Real Estate Intelligence Report, Thursday, Februrary, 26, 2009

Conversion rates in affordable housing projects still lackluster

Conversion rates in affordable housing projects still lackluster
The Financial Express, Corporates & Markets, February 26, 2009, Page VIII

Mona Mehta Mumbai, Feb 25

Despite many top builders offering discounts of 15% to 20% on future affordable housing projects, which are yet to be constructed, the actual bookings for apartments at the revised market rates by potential end-buyers has started happening to the tune of 5% in the fourth quarter of the financial year200S-09.

At the same time, top builders and international property consultants say endusers have started inquiring about future projects this quarter, which was not the case during the previous quarter.

This comes as a relief to realty players since even transaction inquiries were on hold during the quarter ended De¬cember200S due to the liquidity crunch. But with the Central government announcing three stimulus packages in the last 60 days, the scene seems to have improved. Anuj Puri, chairman and country head, Jones Lang LaSalle Meghraj (JLLM), said, ''While the demand continues to be good, the degree to which potential buyers are responding to their needs is minimum, in anticipation of the large scale market rationalisation."

Jayant Gandhi, general manager - marketing and sales, Mayfair Housing Private Ltd said, "For our upcoming Mayfair Housing project in Virar, we have witnessed 1,000 footfalls since January 2009 and SO bookings. The booking rate at which builders are launching their properties is based on the revised market rate.”

According to Pawan Malhotra, managing director and chief executive officer, Mahindra Lifespaces, "There is a 300010 increase in enquiries by end-buyers this quarter. Apart from dropping prices, what is needed is personal negotiation between builders and endbuyers."

Hiranandani Constructions is now planning to develop affordable housing projects in Pune (between Rs 15 lakh and Rs 30 lakh for two and three BHK flats), said Niranjan Hiranandani, its managing director.

With bottlenecks such as high inflation and soaring in¬terest rates dampening the demand in the realty sector, major developers have started focussing on affordable housing in Mumbai, Delhi and Bangalore, as well as in emerging cities such as Pune, Ahmedabad, Lucknow, Kochi, Indore and Gurgaon.

According to Puri, "The market is headed for rationalisation and sustainable growth. The days of spectacular price rises are over. In residential, developers have been forced to take a serious look at the requirements of the common man - a segment that they had, to a large extent, been ignoring. In commercial, the sudden drop in the fortunes of the global IT community has put a brake on indiscriminate project launches and exuberant rentals. Whatever happens from now, will happen around the real needs of real people with real business plans and aspirations."

Residential constitutes 80% of the overall demand for India's real estate, which is now almost entirely end-user driven. While the demand continues to be at that level, the degree to which potential buyers are responding to their needs has dropped in anticipation of large-scale market rationalisation.

Today, there is little potential for the traditional profit avenues associated with real estate development. The highest real-time demand is now for affordable housing in residential and compact, efficiently managed projects in commercial, Puri added.

Big Bets on small houses

Big Bets on small houses
The Financial Express, India Inc, February 26, 2009, Page I

Saikat Neogi

* Omaxe plans to build one million houses in the price band of Rs 2.99 lakh to Rs 9.99 lakh in 21 states across the country
* Puravankara Projects intends to build 64,500 homes in the price range of Rs 10-20 lakh across five cities
* DLF plans to launch mid-income residential projects in the price range of Rs 20 lakh across the country
* Falcon Realty plans to build a one-room-kitchen flat for Rs 5.5 lakh and a one-bedroom apartment for Rs 9.9 lakh in Alwar
* Orange Properties in Bangalore is constructing 1,800 two-bedroom apartments for Rs 13.5 lakh each

These examples suggest a gold rush like situation in the real estate sector. With the government announcing a series of policy initiative and tax incentives on affordable housing in the last few months, real estate developers across the country are making a beeline to construct low-cost houses and are even modifying their pre-approved plans to construct small size apartments to cater to the untapped market.

For realty developers, venturing into low-cost housing is a new business opportunity. Although there has been a real estate boom in recent years, it has been limited to the middle and upper income residential and commercial property market. But with the economic slowdown and credit crunch, demand in this segment has completely dried up and developers are sitting on huge unsold stocks.

