Real Estate Intelligence Report, Wednesday, April 08, 2009

Stimulus measures must continue, recovery will take time: Montek

Stimulus measures must continue, recovery will take time: Montek
The Financial Express, April 8, 2009, Page 2

Anticipating a sharp slowdown in the private investment, Planning Commission deputy chairman Montek Singh Ahluwalia on Tuesday endorsed continuing the stimulus programme in this fiscal at least equal to the level of 2008-09. Ahluwalia said the fiscal deficit in 2008-09 could be at the level of 6.8% of GDP. “I don’t recommend it to lower in the next year,” he said at Shankar Acharya’s book launch.

Ahluwalia said private investment will tumble due to shrink in the demand and difficulty in financing investment, while ruling out inflation being a problem in this fiscal. “There is not even a dog’s chance of inflation this year,” he said. He was responding to the concern that the high level of fiscal stimulus could stoke inflation going forward.

Ahluwalia said while the virtue of fiscal prudence cannot be denied, the global crisis and consequent slowdown require demand stimulation this year, especially since the export demand is unlikely to recover. “Public expenditure is a bit like opium, once you get into it, you can’t get out of it,” he said.

Arguing for expanding the perimeter of regulatory framework, the deputy chairman stressed on the need to make a clear distinction between relying on the real economy and relying on the financial economy. Due to the presence of information asymmetry, the financial economy by its nature needed greater regulation, he said, adding that there was clear consensus on this view among G-20 countries. Ahluwalia also argued that the Indian and global recovery is not going to be V-shaped, implying that the recovery will not be swift and rapid, rather it will be attenuated and flat.

Former chief economic advisor to the finance ministry Shankar Acharya during the launch of his book ‘India and Global Crisis’ said, ‘India’s recovery will be slow due to weak global economy, high fiscal deficit which is likely to persist in 2009-10 and the likely election of a coalition government that would shy away from taking strong decisions.’ He projected the GDP to grow between 4% and 6% in 2009-10. Indian Council for Research in International Economic Relations director and chief executive Rajiv Kumar said crisis demanded innovative solutions. He suggested the RBI should reduce the reverse repo rate to zero from 3.5% at present to discourage banks from parking excess short term funds with the RBI.

The RBI may even impose a charge on banks parking funds at the reverse repo, he said. He also argued for ‘some sort of government diktat’ or incentive for private banks to start lending credit.

“The private banks have been performing worse than the public sector (in lending),” he said.

Implications for corporate India

Implications for corporate India
The Hindu Business Line, April 8, 2009, Page 6

Opportunity-risk imbalance: Implications for Corporate India

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The high growth environment of the last decade trivialised the need for a systematic identification of opportunity and a comprehensive assessment of risk. With the environment now turned on its head, companies need to reassess strategies and take clear stock of risks, says V. RAMAKRISHNAN.
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Business is a fine balance between opportunity and risk. In an ideal world the entrepreneur identifies a new opportunity, a product, a process or a service that would increase user satisfaction. Successful businesses identify opportunities early, and ride a wave, at minimum risk, to deliver sustained growth and profitability. Bad or incomplete identification of an opportunity or an inadequate understanding of risk can destroy businesses.

The last 18 months have seen a significant number of businesses destroyed all over the world. Opportunities available to Indian firms eight months ago are now history; risk has increased manifold. The high growth environment and the go-go nature of growth in the last decade trivialised the need for a systematic identification of opportunity and a comprehensive assessment of risk. The pie was so big and growing so quickly, that almost anything made sense and money.

Indian firms expanded capacity, market footprint, acquired firms in high-cost regimes, increased exports as a component of the sales and profit, salaries and wages rocketed and there was an opportunity for every stakeholder at seemingly no risk. All and sundry began to think of themselves as world-beaters. Now that they have been beaten by the world it is time to reset the approach to avoid a Ctrl-Alt-Del situation.

