has been changing in the past few years and currently has been changing at an even accelerated pace. When you deal with different environments, your strategy has to be different for each environment. The learning is: what’s right in one environment, is not necessarily true in another environment.
During a certain phase of growth, a certain composition of business is relevant to a certain environment and as the environment changes, you have to change. There are two stages of learning here. One, you have to gauge the environment proactively so that you are able to keep yourself ready for the environment, rather than the environment forcing you to make the change. The second is to be nimble so as to be able to keep changing your action in relation to the environment. Because if you cannot change fast enough, or faster than the rate at which the environment is changing, then you will always lag behind. You have to be able to be in control as the environment changes rather than let the environment be in control of you.
During your transition from the consumption to the investment paradigm, did you feel that your lack of access to retail deposits was an inhibiting factor?
When we went into the investment boom, the liabilities required were more long-term in nature and the source of funding were bond issues or loans from bilateral, multilateral sources. Those were the right funds for investment growth. I don’t think that has anything to do with the way we think of our deposits structure today. At the same time, we raised capital not just for funding growth but for acquiring the ability, the risk appetite , to take exposure to risks. Secondly, in hindsight, I think that beneficial since we are in a situation today where, for any bank, capital and liquidity are the two most important assets. So, we built both capital as well as liquidity through one stroke.
But, having said that, you should look at our deposit structure from a legacy point of view. Since, we started as a development financial institution , and not a commercial bank, our source of funding was non-retail . When we became a bank, our retail source of funding was much lesser than other banks. That is the catching up we needed to do. And we have some distance to go. We have to raise the proportion of retail deposits in our total deposits.
What’s in store for ICICI’s retail borrowers and depositors?
For retail depositors, we would like to re-emphasise the fact that ICICI is a sound bank. It is a large bank where capital adequacy is sound, profitability is sound. And, a bank that has got a large branch network. If you add on to that all the other electronic channels, I think ICICI has the most extensive reach to the customer in terms of distribution network. We will be committed to keep up the service levels to meet the demands of the customers.
For the borrowers in particular, in addition to all these, what is in store for them is the fact that one will see interest rates moving southward and loans becoming even more affordable. In service levels, there is always room for improvement. Because according to me a service is a journey. It’s not a destination . One can never say we have reached the optimum level. It has to be a journey for everybody in the bank.
You raised capital to to take risks and create liquidity. But that came with a cost, because capital needs to be serviced. How will you bring cost down?
The approach is not to bring that down but to increase return on equity. We have to remember that one reason why ROE appears lesser than our peers is because our capital is also invested in our group companies. We don’t get annual returns on that capital. But we are building value over a period. So, one way of giving returns to shareholders is unlocking that value.
The second is improving the banking operation. There the issue would be how to control costs, how do we optimize returns, how do we control credit losses. There are three types of costs: funding costs, operating costs and credit cost. We are making sure that we are either in full control or actually improving on these costs. Funding costs over a period will improve as the mix changes towards low cost deposits. We have already started work on operating costs. And, this year’s cost structure is much lower than last year.
The Times of India, February 14, 2009, Page 25
The country’s largest private sector bank, ICICI Bank, will have a new MD & CEO in the corner office by May. Chanda Kochhar steps into a rather formidable pair of shoes left behind by her predecessor K V Kamath. But, she has been with the bank for over 25 years now and was part of the hand-picked team that was instrumental in re-formatting the bank’s genetic structure and imbuing it with a strong sense of competitive spirit. In an exclusive chat with TOI, Chanda Kochhar spoke about some of the challenges ahead and even provided a prescription for riding out the economic slowdown.
There have been two stimulus packages, CRR cuts, SLR cuts, repo and reverse repo rate cuts, and a host of other measures. But they don’t seem to have helped matters much.
There are two issues here. One, all these steps have definitely helped prevent destabilization. If these steps had not been taken , the liquidity in the rupee market would have tightened substantially. We were relying a lot on global inflow of funds which have now dried up. Second, these measures have resulted in substantial rate cuts, but I think their effect will be felt with a lag. In every system, every environment , the last to move is usually the lending rate.
First what moves is inflation . Once that’s under control , corrective policy measures are then taken. Then comes a correction in market benchmark rates, like government securities. Next, you look at market rates, which are related to the real world, like corporate bonds.
Then comes the correction in deposit rates and correction in lending rates. We have seen the correction in inflation, we have seen corrective policy measures, we have seen correction in government bond and corporate bond rates, we have also seen the correction in the wholesale deposit rates. There has been some correction in retail deposits too. I think we next need to see some more correction in retail deposit rates and finally the lending rates. I think the trend has started and I don’t think we can buck the trend now. It’s only a matter of time.
Do you think cutting rates alone is enough to trigger consumption-led growth?
Rates alone can’t do it. But I think it’s important, because it does impact affordability. But, what’s needed additionally is a correction in real estate prices. People must have the confidence that inflation has indeed corrected. Once your rate of inflation, real estate prices and interest rates are under control, I think the consumption cycle will start. But, for the investment cycle to start once again, we have to wait; companies have to finish going through their inventory adjustment.
Have they started building up fresh inventories from low material costs?
They have started, but that part of the inventory is still smaller compared to the old inventory. The old inventory has seen a dip in selling prices, but is based on the old raw material costs. Once that gets out fully, two things will happen. One, the capacity utilizations will improve from the current levels. They will never go back to the past 100% levels. But, they will come to 70-75 % levels from the current 30-40-50 % levels, because currently you are waiting for the inventory to wind down. So you will move to a more stable level of capacity utilizations
Second, they will move to a different cost structure. Their selling prices will be low, but raw material prices will also be low. And, they will have to improve their internal efficiencies enormously to force their cost struct u re s down. Corporates will have to settle at a different economic paradigm so that there is more stable capacity utilization, and more maintainable margins.
But, the real estate sector seems to be still in the denial mode, unwilling to bring the prices down.
For them it is not really the cost. They were operating on huge margins. So, real estate prices have to correct. Though, some correction has actually happened, some price adjustments have happened . But it’s not enough. It’s not enough to re-start demand , to bring back that confidence in the minds of the individuals. And, it is also still not enough to really impact the affordability in a positive manner. Some more correction has to take place. But, in other sectors, companies have started work on costs, on efficiencies and on productivities
What kind of correction is needed in real estate prices?
Maybe 15-20 %, or maybe more. Piecemeal corrections have already happened. But some more correction might be needed because pricing depends on location to location.
‘Maintainable margins’ is the operative phrase.
Because there may not be the euphoric margins of the past. Because, we all have to get used to the lower cost regime. Raw material costs are low, operating costs are low and selling prices are low. But, there is margin. But it’s a more maintainable margin rather than the euphoric margin. And, after that people will start rethinking of investments , of investing into new products. But the consumption cycle will depend on the other three factors we spoke about earlier—low inflation, realistic real estate prices and low interest rates.
Every organization makes some mistakes during its growth phase. And, there are lessons from those mistakes. What are your learnings?
It’s a fact that the environment has been changing in the past few years and currently has been changing at an even accelerated pace. When you deal with different environments, your strategy has to be different for each environment. The learning is: what’s right in one environment, is not necessarily true in another environment.
During a certain phase of growth, a certain composition of business is relevant to a certain environment and as the environment changes, you have to change. There are two stages of learning here. One, you have to gauge the environment proactively so that you are able to keep yourself ready for the environment, rather than the environment forcing you to make the change. The second is to be nimble so as to be able to keep changing your action in relation to the environment. Because if you cannot change fast enough, or faster than the rate at which the environment is changing, then you will always lag behind. You have to be able to be in control as the environment changes rather than let the environment be in control of you.
During your transition from the consumption to the investment paradigm, did you feel that your lack of access to retail deposits was an inhibiting factor?