So, why are real estate developers now moving in doves to construct low-cost housing, which till recently was the sole domain of state housing boards? The catch is in the high demand-supply mismatch as the Planning Commission estimates that there is a shortfall of 24.71 million dwelling units in the country, out of which 99% is for LIG/EWS housing.

Anecdotal evidence suggest that about 100 large and medium size real estate companies have lined up affordable housing projects with a price tag of less than Rs 20 lakh in the range of 400 to 800 sq ft in the national capital region, distant suburbs of Mumbai and in tier II and tier III cities. And many are negotiating with various state governments and local bodies for land at concessional rate to construct low-cost houses under the public-private partnership mode as land cost accounts for around 70% of the total project cost. “One of the key themes of 2009 will be a greater focus on low-cost housing, due to demand still outstripping supply, falling land and construction costs and significant government incentives,” says Tushar Poddar, research head of Goldman Sachs in India in a recent report.

Strong matrix
Recession or no recession, the demand for housing will continue to rise due to urbanisation, demographic change and falling household size. Goldman Sachs estimates that an additional 140 million people will move to cities by 2020 and average household size is likely to continue to decline. Both these factors will push up demand for urban housing. Also falling raw material prices and shortage of land will make people to move into small-size apartments. “Ironically, the real estate sector, which was one of the principal causes of the financial market meltdown in the US, may just offer downside protection in India,” say Poddar.

To initiate a sustained development of affordable housing, the ministry of housing and urban poverty alleviation had set up a high level task force under the chairmanship of Deepak Parekh, chairman of HDFC Ltd. Submitting the report in December last year, the task force has underlined the fact that any delay in addressing the problem of housing would seriously affect India’s economic growth and poverty reduction programmes. (See graphic for more recommendations and affordability criteria)

Developers’ strategies
With the economic slowdown, the heady days of building and selling luxury and super luxury apartments are over. Speculative property buyers have scaled down their investment decision and shifted to Rs 20-25 lakh range, prompting developers to shift focus to building affordable housing in a bearish market where demand has slowed down and project funding has become a major concern.

If mega developers are getting into mid-income residential projects, smaller ones are cutting prices across the board to prop up sales. With shortage of working capital and dampened demand for new houses, developers are optimising costs by cutting down on high-end specifications like vetrified tiles, expensive bathroom fittings, and granite flooring. Moreover, a lot of developers are rushing to clean up their highly leveraged balance sheets and are under mounting pressure to meet their interest payment deadlines. In such a situation, building low-cost housing would enable them to generate the much needed working capital because of priority lending by banks and tax incentives offered by the government.

Says Sanjeev Srivastava, managing director, Assotech, “Small size apartments have become the in thing in today’s business and more and more real estate developers are targeting the segment. Affordable housing can be constructed in partnership with the government as land price is very high in India.” Assotech is building two-bedroom apartments for Rs 20 lakh each in Ghaziabad.

To carry the affordable housing business with a long-term growth strategy companies are floating subsidiaries or taking the special purpose vehicle route. For example, Omaxe has set up a subsidiary called National Affordable Housing Infrastructure Ltd to develop low cost houses and Bangalore-based Puravankara Projects has formed Provident Housing and Infrastructure to build affordable homes across the country. Even premium housing developers like Sharpoorji Pallonji and Matheran Realty have chalked out aggressive plans for affordable housing.

Puravankara Projects will invest around Rs 80 billion for its pan-India affordable housing project. The first phase covers Bengaluru, Chennai, Hyderabad, Coimbatore and Mysore where 64,500 houses with a total built-up area of 59.80 million sq ft will be constructed in the next five years. The company is funding these projects through construction debt and customer advances, which would amount to Rs 65 billion, and internal accruals and equity sourcing. In the second phase, the company will cover cities like New Delhi, Kolkata, Kochi, Jaipur and Pune.

Though building small apartments may be the in thing because of the economic slowdown, margins are much lower in this category. And developers are not dithering. “Volumes make up for the lower margins and economics can be worked out with the use of latest technology to scale down the cost of projects,” says Rohtas Goyal, chairman and managing director, Omaxe Ltd.