OPPORTUNITY MANAGEMENT

Identifying and seizing opportunities requires a profound understanding of markets and customer expectations. Product, process and service has to be tailored to the ‘emerging’ customer need rather than the current need. The new paradigm is: What can we make that you want to buy as against — we have a product you have to buy!

Indian corporates need to develop products and services that are needed around unmet needs of customers and go out and market, rather than sell, them. This requires understanding market reality, shifts and drivers on an ongoing continuous basis. Indian firms need to invest in understanding factors critical to their success — the physical, political, economic, social, technology and trade frameworks that will drive the competencies they need to acquire to leverage an opportunity.

This requires a realistic estimate of the value chains that deliver results at least risk and their own strengths and weaknesses to manage and mitigate the risks while making the most of the opportunity.

The iPhone is an excellent example of this approach. In a commoditising market Apple identified the needs that users, young, old and mid-age, wanted and produced a user-friendly product. The factor critical to its success is its ease of connectivity, high-speed download off the Internet and elegant looks, not to mention superb feature list. The least concern for the user is the phone attributes, which, in any case, are good!

In contrast, all the leading players of two years ago are now playing catch-up with iPhone, which, incidentally, offers a limited range of models, in contrast to the dizzying array and colours from other phone-makers! A good risk reduction exercise.

UNDERSTANDING RISK

Risk needs to be understood in its totality. Risk, defined as the possibility that events may not turn out as planned or expected, has many dimensions to it, much of it ignored in a high growth era, and all which become relevant and rear up when least desired, in difficult times.

The primary risks Indian corporates need to contend with is strategic risk — the ability to identify and seize an opportunity and allot resources to ensure delivery. It is sad to see the ‘retail revolution’ leaders of mid-2008, languishing in sour deals. The closure of 20 per cent of these ‘modern format stores’ is a telling commentary on the poor assessment of strategic risk. Minimising strategic risk increases the competitiveness of the firm.

The second major risk facing Indian corporates is operational risk; Indian productivity remains way behind global standards. And corporates have not even begun addressing them. The garment industry is a case in point. On average, an Indian garment-maker produces 7-10 garments per machine per day. The world standard is 23-25!

No wage differential can mask the harmful consequences of this depth of under-performance. Remove the subsidies and the garment industry will sink like a stone. Reducing operational risk increases asset and resource productivity.

Capacity utilisation is a good mitigator of operational and strategic risk; and both of them could do with significant streamlining. With increasing profitability Indian firms have been diversifying — a nice, but risky way, to seek opportunities. Real estate is littered with firms which saw ‘opportunity’, created land banks and are now sitting ducks.

MANAGING CAPITAL

Capital management is another significant but unrecognised mitigator closely related to cash flow management; an easy task when banks were generous, business good and mood upbeat but frightfully difficult when banks are running for cover and opportunities have dried up. Operating cash flows, while much improved in recent years, still lag the best in global class substantially.

The suddenness of the melt down has caused immense difficulties as cash flows were planned on an eternal upside. One only has to see the plight of the major suppliers to truck majors! While there are many more aspects to risk like forex management, governance, legal, statutory and regulatory risks, two key issues need to be addressed by Corporate India in a hurry. The need to understand market and customer and the imperative to enhance employee productivity is high. The former is more than market research. It is about creating a systematic approach to identifying emerging needs.

The story goes that the Boeing Dreamliner started when a major new plane was presented to a whole group of prospective buyers who just shunned the offering. Boeing had the courage to admit that they needed to stay relevant to what their customers need tomorrow rather than focus on the money and time lost in developing a product nobody wanted in the first place.

The need for employee productivity cannot be understated. The value added per rupee of employee cost is the basis of the firm’s profitability. The correlation is high, very high. In a downturn, corporate India has to come to terms with increasing value-add while reducing employee cost. In a situation as grim as the current one, the opportunity to increase value-add is limited; the risk to a business is infinite if it cannot get its employees to produce more per rupee earned.