When we went into the investment boom, the liabilities required were more long-term in nature and the source of funding were bond issues or loans from bilateral, multilateral sources. Those were the right funds for investment growth. I don’t think that has anything to do with the way we think of our deposits structure today. At the same time, we raised capital not just for funding growth but for acquiring the ability, the risk appetite , to take exposure to risks. Secondly, in hindsight, I think that beneficial since we are in a situation today where, for any bank, capital and liquidity are the two most important assets. So, we built both capital as well as liquidity through one stroke.
But, having said that, you should look at our deposit structure from a legacy point of view. Since, we started as a development financial institution , and not a commercial bank, our source of funding was non-retail . When we became a bank, our retail source of funding was much lesser than other banks. That is the catching up we needed to do. And we have some distance to go. We have to raise the proportion of retail deposits in our total deposits.
What’s in store for ICICI’s retail borrowers and depositors?
For retail depositors, we would like to re-emphasise the fact that ICICI is a sound bank. It is a large bank where capital adequacy is sound, profitability is sound. And, a bank that has got a large branch network. If you add on to that all the other electronic channels, I think ICICI has the most extensive reach to the customer in terms of distribution network. We will be committed to keep up the service levels to meet the demands of the customers.
For the borrowers in particular, in addition to all these, what is in store for them is the fact that one will see interest rates moving southward and loans becoming even more affordable. In service levels, there is always room for improvement. Because according to me a service is a journey. It’s not a destination . One can never say we have reached the optimum level. It has to be a journey for everybody in the bank.
You raised capital to to take risks and create liquidity. But that came with a cost, because capital needs to be serviced. How will you bring cost down?
The approach is not to bring that down but to increase return on equity. We have to remember that one reason why ROE appears lesser than our peers is because our capital is also invested in our group companies. We don’t get annual returns on that capital. But we are building value over a period. So, one way of giving returns to shareholders is unlocking that value.
The second is improving the banking operation. There the issue would be how to control costs, how do we optimize returns, how do we control credit losses. There are three types of costs: funding costs, operating costs and credit cost. We are making sure that we are either in full control or actually improving on these costs. Funding costs over a period will improve as the mix changes towards low cost deposits. We have already started work on operating costs. And, this year’s cost structure is much lower than last year.
Real estate on shifting sands
Real estate on shifting sands
Times Property, February 14, 2009, Page 14
The current phase of real estate sector will separate ‘short-term’ players from the ‘long-term’ players and despite momentary slowdown, the long-term outlook for the sector is positive and encouraging, says Anshuman Magazine
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%. The financial reforms of 1991 have been complemented by favourable policy changes and significant increase in investment on physical infrastructure. The country has also emerged as the fourth largest economy (in Purchasing Power Parity ‘PPP’ terms) in the world, led by economic liberalization and broad-based growth across various sectors. This stellar growth, augmented by unmatched fundamentals that the country enjoys, had given strong impetus to the real estate sector in India which registered an annual growth rate or about 25% between 2003 and 2007. Information technology revolution and MNCs-led demand for quality office space resulted in modern buildings springing up in new suburban locations of key Indian cities. Salaries in India have been rising at the rate of 10-15% per annum and the per capita disposable income that increased several fold in the past decade is expected to further grow by 8-13% in the next five years.
Thus improved affordability in conjugation with increased penetration of housing mortgage finance led to an unprecedented housing acquisition drive by end users as well as investors. This, together with the fact that the average household size in India is fast decreasing, has fostered residential demand in recent times. Moreover, the change in attitude and spending habits of the consumers has led to an increase in consumption and demand for retail malls and has transformed India from a ‘saving’ to a ‘consuming’ economy.
Over the last 2-3 years, the capital markets have seen an increased presence of the real estate sector. In a bid to raise their capital base and fund future projects, real estate companies have approached domestic stock markets and close to 20-25 real estate and construction companies opted for IPOs and stock exchange listing between 2007 and 2008. Another trend that found favour with Indian real estate developers was listing on the offshore exchanges like AIM, Singapore listed REIT, Singapore Stock Exchange and Dubai International Financial Exchange in order to raise overseas capital.
Post partial relaxation of FDI in the real estate sector in 2005, significant amount of global capital has been chasing Indian real estate market, and interest in the sector has been boosted by increased participation from private equity real estate funds, cross border real estate investors and foreign commercial banks. Relaxing of the Foreign Direct Investment (FDI) regulations for real estate sector opened the floodgates for foreign capital inflow into the sector and close to 20% of the total FDI coming into the country in 2007-08 was directed to the real estate sector.
The much-required capital in the last few years has facilitated widespread development of residential, office, retail and hotel space in the country. It has also been instrumental in organizing the market to a large extent and bringing it closer to the real estate markets in other developing countries around the world.
However, after a dream run of close to 36 months, the real estate sector in the country has been exhibiting signs of slowing down in the last few quarters. This slowdown came after the onset of recession in several large economies in the world and is reflective of the financial crisis and economic turmoil facing the global economy. In response to the Reserve Bank of India’s measures to control credit growth and liquidity in the economy, interest rates on home loans were increased by several basis points in the last one year.
This came at a junction when the rising residential values and compounding inflation started to negatively impact affordability of many end users. On the other hand, developers have been facing a cash crunch on account of diminishing sales and scarcity of bank credit due to increase in risk weight for real estate sector.
Poor stock market performance, where share prices of premium real estate players in the country fell by over 80% during 2008, has also blocked raising of money from primary market by way of IPOs. Real estate sector has been the major recipient of the total private equity placement in the Indian market since mid-2007. However, the volatility in the global capital markets and bearish sentiments has led to drying up of private equity funding. Even the off shore exchanges like the Alternate Investment Market (AIM), Singapore Stock Exchange, Dubai International Financial Exchange, etc have been impacted by the global financial crisis and have thereby affected capital raising capacity of a number of domestic developers who were looking at international listings.
As a result of liquidity crunch in the market, increasing input costs and weakening global economic conditions, new project launches in the country have been put on hold and under-construction projects are facing delays.
The transactions volumes across asset classes hit an all time low in mid-2008 and resulted in about 10-20% correction in prices. However, notwithstanding this fact, buyers are still in a wait-and-watch mode and there has been an erosion of confidence amongst buyers due to weakening business sentiments, reigning job insecurity and pay-cuts.
On the other hand, developers who have been trying to hold back their prices so far are reconciling to the current market conditions and are readying themselves for a downward revision in price points. In order to ease liquidity situation and boost demand, the government has taken various policy measures since October 2008. Exhibiting its commitment to encourage consumer spending and to keep up the pace of economic growth and investment in the country, the government announced two financial stimulus packages within a month of each other.
While the stimulus package includes speeding up infrastructure projects, introduction of export incentives, and cut in various categories of value-added tax to encourage consumer spending, the RBI’s staggered downward revision in Cash Reserve Ratio (CRR) and repo rates to a low of 5.5% (from a high of 9% in September 2008) is aimed towards reduction in cost of capital and infusion of liquidity in the economy including the real estate sector. Besides, developers have been allowed to explore the External Commercial Borrowings (ECB) route for the development of integrated townships.
Even though the recent policy measures to increase liquidity and ease credit for real estate sector were much desired, real liquidity may take some time to get back in the system and credit disbursal may remain sluggish. According to reports, despite the sharp cut in CRR, repo rate and reverse repo rate by RBI, bank credit declined sharply in Dec ‘08 by levels not seen in the past 10 years. Going forward, the markets are expected to remain slow in the near future on the back of low consumer sentiments due to global macro weakness.
Looking ahead, the revival of the real estate markets in India would depend substantially on the improvement of the economic sentiments, which is likely to take some more time, as such sentiments amongst occupiers, buyers and investors will remain subdued in the short to medium term. In the residential segment, the prospective buyers are expected to come back when there is renewal of confidence that the prices have stabilized and the mortgage rates are conducive for investing in property once again. However, an overriding concern and a key variable influencing the purchase decision will be the outlook for the Indian economy and its future growth prospects.