Stock of urban land for affordable housing remains a major problem. Each parcel of land, depending upon its location and physical attributes, has its own set of problems. A developer of low-cost houses has to take 58 various approvals and no-objection certificates and the waiting time could be anywhere between six months to two years.

“Though the government has introduced a series of sops for developing affordable housing, there are many who are deprived of this basic need. For making houses affordable, the bureaucracy needs to be transparent in regulations and set up a single window clearance. It should also encourage use of local raw materials, which will bring down the cost of housing,” says Navin M Raheja, managing director, Raheja Developers Ltd.

Technology plays an important role in reducing costs on construction. Residential projects could use new prefabricated construction technology where the construction needs to be done at a faster pace with quality control. “Construction cost has to be reduced without compromising on quality and various technology options should be put in place,” says R R Singh, director-general, National Real Estate Development Council.

Experts suggest that core housing, which are incomplete at the time of initial occupation and completed by the inhabitant, should be adopted in smaller towns as it is cost effective, and one can do incremental construction.

Damp demand
Though builders are firming up affordable projects and are advertising them, consumer sentiment is still low and even banks are keeping a tight control on loan disbursement. The latest data from the RBI Monetary Policy shows that offtake of credit for housing had slowed down to 8.8% till December last year from 14.6% during the same period in 2007.

Even after the two stimulus packages and low interest rates offered by PSU banks on loans below Rs 20 lakh, credit offtake for housing remains dismal. RBI data between November 7, 2008 and January 16, 2009 shows that while the aggregate non-food credit grew at 4.3%, housing recorded a credit growth of only 2.49%, underlining the fact that consumers are still in a watch-and-wait mood and expect price of real estate to fall further.

Experts say that the interest rate cuts alone will not help boost real estate sales and reciprocal steps need to be taken by developers. “Demand has to come from actual borrowers and low interest rate has no relevance if borrowers do not come for loans because of high real estate prices,” opines V K Sood, managing director, PNB Housing Finance Ltd.

Buyers are also skeptical about claims by developers. Developers do not mention the end-cost in their advertisements, which could exclude additional costs like parking, external development, preferential location, club membership and power backup. These charges put together can go up to Rs 6 lakh per apartment.

Boosting the economy
Large-scale construction of low-cost houses will boost sectors like steel and cement.The Deepak Parekh committee estimates that alleviating the urban housing shortage could potentially raise the rate of growth by at least 1-1.5% and have a decisive impact on improving the basic quality of life of our people.

Various studies have established the fact that investment in real estate has a multiplier effect on income and employment. It is estimated that every rupee invested in this sector adds 78 paise to the state’s GDP and for every direct job created in the housing industry, eight jobs are created indirectly.

The National Urban Housing and Habitat Policy recognises the need for public-private partnerships and development of various financial and operational innovations for bridging the housing shortage.

Perhaps a lesson can be learnt from China, which has compelled local administration to promote low-cost housing and directed private developers to reserve 70% of their new projects for small units. The government of India has been considering cross-subsidisation but progress will depend on the Centre, state governments and real estate developers acting in a far-sighted way to build low-cost housing.

Cabinet to take up changes in land acquisition policy today

Cabinet to take up changes in land acquisition policy today
The Financial Express, February 26, 2009, Page 3

Sandip Das

After getting go ahead from GoM on Tuesday, the Cabinet would consider two significant policy changes on land acquisition for industrial use and rehabilitation of displaced people due to industrial project on Thursday.

Sources told FE that amendment to the Land Acquisition Act 1894 and a introduction of the National Rehabilitation and Resettlement Policy (NRRP), 2007, would be taken up by Cabinet, following which both the bills are likely to introduced in both houses of Parliament on Thursday.

With Thursday being the last day of Parliament session for the UPA government, it wants to rush through the amendment instead of waiting for the next government. Agriculture minister Raghuvansh Prasad Singh has been pushing for including the two important items in Parliament’s business schedule.

As per the changes proposed to the Land Acquisition Act, a state could only acquire a maximum 30% land required for an industrial project while the rest has to be purchased directly by the concerned company. If passed, the amendment is expected to see opposition from the states as the issue of land remained a state subject.