A forward-thinking industrialist was recently telling me of his plans — half the manpower, twice the output. While this has far-reaching consequences for employment in India the downside of not doing it could be even riskier.

India is at the threshold of becoming a high quality manufacturing hub, to supplant its success in the services space. This can be sustained only if assets — and people are the major ones — and resources are at least as productive as our main contenders.

Corporate India needs to take a hard look at its past practices and set in place a set of good practices that will work well when the economy gets going, as it undoubtedly will. The opportunity dimension is transforming, possibly forever; the risks, in the near term are different and higher. The revised equation has to be identified; and solutions innovated.

QED.

(The author is a Singapore-based enterprise performance consultant. blfeedback@thehindu.co.in)

Realty index on a roller coaster ride, but speculators ruled out

Realty index on a roller coaster ride, but speculators ruled out
The Financial Express, April 8, 2009, Page 4

The last few days of March saw extreme volatility in realty stocks, which experts have attributed to profit booking, trading moves, global cues and macro economy moves.

On March 20, the realty index was -4.1%, while it went up to 6.3% on March 25. A day later, it went down to -4.54%. After a marginal recovery to 1.23% a day later, it slipped again on March 30 to -7.24%, only to regain ground marginally on March 31 when it went up to 2.93%.

“This movement is certainly not because of speculators, since they are very unlikely to sell off their stocks, incur a loss and exit the market”, Shobhit Agarwal, joint managing director, capital markets, Jones Lang LaSalle Meghraj, pointed out. Hitesh Agarwal, head of research, Angel Broking said the swings were mostly due to trading moves. DR Dogra, deputy managing director, CARE Ratings, reiterated that investors are not responsible for any movement—positive or negative—in the market.

Dogra also said the movement of the realty index is not totally unrelated to the movement of the sensex. “The month of March saw a rise of 13% in the BSE realty index at 1560.83 points, with a surge in stock prices of realty majors like DLF, Unitech, HDIL and Mahindra Life. There have also been minor declines in the realty index in March, mainly because of the fall in Sensex”, Dogra added.

“Global markets are in sync right now. In these uncertain times, one is watching the other’s move. So a rise or fall in stocks in the US market is likely to affect stocks here,” explained Shobhit Agarwal.

Another reason for the random movement of stock prices is due to profit booking. “The fall in the realty index on March 26 can be attributed to profit booking due to considerable rise in index on the previous trading day”, Dogra added.

Overseas factors have also been responsible for a rise in the stock prices of realty index. Dogra believes that, oversubscription of rights issue of CapitaLand, a Singapore-based company, has led to a rise in realty stocks in India.

During March-end, stocks become volatile, while at other times, the impact is not so much. But at a time when the realty index rises and comes down very sharply, the year-end phenomenon is also very exaggerated and pronounced.

RBI to meet industrialist, credit rating firms

RBI to meet industrialist, credit rating firms
The Financial Express, April 8, 2009, Page 2

Amidst economic slowdown, the Reserve Bank of India (RBI) has convened a meeting of top industrialists, credit rating agencies and chief financial officers of the top companies in Mumbai on Thursday to discuss emerging economic situation.

RBI governor D Subbarao along with other top brass of the central bank will meet professionals from across the segments of economy before RBI announces its annual monetary and credit policy on April 21. Industrialists who are members of trade and commerce bodies like CII and Ficci will attend the meeting. The meeting will focus on the effects of stimulus packages announced by the Centre and the RBI in recent months.

Issues like interest rates, credit flow and restructuring of assets by banks will be also be discussed in the meeting.While industrialists have demanded more stimulus packages, Subbarao has cautioned that the economy will see more paid in days ahead.

However, the RBI has been vociferous about the fact that banks are not adequately bringing down their rates to prop up the demand in the system.