The office segment is currently undergoing a demand compression as most of the space occupiers are large MNCs who have put their expansion plans on hold for the time being. However, India is an established information technology and outsourcing destination and has unparalleled capacity in the sector. Hence, with the revival of the global economy in the near future there will be restoration of outsourcing demand, thereby bringing back the space demand in office sector.
Most importantly, the current churn in the real estate sector will result in increased focus on ‘neo-asset’ classes like development of healthcare facilities, warehousing space development and infrastructure initiatives based on public-private partnership (PPP) models. Besides being the need of the hour, these asset classes will help developers spread risks and hence will find place in developers’ future portfolios.
The recent trend by real estate markets in the country reinforces the fact that real estate sector is a cyclical sector influenced by several variables. In the long term, current churn and shakeout in the sector is expected to lead to market consolidation and make it more attractive for investment as the valuations will be more realistic. The current phase of the industry will separate ‘short-term’ players from the ‘long-term’ players and despite the momentary slowdown, the longterm outlook for the sector is positive and encouraging.
With strong economic and demographic fundamentals that the country has, real estate will remain a long-term attractive proposition. Though revival of the sector will depend on recovery of the domestic economy, it is likely to be earlier than in many other countries across the globe.
Times Property, February 14, 2009, Page 14
The current phase of real estate sector will separate ‘short-term’ players from the ‘long-term’ players and despite momentary slowdown, the long-term outlook for the sector is positive and encouraging, says Anshuman Magazine
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%. The financial reforms of 1991 have been complemented by favourable policy changes and significant increase in investment on physical infrastructure. The country has also emerged as the fourth largest economy (in Purchasing Power Parity ‘PPP’ terms) in the world, led by economic liberalization and broad-based growth across various sectors. This stellar growth, augmented by unmatched fundamentals that the country enjoys, had given strong impetus to the real estate sector in India which registered an annual growth rate or about 25% between 2003 and 2007. Information technology revolution and MNCs-led demand for quality office space resulted in modern buildings springing up in new suburban locations of key Indian cities. Salaries in India have been rising at the rate of 10-15% per annum and the per capita disposable income that increased several fold in the past decade is expected to further grow by 8-13% in the next five years.
Thus improved affordability in conjugation with increased penetration of housing mortgage finance led to an unprecedented housing acquisition drive by end users as well as investors. This, together with the fact that the average household size in India is fast decreasing, has fostered residential demand in recent times. Moreover, the change in attitude and spending habits of the consumers has led to an increase in consumption and demand for retail malls and has transformed India from a ‘saving’ to a ‘consuming’ economy.
Over the last 2-3 years, the capital markets have seen an increased presence of the real estate sector. In a bid to raise their capital base and fund future projects, real estate companies have approached domestic stock markets and close to 20-25 real estate and construction companies opted for IPOs and stock exchange listing between 2007 and 2008. Another trend that found favour with Indian real estate developers was listing on the offshore exchanges like AIM, Singapore listed REIT, Singapore Stock Exchange and Dubai International Financial Exchange in order to raise overseas capital.
Post partial relaxation of FDI in the real estate sector in 2005, significant amount of global capital has been chasing Indian real estate market, and interest in the sector has been boosted by increased participation from private equity real estate funds, cross border real estate investors and foreign commercial banks. Relaxing of the Foreign Direct Investment (FDI) regulations for real estate sector opened the floodgates for foreign capital inflow into the sector and close to 20% of the total FDI coming into the country in 2007-08 was directed to the real estate sector.
The much-required capital in the last few years has facilitated widespread development of residential, office, retail and hotel space in the country. It has also been instrumental in organizing the market to a large extent and bringing it closer to the real estate markets in other developing countries around the world.
However, after a dream run of close to 36 months, the real estate sector in the country has been exhibiting signs of slowing down in the last few quarters. This slowdown came after the onset of recession in several large economies in the world and is reflective of the financial crisis and economic turmoil facing the global economy. In response to the Reserve Bank of India’s measures to control credit growth and liquidity in the economy, interest rates on home loans were increased by several basis points in the last one year.
This came at a junction when the rising residential values and compounding inflation started to negatively impact affordability of many end users. On the other hand, developers have been facing a cash crunch on account of diminishing sales and scarcity of bank credit due to increase in risk weight for real estate sector.
Poor stock market performance, where share prices of premium real estate players in the country fell by over 80% during 2008, has also blocked raising of money from primary market by way of IPOs. Real estate sector has been the major recipient of the total private equity placement in the Indian market since mid-2007. However, the volatility in the global capital markets and bearish sentiments has led to drying up of private equity funding. Even the off shore exchanges like the Alternate Investment Market (AIM), Singapore Stock Exchange, Dubai International Financial Exchange, etc have been impacted by the global financial crisis and have thereby affected capital raising capacity of a number of domestic developers who were looking at international listings.
As a result of liquidity crunch in the market, increasing input costs and weakening global economic conditions, new project launches in the country have been put on hold and under-construction projects are facing delays.
The transactions volumes across asset classes hit an all time low in mid-2008 and resulted in about 10-20% correction in prices. However, notwithstanding this fact, buyers are still in a wait-and-watch mode and there has been an erosion of confidence amongst buyers due to weakening business sentiments, reigning job insecurity and pay-cuts.
On the other hand, developers who have been trying to hold back their prices so far are reconciling to the current market conditions and are readying themselves for a downward revision in price points. In order to ease liquidity situation and boost demand, the government has taken various policy measures since October 2008. Exhibiting its commitment to encourage consumer spending and to keep up the pace of economic growth and investment in the country, the government announced two financial stimulus packages within a month of each other.
While the stimulus package includes speeding up infrastructure projects, introduction of export incentives, and cut in various categories of value-added tax to encourage consumer spending, the RBI’s staggered downward revision in Cash Reserve Ratio (CRR) and repo rates to a low of 5.5% (from a high of 9% in September 2008) is aimed towards reduction in cost of capital and infusion of liquidity in the economy including the real estate sector. Besides, developers have been allowed to explore the External Commercial Borrowings (ECB) route for the development of integrated townships.
Even though the recent policy measures to increase liquidity and ease credit for real estate sector were much desired, real liquidity may take some time to get back in the system and credit disbursal may remain sluggish. According to reports, despite the sharp cut in CRR, repo rate and reverse repo rate by RBI, bank credit declined sharply in Dec ‘08 by levels not seen in the past 10 years. Going forward, the markets are expected to remain slow in the near future on the back of low consumer sentiments due to global macro weakness.
Looking ahead, the revival of the real estate markets in India would depend substantially on the improvement of the economic sentiments, which is likely to take some more time, as such sentiments amongst occupiers, buyers and investors will remain subdued in the short to medium term. In the residential segment, the prospective buyers are expected to come back when there is renewal of confidence that the prices have stabilized and the mortgage rates are conducive for investing in property once again. However, an overriding concern and a key variable influencing the purchase decision will be the outlook for the Indian economy and its future growth prospects.
The office segment is currently undergoing a demand compression as most of the space occupiers are large MNCs who have put their expansion plans on hold for the time being. However, India is an established information technology and outsourcing destination and has unparalleled capacity in the sector. Hence, with the revival of the global economy in the near future there will be restoration of outsourcing demand, thereby bringing back the space demand in office sector.
Most importantly, the current churn in the real estate sector will result in increased focus on ‘neo-asset’ classes like development of healthcare facilities, warehousing space development and infrastructure initiatives based on public-private partnership (PPP) models. Besides being the need of the hour, these asset classes will help developers spread risks and hence will find place in developers’ future portfolios.