The NRRP, which comprehensively deals with rehabilitation aspect of land acquisition for industrial use, states that families displaced due to industrial project are to be given market rate for the land, including some compensation in terms of shares and debentures of the company.

“In case of a project involving land acquisition on behalf of a requiring body, and if the body is a company authorised to issue shares and debentures, the affected families who are entitled to get compensation for the land or other property required shall be given the option to take up 20% of the compensation amount due to them in the form of share and debentures,” NRRP states.

Sources also said the GoM has accepted the rural development ministry’s demand for 70:30 formula for land acquisition for industry, which was earlier opposed by Left parties, a parliamentary panel and few state governments.

The suggested policy change in policy assumes significant as NRRP categorically says that the purpose of setting up an industrial unit should be to minimise large scale displacement of people as far as possible.

NRRP and the associated legislative measures aim at striking a balance between the need for land for developmental activities and at the same time protecting the interests of the land owners, tenants, the landless, agricultural and non-agricultural labourers, artisans and others whose livelihood depends on the land involved.

“Acquisition of agricultural land for non-agricultural use in the project may be kept to the minimum and multi-crop land may be avoided to the extent possible for such purpose and acquisition of irrigated land,” NRRP has states.

Ear to ground

•As per the changes proposed to the Land Acquisition Act, a state could only acquire a maximum 30% land required for an industrial project while the rest has to be purchased directly by the company

• If passed, the amendment is expected to see opposition from the states as the issue of land remained a state subject

• The GoM has accepted the rural development ministry’s demand for 70:30 formula for land acquisition for industry, which was earlier opposed by Left parties, a parliamentary panel and few state governments

Pune builders working out 3-month relief package

Pune builders working out 3-month relief package
The Hindu Business Line, February 26, 2009, Page 19

Our Bureau

Mumbai, Feb 17 Realising that job security is uppermost on the minds of home buyers, the Promoters and Builders Association of Pune is working out a three-month relief package to address the EMI portion for the period in case of job loss.

The Pune-based builders would take up the payment of EMI for the three-month period, subject to buyers providing proof of job loss. The scheme is being framed on the presumption that the buyer would get employment in three months.

The builders would also not insist on any instalment due during the period and would collect the same without interest after the buyer was gainfully employed, said the Association President, Mr Lalit Kumar Jain.

The provision would be extended through an escrow account created for the purpose by builders or the association could take up the responsibility.

Mr Jain said prices have fallen by 20-40 per cent in Pune and the 260-member association has asked members to lower prices to the maximum extent to induce buying.

Some developers were also offering price guarantee schemes - in case prices fall after the booking is made, but before possession, the sale amount would be revised accordingly.

Mr Jain said the cost of a square foot in a residential built-up area across Pune was in the range of Rs 2,500-2,900.

This cost had been arrived after an extensive survey by the association, which had concluded that the sq ft rate, inclusive of inputs, expenses and overheads, was Rs 1,900- Rs 2,000, in addition to the land cost that varies from Rs 900 to Rs 1,400 a sq ft.

Any deal below this bandwidth depended on ‘builder comfort,’ as land could have been bought much ahead of the normal three-year horizon the builders adopt, he said.

Steel: Hard times to stay

Steel: Hard times to stay
Business Standard, Money & Markets, February 26, 2009, Section II, Page 1

The lower prices could stimulate demand though not significantly

Steel makers plan to trim prices of steel by about Rs 600 per tonne following the 2 per cent cut in excise duties.But that’s unlikely to result in a spurt in orders from the real estate or automobile players though players in the infrastructure space may be willing to buy more.Until there’s a fullfledged revival in demand, companies will have to live with low realisations-prices have fallen sharply by around 30-40 per cent since August last year and now range between Rs 32,000 and Rs 36,000 per tonne. That’s what caused JSW Steel (standalone) to report losses before tax of Rs 139 crore in the December 2008 quarter. This number doesn’t include foreign exchange losses. Of course, the company also sold a smaller amount of steel—it had actually scaled down production by 20 per cent and therefore revenues remained flat. In fact, others too netted lower realisations as a result of which sales at Tata Steel, for instance contracted 3.5 per cent while SAIL’s revenues were down 6 per cent.