“The global recession, a fall-out of the unprecedented financial crisis, is the most serious economic problem that the world has faced in the post-war era and contrary to earlier hopes, it is now clear that the downturn will be deeper and the recovery will be longer than we had earlier anticipated. The RBI has played, and will continue to play, a leading role in managing the crisis and minimizing the pain of adjustment,’’ Subbarao said last week addressing RBI staffers on the occasion of the institution’s Platinum Jubilee celebrations.

CII to submit proposal on land acquisition to the new Govt

CII to submit proposal on land acquisition to the new Govt
The Hindu Business Line, April 8, 2009, Page 11

Task force analysing States models.

Our Bureau

The task force set up by the Confederation of Indian Industry on land acquisition is expected to submit its recommendations after the elections to the new Government, according to the CII President, Mr Venu Srinivasan.

“There should be transparency so far as land acquisition is concerned. States should have transparent land banks as it is difficult for industry to acquire large tracts of land,” Mr Srinivasan said at a CII press meet here on Tuesday.

The recommendations would be ready by July and would be submitted to the new Government after the elections, he said, refusing to divulge details about the proposed recommendations.

The CII was analysing the model of land acquisition followed by various States and would try to compile the best practices followed by some of these States in its recommendations, according to Mr Mukul Somany, Chairman, CII-Eastern Region. “We have analysed 2-3 States, Punjab being one of them, and we will look at including their land acquisition procedures in our recommendations,” he said.

The confederation would also encourage the role of private sector in agriculture in the form of contract farming. “There is nothing much happening in agriculture post reforms, we want to encourage private sector to come in for contract farming,” said Mr Srinivasan.

There was a need to create awareness among investors about the industrial policy in West Bengal in order to attract investments into the State. “West Bengal was the leader of industrial growth and manufacturing sector. However, it is the lack of awareness and some image related issues which is causing hindrance to the industrial development of the State,” Mr Srinivasan said.

The success stories of various industrial houses should be showcased to the investor community to clear perceptions about the State, Mr Somany added.

Property rates going south, slowly

Property rates going south, slowly
Hindustan Times, April 8, 2009, Page 1

Real estate prices are set to fall the same way they went up over the past few years.

Residential property prices have already corrected by over 25 per cent in the last eight months but have failed to enthuse buyers. This will pull prices down further.

Property prices in key Indian cities will decline by another 35 per cent in the next three years, a report by brokerage firm Edelweiss Capital noted. “Property prices increased sharply over the past six to seven years, rising 3.4 times in normal term (quoted price) and 2.5 times in real term (transaction price) over 2001 prices. We expect a price correction of 48 per cent in normal term and 58 per cent in real term,” the report said.

“Appetite for real estate has diminished significantly with foreign investors; developers are highly leveraged and their inability to serve the debt obligation raises a threat,” it said.

“Prices have fallen 25-30 per cent and have bottomed out in most places,” said Anuj Puri, chairman, Jones Lang LaSalle Meghraj. “Over the next 12 months, expect another 10-15 per cent drop in markets where there’s excess supply and where prices are too high.”

“Prices have corrected by 10-25 per cent,” said Aditi Vijayakar, executive director (residential services), Cushman & Wakefield India. “In high-end properties, it would correct by another 5 per cent and by 5-10 per cent in suburban markets over the next 12 months."

Property brokers are feeling pessimistic. Gurgaon has seen a drop of 25 per cent in prices of ready-to-move properties and brokers say there’s no demand for under-construction properties either. It’s no better in Delhi, Noida and Faridabad.

DLF eyes 900 cr from plot sales

DLF eyes 900 cr from plot sales
The Economic Times, April 8, 2009, Page 1

ITC, Accor, Hyatt, Park Hotels & Duet Group In Race For 8-9 Hotel Plots

Sanjeev Choudhary NEW DELHI

INDIA’S largest real estate developer, DLF, expects to raise around Rs 900 crore in the next three months by selling at least eight hotel plots across the country, a senior company executive said.