The recent trend by real estate markets in the country reinforces the fact that real estate sector is a cyclical sector influenced by several variables. In the long term, current churn and shakeout in the sector is expected to lead to market consolidation and make it more attractive for investment as the valuations will be more realistic. The current phase of the industry will separate ‘short-term’ players from the ‘long-term’ players and despite the momentary slowdown, the longterm outlook for the sector is positive and encouraging.
With strong economic and demographic fundamentals that the country has, real estate will remain a long-term attractive proposition. Though revival of the sector will depend on recovery of the domestic economy, it is likely to be earlier than in many other countries across the globe.
(The writer is chairman & managing director of CB Richard Ellis, South Asia Pvt Ltd)
Relief for realty, auto likely in interim Budget
Relief for realty, auto likely in interim Budget
The Financial Express, February 16, 2009, Page 1
fe Bureau
The government is hoping that the leading indicators of a partial hike in industrial production and a good rabi harvest will combine with the third stimulus package, to be released on Monday, and push the growth momentum of the economy.
The stimulus package, to be announced in the interim Budget, is again in line with a plan agreed by governments across the globe to go in for coordinated fiscal and monetary steps after the downturn peaked in September 2008. The government has been in touch with multilateral institutions such as the IMF and the World Bank on the broad contours of the package. Finance minister Pranab Mukherjee is expected to make a detailed review of the economy in his Budget speech to clarify the steps the government plans to take till May 2009, when the new government is sworn in. The government will target realty and the automobile sector, as they have massive linkages with the rest of the economy.
Anticipating the changes, the stocks of leading banks on Friday ended higher on the Bombay Stock Exchange. ICICI Bank ended 3.2% higher, while SBI too ended 3.1% higher—its highest close in a month.
The third largest, HDFC Bank, also ended 1.1% higher. The barometer Sensex added 168.91 points or 1.78% to close the day at 9,634.74 points.
The realty sector is banking on a relaxation of Section 80 IB(10)of the Income Tax Act. The section gives tax breaks for housing projects with flat sizes of less than 1,500 sq feet but is restricted to projects began before March 31, 2007. The builders felt that projects meant for low-income groups can take off if this date is extended.
The step could also be quite popular but as this involves a change in the direct tax laws, it would need an approval from Parliament unlike most changes in indirect tax laws.
Consequently, the relaxation for pushing up the slab for tax deduction from income for interest payment on housing loans, currently set at Rs 1.5 lakh, is unlikely to happen.
Realtors have also asked banks to ease the terms for giving them loans. Domestic funds are still more expensive compared with foreign funds. In the last stimulus package, realty sector was allowed to go for ECB for integrated townships only. The current demand is to allow it for all other segments of the sector.
Beside realty, the steel industry, hit by a slump in demand, wants the government to come out with schemes for the infrastructure sector in its interim Budget that would lead to higher consumption of the commodity.
“Real boost should be given to the infrastructure sector, which would in turn spur demand for steel in the economy,” SAIL chairman Sushil Kumar Roongta said.
“Interest rates to the borrower must come down to single digit. If that happens, things will become easier (in the economy) and steel demand would surge,” JSW Steel MD Sajjan Jindal said.
Besides, seeking sops for the infrastructure sector, the steel industry wants the government to increase the import duty on the commodity up to 15% as recommended by the steel ministry to protect producers against cheap dumping. “The government should impose 15% import duty soon on steel to protect the domestic industry,” Jindal said.
Commenting on the situation, home minister P Chidambaram on Friday said, “The 2009-10 will be a difficult one for our economy but there will be a turnaround from October or little thereafter.”
Asserting that India would post a 7% growth, he said a “right mix of policies and leadership” was required to steer the country through these difficult times.
Tax collections, another key element of the economy, in the next fiscal may be proposed to grow at moderate 15% in the interim Budget.
According to indications, the interim Budget would propose lower growth in tax receipts of the Centre due to the slowdown.
During the last few years, the Centre’s tax receipts have been growing by 25%.
The tax collections by the government for 2008-09 were proposed to grow by 25% at Rs 6,87,715 crore as per provisional estimates in the Budget. In 2007-08, the tax kitty grew by about 25% at Rs 5,85,410 crore as per the revised estimates.
However, for the current fiscal, direct tax collections posted a negative growth in November and December, before rising again in January. Collections from excise and customs duties are already in negative territory since October 2008.
In fact, collections from otherwise buoyant sector, services, dipped by 3.6% for the first time in December in the current financial year. In the direct tax collections, there is a gap of more than Rs 1,00,000 crore till January this fiscal. And this gap is against the provisional estimates of
Budget for direct tax collections at Rs 3,65,000 crore, whereas the Central Board of Direct Taxes had increased that target to Rs 3,95,000 crore after the first two months showed a remarkable increase.
The interim Budget is also likely to announce short-term measures for exporters reeling under the impact of a global slowdown. The government in the last Budget has fixed the fiscal deficit for the current fiscal at 2.5% of GDP, which is likely to be raised to 5% for the next fiscal, primarily on account of higher allocations towards the government’s flagship schemes like the Bharat Nirman and the National Rural Employment Guarantee Scheme.
To provide focus on urban infrastructure, the government may expand the ambit of the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) to include more districts. At present, the scheme is operational in about 60 mission cities. The other focus of the Budget is likely to be on rural development which may witness allocations going up to more than Rs 55,000 crore from Rs 39,000 crore, an increase of over 40%.
Hopes & projections
• Realty sector is banking on a relaxation of Section 80 IB(10)of the I-T Act
• Govt may propose lower tax growth due to meltdown
• Steel firms want schemes that will raise consumption of the commodity
• More districts may be included under JNNURM
The Financial Express, February 16, 2009, Page 1
fe Bureau
The government is hoping that the leading indicators of a partial hike in industrial production and a good rabi harvest will combine with the third stimulus package, to be released on Monday, and push the growth momentum of the economy.
The stimulus package, to be announced in the interim Budget, is again in line with a plan agreed by governments across the globe to go in for coordinated fiscal and monetary steps after the downturn peaked in September 2008. The government has been in touch with multilateral institutions such as the IMF and the World Bank on the broad contours of the package. Finance minister Pranab Mukherjee is expected to make a detailed review of the economy in his Budget speech to clarify the steps the government plans to take till May 2009, when the new government is sworn in. The government will target realty and the automobile sector, as they have massive linkages with the rest of the economy.
Anticipating the changes, the stocks of leading banks on Friday ended higher on the Bombay Stock Exchange. ICICI Bank ended 3.2% higher, while SBI too ended 3.1% higher—its highest close in a month.
The third largest, HDFC Bank, also ended 1.1% higher. The barometer Sensex added 168.91 points or 1.78% to close the day at 9,634.74 points.
The realty sector is banking on a relaxation of Section 80 IB(10)of the Income Tax Act. The section gives tax breaks for housing projects with flat sizes of less than 1,500 sq feet but is restricted to projects began before March 31, 2007. The builders felt that projects meant for low-income groups can take off if this date is extended.
The step could also be quite popular but as this involves a change in the direct tax laws, it would need an approval from Parliament unlike most changes in indirect tax laws.
Consequently, the relaxation for pushing up the slab for tax deduction from income for interest payment on housing loans, currently set at Rs 1.5 lakh, is unlikely to happen.
Realtors have also asked banks to ease the terms for giving them loans. Domestic funds are still more expensive compared with foreign funds. In the last stimulus package, realty sector was allowed to go for ECB for integrated townships only. The current demand is to allow it for all other segments of the sector.
Beside realty, the steel industry, hit by a slump in demand, wants the government to come out with schemes for the infrastructure sector in its interim Budget that would lead to higher consumption of the commodity.
“Real boost should be given to the infrastructure sector, which would in turn spur demand for steel in the economy,” SAIL chairman Sushil Kumar Roongta said.