High raw materials continued to pressure operating profit margins(opm) at JSW Steel—the opm was down by about 1400 basis points to 15.3 per cent. Tata Steel’s margins too came off by about 1200 basis points, though of course they were far higher at 30 per cent.

In the current year Tata Steel is expected to post sharply lower profits compared with the Rs 7,700 crore reported in 2007-08, with its overseas subsidiary Corus expected to report only a small surplus. Analysts are also forecasting afall in profits in the following year and that’s why the Tata Steel stock is quoting at a price-earnings multiple of less than 3 times estimated earnings in 2009-10. JSW Steel’s net profits too are tipped to fall this year from the Rs 1,728 earned in 2007-08. However, since the company is not as exposed to the overseas markets as Tata Steel is, a revival in demand at home could mean better operational profits in 2009-10. Nevertheless the company could continue to incur foreign exchange losses and that could hurt the bottom line.

Tatas, Birlas bet big on real estate

Tatas, Birlas bet big on real estate
The Economic Times, February 26, 2009, Page 5

M V Ramsurya & Rajesh Unnikrishnan MUMBAI

TWO OF India’s large business houses, the Birlas and Tatas, are looking at real estate as a major investment area, albeit in different ways. While the Birlas, through a financial services arm, are offering real estate as an alternative investment option to clients, the Tatas are planning to develop surplus land held by group companies and could also invest in the sector through money raised in recent public offerings.

Interestingly, these moves come at a time when real estate prices are correcting and slow demand for projects has prompted large developers to default on their fi nancial commitments and on project deadlines.

Aditya Birla Management director Ajay Srinivasan who also heads the fi nancial services business, says the con glomerate is merely gearing up for the future. “We are now putting a team in place and want to be ready when the time is right,” he told ET. The financial services arm of the group is setting up a real estate and private equity arm for its wealth management units. To be headed by Sashi Kumar, the real estate business would be managed through Birla Sun Life Asset Management.

The Birlas plan to subsequently launch two real estate funds, offshore and local, for the real estate sector where although the investors would be different, the investment destinations would be in India and could also likely include distressed real estate assets.

Tata Housing Development, a real estate arm of the Tata group, has already said that it plans to leverage its tie-up with banks by developing properties on surplus land owned by other Tata group companies. Tata Housing is now identifying excess landbanks owned by companies such as TCS, Voltas, Rallis India, Tata Motors, Tata Coffee and Tata Tea.

Tata Capital, the financial services arm of the Tatas, is scheduled to close a largely successful non-convertible debenture issue on Tuesday; it has so far raised Rs 2,300 crore against a targeted Rs 1,500 crore. Although Tata Capital has said that it won’t lend to group companies, it has proposed to invest in most asset classes.

Anticipating a large value erosion in the realty space, Indian corporates are planning to float new funds to acquire assets in the domestic property market. Real estate funds such as Saffron Advisors have either floated or are in the process of floating funds with corpus ranging between Rs 500 crore and Rs 1,000 crore. “As far as Indian realty is concerned, for the right projects, funds are still available,” says Saffron Advisors MD Ajoy Kapoor. “Conservative European investors, after conducting extensive due diligence and research, are more comfortable with investing in Indian real estate provided they are able to align with the right partners.”

A few months back, Munich-based retail aggregator Deutsche Capital Management AG underwrote $20 million for Saffron India Real Estate Fund I, an India-focused real estate fund. DCM is raising a specific fund for investing in Indian real estate through Saffron Advisors.

HOUSING IN

Birlas are offering realty as an alternative investment option to its clients
Plan offshore and local real estate funds
Realty arm of the Tata group, Tata Housing Development, plans to leverage its tie-up with banks by developing properties on surplus land owned by group firms
It’s identifying excess land owned by TCS, Voltas, Rallis India, Tata Motors, Tata Coffee and Tata Tea

NRI realty investments halve

NRI realty investments halve
The Economic Times, February 26, 2009, Page 5

Avinash Nair & Parag Dave AHMEDABAD

THENRI season is now at its fag end. De spite undertaking tours to the US, the UK and Middle East and doling out free bies and discounts, realtors have been unable to catch the attention of this cash rich community. The result: NRI invest ments in India-based properties dropped by over 50% this season, with the four metro cities and “NRI-heavy” mirco markets in states like Gujarat and Kerala being among the worst hit.