The company is talking to several hotel companies, including ITC, Accor, Hyatt and Park Hotels, and buyout fund Duet Group for sale of these plots, he added, requesting anonymity.

The plots put on the block are located in Mumbai, Kolkata, Bangalore, Gurgaon, Baroda, Lucknow, Kasauli (Himachal Pradesh) and Sikkim.

“We are in advanced stages of negotiations with several hotel chains to sell 8-9 land parcels that were marked for hotel projects. We have necessary government approvals in place, but don’t intend to build hotels there immediately,” he said.

DLF is selling these plots to raise funds for other hotel projects that are due to begin construction soon. The company may close 4-5 deals in a month and the balance by June-end, he added.

Real estate consultants say there are a large number of incomplete hotel projects up for sale across the country as realty companies, faced with cash crunch, are losing interest in these capital-intensive projects. The official spokesman at DLF declined to comment on the hotel plot negotiations. “We do not comment on market speculation,” he said. Hotel business not attractive any more.

WHILE announcing December 2008 quarter earnings, DLF vice-chairman Rajiv Singh had said the company wanted to raise around Rs 2,000 crore by selling its assets, but didn’t mention hotel plots specifically. DLF had nursed ambitious plans to build over 25,000 hotel rooms in more than 40 cities and tourist destinations across India. But the global downturn made capital scarce and expensive, forcing it to slow down plans.

The terror strikes in India and belt-tightening overseas further hit visitor arrivals. Lower occupancy forced hotels to cut room rates, making the business less attractive. DLF’s joint venture with international hotel chain Hilton too was reworked after the latter was taken over by the world’s largest buyout fund, Blackstone Group, globally.

The joint venture company is now expected to build only four hotels against the much larger number planned earlier. Exact numbers were never disclosed. The joint venture company will build hotels in Kolkata, Chennai, Mysore and Trivandrum. DLF has obtained government clearances for all hotels except in Mysore, but hasn’t achieved financial closure for any of the projects. Two of DLF’s hotels are ready and likely to open by the monthend in south Delhi. Several real estate developers, which entered the hotel business in the past few years, are now looking for an exit or trying to moderate their ambition. Delhi-based Parsvnath Developers has put its four hotel projects on the block while Unitech has sold one hotel in Gurgaon and looking for buyers for the rest.

Rally may sustain, say market players

Rally may sustain, say market players
Business Standard, Money & Markets, April 7, 2009, Section II, Page 1

BS Reporter / Mumbai

The equity market is expected to see some more improvement going forward as market players believe that the $1.1 trillion G-20 stimulus package will have a definite positive impact.

The stimulus has raised hopes of recovery in global economies and funds that had been sitting on huge cash piles have already started putting money in potentially strong markets.

Most markets had already risen by nearly 20-25 per cent on hopes of some G-20 stimulus – a trend that continued on expected lines after the package was announced. The current uptrend is being viewed as the first signs of a revival in the real economy as the stock market recovery always comes first.

The Indian market at present is dancing to global tunes but it also has its own issues. Macroeconomic data such as shrinking exports and widening current account deficit have had negative impact on the market.

“Historically, macroeconomic data reflect a grim picture but the market always precedes an economic recovery,” said Kamlesh Kotak, Senior Vice President, Asian Market Securities. Even foreign institutional investors (FIIs) have turned positive on equities, he added.

Jigar Shah, Research Head, Kim Eng India, a leading South Asian FII brokerage house, said, “The recent rally may sustain as it is based on the optimism globally. Also, some investments have been coming back to emerging markets.”

However, he said, it was too early to think that the worst was over and corporate earnings that were expected in coming weeks might not be good. Political uncertainty was also there, he added.

Derivative market indicators also suggest that some more steam is left in the current rally. “Implied volatility, based on trading in options, has come down, indicating that volatility has reduced and the market will continue to move in the direction in which it has been moving since last few days,” said Sidharth Bhamre, Head, Derivatives and Investment Advisory, Angel Broking.