“Interest rates to the borrower must come down to single digit. If that happens, things will become easier (in the economy) and steel demand would surge,” JSW Steel MD Sajjan Jindal said.
Besides, seeking sops for the infrastructure sector, the steel industry wants the government to increase the import duty on the commodity up to 15% as recommended by the steel ministry to protect producers against cheap dumping. “The government should impose 15% import duty soon on steel to protect the domestic industry,” Jindal said.
Commenting on the situation, home minister P Chidambaram on Friday said, “The 2009-10 will be a difficult one for our economy but there will be a turnaround from October or little thereafter.”
Asserting that India would post a 7% growth, he said a “right mix of policies and leadership” was required to steer the country through these difficult times.
Tax collections, another key element of the economy, in the next fiscal may be proposed to grow at moderate 15% in the interim Budget.
According to indications, the interim Budget would propose lower growth in tax receipts of the Centre due to the slowdown.
During the last few years, the Centre’s tax receipts have been growing by 25%.
The tax collections by the government for 2008-09 were proposed to grow by 25% at Rs 6,87,715 crore as per provisional estimates in the Budget. In 2007-08, the tax kitty grew by about 25% at Rs 5,85,410 crore as per the revised estimates.
However, for the current fiscal, direct tax collections posted a negative growth in November and December, before rising again in January. Collections from excise and customs duties are already in negative territory since October 2008.
In fact, collections from otherwise buoyant sector, services, dipped by 3.6% for the first time in December in the current financial year. In the direct tax collections, there is a gap of more than Rs 1,00,000 crore till January this fiscal. And this gap is against the provisional estimates of
Budget for direct tax collections at Rs 3,65,000 crore, whereas the Central Board of Direct Taxes had increased that target to Rs 3,95,000 crore after the first two months showed a remarkable increase.
The interim Budget is also likely to announce short-term measures for exporters reeling under the impact of a global slowdown. The government in the last Budget has fixed the fiscal deficit for the current fiscal at 2.5% of GDP, which is likely to be raised to 5% for the next fiscal, primarily on account of higher allocations towards the government’s flagship schemes like the Bharat Nirman and the National Rural Employment Guarantee Scheme.
To provide focus on urban infrastructure, the government may expand the ambit of the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) to include more districts. At present, the scheme is operational in about 60 mission cities. The other focus of the Budget is likely to be on rural development which may witness allocations going up to more than Rs 55,000 crore from Rs 39,000 crore, an increase of over 40%.
Hopes & projections
• Realty sector is banking on a relaxation of Section 80 IB(10)of the I-T Act
• Govt may propose lower tax growth due to meltdown
• Steel firms want schemes that will raise consumption of the commodity
• More districts may be included under JNNURM
Omaxe in talks with 14 banks for debt restructuring
Omaxe in talks with 14 banks for debt restructuring
Business Standard, February 16, 2009, Page 4
Omaxe said it is in talks with 14 banks to restructure debt after international rating firm Fitch downngraded the Delhi-based developer’s long-term debt programme by one notch.
Fitch on February 13 downgraded Omaxe’s national long-term rating and the rating on its Rs 300 crore long-term debt programme to ‘BB-(ind)’ from ‘A-(ind)/Negative’, citing concerns on the company’s profitability and operational cash flow because of the challenging industry environment.
“The rating action also relates to heightened concerns over Omaxe’s short-term liquidity position, which has shown signs of weakening over recent months and has therefore created a degree of short-term refinancing risk,” the agency said.
“We are hopeful of getting Rs 900 crore worth of debt restructured soon,” said Sunil Malhotra, vice-president, finance, Omaxe. The company has a debt of Rs 1,513 crore on its books. Without disclosing the name of the banks, Malhotra said the company is in advance talks and most of the banks are likely to agree. The company has already restructured Rs 130 crore short-term debts as long-term liabilities.
After the restructuring, the company expects cost of funds on the outstanding loans to drop by as much as 150 basis points. The developer’s average cost of funds is around 14 per cent.
Indian developers including Omaxe, DLF and Unitech are in talks with lenders to restructure debt and lower interest cost to tide over the cash crunch. The move comes after the Reserve Bank of India allowed banks to restructure real estate loans in a bid to stimulate the sector and avoid accumulation of bad loans at the lenders.
Omaxe reported a significant fall in operating performance with revenue and net income falling by 73 per cent and 96 per cent, respectively, as against corresponding quarter the previous year. The net profit of the company fell 96 per cent to Rs 5.89 crore for the third quarter.
Omaxe has to repay about Rs 85 crore of debt by March 31, 2009. The company has postponed implementation of several of its project by at least two years.
Business Standard, February 16, 2009, Page 4
Omaxe said it is in talks with 14 banks to restructure debt after international rating firm Fitch downngraded the Delhi-based developer’s long-term debt programme by one notch.
Fitch on February 13 downgraded Omaxe’s national long-term rating and the rating on its Rs 300 crore long-term debt programme to ‘BB-(ind)’ from ‘A-(ind)/Negative’, citing concerns on the company’s profitability and operational cash flow because of the challenging industry environment.
“The rating action also relates to heightened concerns over Omaxe’s short-term liquidity position, which has shown signs of weakening over recent months and has therefore created a degree of short-term refinancing risk,” the agency said.
“We are hopeful of getting Rs 900 crore worth of debt restructured soon,” said Sunil Malhotra, vice-president, finance, Omaxe. The company has a debt of Rs 1,513 crore on its books. Without disclosing the name of the banks, Malhotra said the company is in advance talks and most of the banks are likely to agree. The company has already restructured Rs 130 crore short-term debts as long-term liabilities.
After the restructuring, the company expects cost of funds on the outstanding loans to drop by as much as 150 basis points. The developer’s average cost of funds is around 14 per cent.
Indian developers including Omaxe, DLF and Unitech are in talks with lenders to restructure debt and lower interest cost to tide over the cash crunch. The move comes after the Reserve Bank of India allowed banks to restructure real estate loans in a bid to stimulate the sector and avoid accumulation of bad loans at the lenders.
Omaxe reported a significant fall in operating performance with revenue and net income falling by 73 per cent and 96 per cent, respectively, as against corresponding quarter the previous year. The net profit of the company fell 96 per cent to Rs 5.89 crore for the third quarter.
Omaxe has to repay about Rs 85 crore of debt by March 31, 2009. The company has postponed implementation of several of its project by at least two years.
Ansals get relief on development charge
Ansals get relief on development charge
Business Standard, February 16, 2009, page 11
Ansal Properties & Industries Ltd, which developed townships in Gurgaon, got substantial relief from the Supreme Court when it held that the demand of the Haryana government for Rs 61,000 per gross acre was “illegal, unjustified and unreasonable”. The director of town and country planning of the state had threatened to cancel the licence to the company if it did not pay the amount at the above rate towards external development charges, but actually on account of construction of internal community buildings.
There was a further stipulation that no such charge would be realised from the plot holders. The company challenged the demand in the Punjab and Haryana High Court, but it dismissed its writ petition. On appeal, the Supreme Court allowed the appeal and let the government adjust the refund towards the dues of the company.
Service tax on construction and sale of residential property
Service tax on construction and sale of residential property
Business Standard, February 16, 2009, page 11
The Central Board of Excise and Customs has recently issued a Circular (No. 108/02-ST dated January 29, 2009), which clarifies that the activities carried out by the builders/developers prior to the point of sale of property were not services rendered to customers. Consequently, no service tax would be chargeable with regard to the construction activities carried out by the builders / promoters.
S Madhavan / New Delhi
The issue of the imposition of service tax on construction and sale of residential property has been a matter of concern for the real estate and construction industry as well as buyers of residential property. The Central Board of Excise and Customs (CBEC) has recently issued a Circular (No. 108/02-ST dated January 29, 2009) clarifying the Board’s view on the matter. While the Circular is welcome, in that it provides for relief from service tax in specified circumstances, it remains to be seen as to how it would be understood and implemented on the ground.