“Compared to last year, the drop in NRI interest in India-based properties has been almost 50% in all sectors. The metros showed a sharp drop in demand, largely owing to the steep prices”, says Sanjay Dutt, CEO - business, Jones Lang LaSalle Meghraj (JLLM), a global realestate consultancy firm. “Very few luxury homes have been sold as compared to last year”, he adds.

At a time when the domestic demand in micro-markets in Tier-I, II and III cities began to slump in the third quarter of this financial year, the developers were hopeful that the demand from the NRIs will pep up the sentiments in the realty markets. However, the global slowdown and the resulting slump froze the bullish sentiments among NRIs. “Though a far-from-spectacular number of transactions have indeed taken place this season, generalised job insecurity and a desire to conserve available cash among IT employees abroad has curbed investment demand for high-end properties, Mr Dutt said adding that the response was “significantly muted” from the NRI community this season.

The sharp corrections seen in some larger cities has also led to an “acute wait-and-watch attitude among NRIs who - just like everyone else - are now very price sensitive”, he explained.

DLF Chennai project faces buyers exit

DLF Chennai project faces buyers exit
Business Standard, February 26, 2009, Page 6

Chennai: DLF, the country’s biggest real estate developer, is facing buyer pressure, as many of them are exiting its project here on concerns of delay and issues related to implementation of the project. A customer group comprising buyers of flats in the DLF Southern Homes project claimed that as many as 600 members had issued letters of exit to the developer. A DLF spokesperson, however, said only 150 buyers had submitted letters to exit. BS Reporter

I-T dept orders special audit of DLF accounts

I-T dept orders special audit of DLF accounts
The Economic Times, February 26, 2009, Page 12

Our Bureau NEW DELHI

THE Income-Tax department has ordered a special audit of the accounts of DLF and would take necessary action after scrutiny, minister of state for finance S S Palanimanickam said on Wednesday.

“A special audit under section 142(2A) of the I-T Act has been ordered in the case of Delhi Lease and Financing Ltd, also known as DLF, for the assessment year 2006-07,” the minister said. As per the minister, the audit report ’is being examined’ for necessary action as laid down under the law.

The DLF spokesman said, “we would like to state that the assessment (of the audit report) is still to be done; it will be wrong to say that any action is being taken against DLF”.

As per DLF, FY 2005-06 was the first year in which DLF revised accounting standards as prescribed by ICAI because it had to go public. As per these standards, DLF started using Percentage of Completion Method (PoCM) for recognising revenues, and consequently, profits. Prior to this, all accounts were prepared in accordance with Indian GAAP.

Percentage of completion method mandates a realty company to book sales and profit proportionate to the level of construction achieved in any project in the given quarter. Earlier, developers would book sales and profits once the project was completed.

DLF said this accounting change led to DLF recognising an additional profit of Rs 314 crore, resulting in taxable income of Rs 334 crore (for DLF Limited as a standalone entity). DLF Limited (as a standalone entity) paid tax of Rs 114 crore on the same, which is more than the tax paid by the company in the past years.’’

Under the I-T law, in an assessment year, the tax department assesses income of preceding financial year.

Co raises Rs 2,000cr to repay short loans

DLF, India’s largest listed property developer by market cap, has raised over Rs 2,000 crore in debt from PNB, LIC, SBI and Bank of India in the past one month to repay short-term debt, a company official said. The company had earlier raised Rs 1,000 crore in debt from PNB in the December quarter, reports Sanjeev Choudhary from New Delhi. In all, the company has borrowed Rs 1,700 crore from Punjab National Bank, Rs 350 crore from State Bank of India, Rs 220 crore from Bank of India and Rs 720 crore through sale of nonconvertible debentures to LIC in the past three months. All these loans are long-term loans for a period exceeding three years and at an average rate of interest of 14%.