However, before coming to the matters that have been clarified in the Circular, it would be worthwhile to look at the manner in which the service tax authorities have sought to tax the activities construction of residential property. It must be mentioned at the outset that since the activity of construction is in many instances in the nature of a works contract, the charge of sale tax or VAT has typically applied as well. Indeed, the genesis of the dispute in relation to service taxation of the activities of construction and sale of residential property is the decision of the Supreme Court in the case of K Raheja Development Corporation Vs State of Karnataka [2005] 2 STT 178 (SC), which was qua the provisions of the Karnataka Sales Tax Act, 1957.
Based on a particular understanding of this decision, the Director General of Service Taxes issued a Circular in February 2006 holding simply that construction and sale of residential property in all situations were taxable as works contracts and since such contracs, inter alia, comprised of provision of services, service taxes would apply under the heading of residential complex construction service.
This Circular essentially meant that in all situations where the developer or builder engaged in the above activities, regardless of when the sale of immovable property took place, service tax would inevitably apply. This Circular led to significant litigation and was the subject matter of a petition in the Mumbai High Court.
Meanwhile, the CBEC issued a clarification in August 2007, holding that in a situation of construction of residential property, a contractor who was engaged in construction activity on behalf of a builder who ultimately sold the built up residential property to the various buyers was alone liable to discharge service tax in relation to the construction activity.
The Circular implied that if such a contractor had discharged the tax, there was no further liability on the part of the builder to charge service tax on the consideration received from the byers who purchased the residential property from the builder. The Circular also stated that if the builder himself undertook the construction activity and sold only the completed flats to the buyers, no service tax was at all payable.
It must be mentioned here that in addition to the aforesaid heading of construction of residential complex, the government also brought within the ambit of the service tax, the category of ‘works contract service’ with effect from June 1, 2007. This category included within its purview works contracts relating to residential complexes as well. The Department has further clarified that contracts for carrying out any works would be covered under the aforesaid heading even if they were to be possibly categorised under any other heading. Consequently, the position is that in case a contract is in the nature of a works contract, it would become liable to both the sales tax or VAT as well as the service tax.
The point however is whether or not the construction and sale of residential property is a works contract in all situations or whether it could only be so construed, based on the intent of the contracting parties, as discerned from under the contractual agreement.
In a decision of dubious quality, the Authority for Advance Ruling in the case of Harekrishna Developers [2008-TIOL-03-ARA-ST] held that the definition of construction of residential complex covered within its ambit incidental and allied activities thereto as well.
Further, it also relied upon the words ‘in relation thereto’ occurring thereunder in order to hold that an agreement to sell yet to be built residential units would attract service tax and consequently a developer or a builder who charged periodic payments from parties and thereupon constructed residential units prior to their ultimate sale was indeed a service provider and liable to pay service tax under the relevant heading.
The CBEC Circular of August 2007 was brought to the attention of the AAR but it curiously held that the Circular lacked clarity and could not, in any event, be relied upon to argue that developers were not required to discharge service tax in such situations.
Again, the Guwahati High Court in the case of Magus Construction Pvt Ltd Vs Union of India [2008-TIOL-321-HC-GUW-ST], held that an agreement to purchase a fully constructed unit, which envisaged instalment payments of the purchase price during the period of construction was not a works contract since the intention of the parties was always to transact in sale/purchase of a fully constructed immovable property.
Notwithstanding the aforesaid position in law, litigation on the matter was rampant and the authorities were continuously seeking to impose tax on the typical activities undertaken by builders/developers. As a result of the several representations that were consequently received by the CBEC, the recent clarificatory Circular has been issued. It sets out the underlying issue as also the possible two views in regard to the service tax.
Thereupon, the Board has opined that an agreement to sell immovable property does not by itself create any interest in or charge on such a property, as per the Transfer of Property Act, 1884. It was only after the completion of the construction and the payment of the full consideration by the buyer to the developer/builder that the proper sale deed was executed and ownership/title in property was transferred.
The Circular consequently clarifies that the activities carried out by the builders/developers prior to the point of sale of property were not services rendered to customers. Consequently, no service tax would be chargeable with regard to the construction activities carried out by the builders/promoters.
While the Circular does not explicitly say so, it is also implied and indeed it is implicit therein that since the agreement for sale does not transfer title and indeed the parties only intend to buy and sell immovable property, there could also not be a service tax on such activities under the heading of ‘works contracts’. The Circular also reiterates what was clarified through the earlier Circular of August 2007 that if the services of a third party such as the contractor or a designer was procured by the builder/promoter, such services would be chargeable to tax.
The Circular concludes by holding that any decision of the Advance Ruling Authority which is contrary to the foregoing view could only impliedly be based on different facts and would hence have applicability to that case only. It is hoped that in line with the principles enunciated in the aforesaid Circular, due relief from the service tax would be granted to the construction industry and to the buyers of immovable property.
It is also hoped that the benefits of this Circular, which were until very recently understood to be binding on the authorities, will effectively accrue to those for whom it is intended and that the matter will no longer be pursued by the tax authorities.
The author is Leader, Indirect Tax Practice, PricewaterhouseCoopers, pwctls.nd@in.pwc.com
Business Standard, February 16, 2009, page 11
The Central Board of Excise and Customs has recently issued a Circular (No. 108/02-ST dated January 29, 2009), which clarifies that the activities carried out by the builders/developers prior to the point of sale of property were not services rendered to customers. Consequently, no service tax would be chargeable with regard to the construction activities carried out by the builders / promoters.
S Madhavan / New Delhi
The issue of the imposition of service tax on construction and sale of residential property has been a matter of concern for the real estate and construction industry as well as buyers of residential property. The Central Board of Excise and Customs (CBEC) has recently issued a Circular (No. 108/02-ST dated January 29, 2009) clarifying the Board’s view on the matter. While the Circular is welcome, in that it provides for relief from service tax in specified circumstances, it remains to be seen as to how it would be understood and implemented on the ground.
However, before coming to the matters that have been clarified in the Circular, it would be worthwhile to look at the manner in which the service tax authorities have sought to tax the activities construction of residential property. It must be mentioned at the outset that since the activity of construction is in many instances in the nature of a works contract, the charge of sale tax or VAT has typically applied as well. Indeed, the genesis of the dispute in relation to service taxation of the activities of construction and sale of residential property is the decision of the Supreme Court in the case of K Raheja Development Corporation Vs State of Karnataka [2005] 2 STT 178 (SC), which was qua the provisions of the Karnataka Sales Tax Act, 1957.
Based on a particular understanding of this decision, the Director General of Service Taxes issued a Circular in February 2006 holding simply that construction and sale of residential property in all situations were taxable as works contracts and since such contracs, inter alia, comprised of provision of services, service taxes would apply under the heading of residential complex construction service.
This Circular essentially meant that in all situations where the developer or builder engaged in the above activities, regardless of when the sale of immovable property took place, service tax would inevitably apply. This Circular led to significant litigation and was the subject matter of a petition in the Mumbai High Court.
Meanwhile, the CBEC issued a clarification in August 2007, holding that in a situation of construction of residential property, a contractor who was engaged in construction activity on behalf of a builder who ultimately sold the built up residential property to the various buyers was alone liable to discharge service tax in relation to the construction activity.
The Circular implied that if such a contractor had discharged the tax, there was no further liability on the part of the builder to charge service tax on the consideration received from the byers who purchased the residential property from the builder. The Circular also stated that if the builder himself undertook the construction activity and sold only the completed flats to the buyers, no service tax was at all payable.
It must be mentioned here that in addition to the aforesaid heading of construction of residential complex, the government also brought within the ambit of the service tax, the category of ‘works contract service’ with effect from June 1, 2007. This category included within its purview works contracts relating to residential complexes as well. The Department has further clarified that contracts for carrying out any works would be covered under the aforesaid heading even if they were to be possibly categorised under any other heading. Consequently, the position is that in case a contract is in the nature of a works contract, it would become liable to both the sales tax or VAT as well as the service tax.
The point however is whether or not the construction and sale of residential property is a works contract in all situations or whether it could only be so construed, based on the intent of the contracting parties, as discerned from under the contractual agreement.
In a decision of dubious quality, the Authority for Advance Ruling in the case of Harekrishna Developers [2008-TIOL-03-ARA-ST] held that the definition of construction of residential complex covered within its ambit incidental and allied activities thereto as well.
Further, it also relied upon the words ‘in relation thereto’ occurring thereunder in order to hold that an agreement to sell yet to be built residential units would attract service tax and consequently a developer or a builder who charged periodic payments from parties and thereupon constructed residential units prior to their ultimate sale was indeed a service provider and liable to pay service tax under the relevant heading.
The CBEC Circular of August 2007 was brought to the attention of the AAR but it curiously held that the Circular lacked clarity and could not, in any event, be relied upon to argue that developers were not required to discharge service tax in such situations.
Again, the Guwahati High Court in the case of Magus Construction Pvt Ltd Vs Union of India [2008-TIOL-321-HC-GUW-ST], held that an agreement to purchase a fully constructed unit, which envisaged instalment payments of the purchase price during the period of construction was not a works contract since the intention of the parties was always to transact in sale/purchase of a fully constructed immovable property.
Notwithstanding the aforesaid position in law, litigation on the matter was rampant and the authorities were continuously seeking to impose tax on the typical activities undertaken by builders/developers. As a result of the several representations that were consequently received by the CBEC, the recent clarificatory Circular has been issued. It sets out the underlying issue as also the possible two views in regard to the service tax.
Thereupon, the Board has opined that an agreement to sell immovable property does not by itself create any interest in or charge on such a property, as per the Transfer of Property Act, 1884. It was only after the completion of the construction and the payment of the full consideration by the buyer to the developer/builder that the proper sale deed was executed and ownership/title in property was transferred.
The Circular consequently clarifies that the activities carried out by the builders/developers prior to the point of sale of property were not services rendered to customers. Consequently, no service tax would be chargeable with regard to the construction activities carried out by the builders/promoters.
While the Circular does not explicitly say so, it is also implied and indeed it is implicit therein that since the agreement for sale does not transfer title and indeed the parties only intend to buy and sell immovable property, there could also not be a service tax on such activities under the heading of ‘works contracts’. The Circular also reiterates what was clarified through the earlier Circular of August 2007 that if the services of a third party such as the contractor or a designer was procured by the builder/promoter, such services would be chargeable to tax.
The Circular concludes by holding that any decision of the Advance Ruling Authority which is contrary to the foregoing view could only impliedly be based on different facts and would hence have applicability to that case only. It is hoped that in line with the principles enunciated in the aforesaid Circular, due relief from the service tax would be granted to the construction industry and to the buyers of immovable property.
It is also hoped that the benefits of this Circular, which were until very recently understood to be binding on the authorities, will effectively accrue to those for whom it is intended and that the matter will no longer be pursued by the tax authorities.
The author is Leader, Indirect Tax Practice, PricewaterhouseCoopers, pwctls.nd@in.pwc.com
Developers lobby hard with states for sops
Developers lobby hard with states for sops
Sunday Business Standard, February 15, 2009, Page 1
Joe C Mathew / New Delhi
With each passing day making it clearer that only low-cost small houses can sell in this market, real estate developers have begun to lobby with states for concessions that will help them build such houses.
Developers, for instance, have asked the Haryana government to relax the population density norm for Gurgaon, a suburb of Delhi where they hold large parcels of land. Current rules say that builders cannot construct houses for more than 400 people in a hectare of land. Developers want the number to be doubled.
“We have approached the Haryana government for this. If accepted, this can lead to a 50 per cent increase in the number of houses that can be built in any defined area of land,” Unitech Managing Director Sanjay Chandra said. Haryana Urban Development Authority officials said they are seriously reviewing the situation.
It is learnt that developers, through their lobby groups, have made a similar request to other states as well. “We have asked all state governments and the central government to relax the density norms,” said Parsvnath Developers Chairman & Managing Director Pradip Jain.
All developers, small and big alike, have now decided to focus on affordable housing projects. While Unitech says 80 per cent of its new projects will fall under this category, DLF plans to test-launch affordable housing projects in at least six cities in the coming months.
While construction costs have come down a quarter with the fall in steel and cement prices, developers want the states also to contribute their share to bring down prices. Their organisations like the National Real Estate Development Council and the Confederation of Real Estate Developers’ Associations of India are at the forefront of this lobbying.
The builders met with some success a few days back when Uttar Pradesh decided to change its building rules to allow construction of more houses in a specified area than earlier. To make this possible, the government changed the floor area ratio (FAR) of group housing plots from 1.75 to 2.75. FAR refers to the area permitted to be used for actual construction out of the total area earmarked as housing plot.
“There are about 1,000 acres of land already allotted to the builders in Noida and Greater Noida. Due to the changes made by the Uttar Pradesh government, we will be able to build 50 per cent more houses than what we would have been able to legally construct in the same land earlier,” Omaxe Managing Director Rohtas Goel, who is also the president of the National Real Estate Development Council, said.
“We have asked all state governments to announce concessional registration charges for affordable houses. The government should provide loans at 5.5 to 6 per cent annual interest,” Jain said.
Meanwhile, Andhra Pradesh has announced stamp duty waiver for houses that cost less than Rs 20 lakh from January 1, 2009. Jain wanted other states to follow the Andhra model and allow waiver of stamp duty as well as land conversion charges to make housing more “low cost.”
Also, Uttar Pradesh has come out with a rule that developers who have not been able to pay fully for the land allocated to them, will be given land in the same proportion as the payment made by them.
Sunday Business Standard, February 15, 2009, Page 1
Joe C Mathew / New Delhi
With each passing day making it clearer that only low-cost small houses can sell in this market, real estate developers have begun to lobby with states for concessions that will help them build such houses.
Developers, for instance, have asked the Haryana government to relax the population density norm for Gurgaon, a suburb of Delhi where they hold large parcels of land. Current rules say that builders cannot construct houses for more than 400 people in a hectare of land. Developers want the number to be doubled.
“We have approached the Haryana government for this. If accepted, this can lead to a 50 per cent increase in the number of houses that can be built in any defined area of land,” Unitech Managing Director Sanjay Chandra said. Haryana Urban Development Authority officials said they are seriously reviewing the situation.
It is learnt that developers, through their lobby groups, have made a similar request to other states as well. “We have asked all state governments and the central government to relax the density norms,” said Parsvnath Developers Chairman & Managing Director Pradip Jain.
All developers, small and big alike, have now decided to focus on affordable housing projects. While Unitech says 80 per cent of its new projects will fall under this category, DLF plans to test-launch affordable housing projects in at least six cities in the coming months.
While construction costs have come down a quarter with the fall in steel and cement prices, developers want the states also to contribute their share to bring down prices. Their organisations like the National Real Estate Development Council and the Confederation of Real Estate Developers’ Associations of India are at the forefront of this lobbying.
The builders met with some success a few days back when Uttar Pradesh decided to change its building rules to allow construction of more houses in a specified area than earlier. To make this possible, the government changed the floor area ratio (FAR) of group housing plots from 1.75 to 2.75. FAR refers to the area permitted to be used for actual construction out of the total area earmarked as housing plot.
“There are about 1,000 acres of land already allotted to the builders in Noida and Greater Noida. Due to the changes made by the Uttar Pradesh government, we will be able to build 50 per cent more houses than what we would have been able to legally construct in the same land earlier,” Omaxe Managing Director Rohtas Goel, who is also the president of the National Real Estate Development Council, said.
“We have asked all state governments to announce concessional registration charges for affordable houses. The government should provide loans at 5.5 to 6 per cent annual interest,” Jain said.
Meanwhile, Andhra Pradesh has announced stamp duty waiver for houses that cost less than Rs 20 lakh from January 1, 2009. Jain wanted other states to follow the Andhra model and allow waiver of stamp duty as well as land conversion charges to make housing more “low cost.”
Also, Uttar Pradesh has come out with a rule that developers who have not been able to pay fully for the land allocated to them, will be given land in the same proportion as the payment made by them.
Now, an EMI holiday
Now, an EMI holiday
The Hindu Business Line, February 15, 2009, Page 15
--------------------------------------------------------------------------------
With real estate in the grip of a slowdown, developers are taking on buyers’ EMI obligation till handing over possession. This appears to be paying off.
--------------------------------------------------------------------------------
S. Shanker
From equated monthly instalment (EMI) subvention, it is now EMI holiday, with real estate developers agreeing to bear the buyers’ repayment obligation till handing over possession.
While buyers stand to benefit, as they will service their loans only on possession of the property, the builders too will benefit as they stand to garner sales and obtain finance in phases from the buyers’ bank, which otherwise is not easily available to them. And, even if available, it is at a much higher cost than the home loan rates of 8 per cent-plus.
On the flip side, detractors say the homebuyer runs a major risk, if developers default on payment/delivery.
With real estate in the grip of a slowdown, one can expect many such schemes to induce buying, says Mr Kamal Khetan, Managing Director, Sunteck Realty. However, he pointed out that not all projects can be slotted under the scheme — commercial, being one.
DELHI IN LEAD
The practice appears to be fast catching up. In Delhi and Mumbai, the builders are just about warming up to the idea. A couple of builders in the suburbs have come out with advertisements on similar lines, while seeking a 20 per cent upfront payment.
Mr Anand J. Gupta, General Secretary of the Builders Association of India, felt it was a well drafted scheme and worth considering as it benefits both the buyer and the builder.
Delhi-based Parsvnath Developers has sold 392 units, 80-85 per cent of them under the EMI holiday scheme, in a group residential project at Sonepet, Haryana. The company intends to build 1,200 units and had sought bookings for the first phase of 500 units. The expected realisation from the project in the next two years is Rs 500 crore.
The cost involved in the EMI holiday duration has been factored into the pricing. The company offers two plans — a full down-payment scheme under which the price is discounted close to six per cent. The EMI holiday plan is not on offer for all projects, especially those nearing completion as it would not benefit the buyer.
Mr Pradeep Jain, Chairman, Parsvnath Developers, said, “Keeping in view the requirements, the company has introduced the special EMI reimbursement scheme to provide substantial benefits in payment plans.”
Parsvnath provides post-dated cheques to buyers who opt for the scheme, which they can en-cash to honour their EMI commitment to the banks they had borrowed from.
Taneja Developers Infrastructure, which announced homes in the Rs 60-65 lakh range, said the response had been overwhelming and 90 per cent of the units were sold. “This enables prospective buyers to own the apartment for just Rs 9 lakh, whereas the rest of the payments can be disbursed in EMI after two years,” said a senior company official.
It is buy at today’s rates and pay at tomorrow’s low rate of interest, according to the Jaypee Group, which has homes in the Rs 35-75 lakh price bracket at Noida.
UK-based developer Dandara has been offering a similar scheme and had sold 68 units in London to high net worth individuals in India as investment. The apartments are priced between Rs 1crore and Rs 2 crore.
An important feature of Dandara’s offer is that the developer also provides an insurance cover from Zurich insurers for the down payment made. The premium is borne by Dandara. Sales is said to have picked up after the insurance component was offered.
Ms Mona Jalota, Head, Business and Sales Development, Dandara Group, said she sold 68 units in three months. Dandara assures to deliver the property in two years, while seeking an upfront payment of 10 per cent during booking and 10 per cent at the end of the second year — during delivery. With UK markets reeling under the global meltdown, Dandara has further reduced the upfront payment to five per cent this January.
This apart, Dandara arranges loans from UK-based banks to buyers, furnishing the property as collateral. It also assures buyers rental income for a period of three years to offset the loan repayment.
The Hindu Business Line, February 15, 2009, Page 15
--------------------------------------------------------------------------------
With real estate in the grip of a slowdown, developers are taking on buyers’ EMI obligation till handing over possession. This appears to be paying off.
--------------------------------------------------------------------------------
S. Shanker
From equated monthly instalment (EMI) subvention, it is now EMI holiday, with real estate developers agreeing to bear the buyers’ repayment obligation till handing over possession.
While buyers stand to benefit, as they will service their loans only on possession of the property, the builders too will benefit as they stand to garner sales and obtain finance in phases from the buyers’ bank, which otherwise is not easily available to them. And, even if available, it is at a much higher cost than the home loan rates of 8 per cent-plus.
On the flip side, detractors say the homebuyer runs a major risk, if developers default on payment/delivery.
With real estate in the grip of a slowdown, one can expect many such schemes to induce buying, says Mr Kamal Khetan, Managing Director, Sunteck Realty. However, he pointed out that not all projects can be slotted under the scheme — commercial, being one.
DELHI IN LEAD
The practice appears to be fast catching up. In Delhi and Mumbai, the builders are just about warming up to the idea. A couple of builders in the suburbs have come out with advertisements on similar lines, while seeking a 20 per cent upfront payment.
Mr Anand J. Gupta, General Secretary of the Builders Association of India, felt it was a well drafted scheme and worth considering as it benefits both the buyer and the builder.
Delhi-based Parsvnath Developers has sold 392 units, 80-85 per cent of them under the EMI holiday scheme, in a group residential project at Sonepet, Haryana. The company intends to build 1,200 units and had sought bookings for the first phase of 500 units. The expected realisation from the project in the next two years is Rs 500 crore.
The cost involved in the EMI holiday duration has been factored into the pricing. The company offers two plans — a full down-payment scheme under which the price is discounted close to six per cent. The EMI holiday plan is not on offer for all projects, especially those nearing completion as it would not benefit the buyer.
Mr Pradeep Jain, Chairman, Parsvnath Developers, said, “Keeping in view the requirements, the company has introduced the special EMI reimbursement scheme to provide substantial benefits in payment plans.”
Parsvnath provides post-dated cheques to buyers who opt for the scheme, which they can en-cash to honour their EMI commitment to the banks they had borrowed from.
Taneja Developers Infrastructure, which announced homes in the Rs 60-65 lakh range, said the response had been overwhelming and 90 per cent of the units were sold. “This enables prospective buyers to own the apartment for just Rs 9 lakh, whereas the rest of the payments can be disbursed in EMI after two years,” said a senior company official.
It is buy at today’s rates and pay at tomorrow’s low rate of interest, according to the Jaypee Group, which has homes in the Rs 35-75 lakh price bracket at Noida.
UK-based developer Dandara has been offering a similar scheme and had sold 68 units in London to high net worth individuals in India as investment. The apartments are priced between Rs 1crore and Rs 2 crore.
An important feature of Dandara’s offer is that the developer also provides an insurance cover from Zurich insurers for the down payment made. The premium is borne by Dandara. Sales is said to have picked up after the insurance component was offered.
Ms Mona Jalota, Head, Business and Sales Development, Dandara Group, said she sold 68 units in three months. Dandara assures to deliver the property in two years, while seeking an upfront payment of 10 per cent during booking and 10 per cent at the end of the second year — during delivery. With UK markets reeling under the global meltdown, Dandara has further reduced the upfront payment to five per cent this January.
This apart, Dandara arranges loans from UK-based banks to buyers, furnishing the property as collateral. It also assures buyers rental income for a period of three years to offset the loan repayment.
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