Real Estate Intelligence Report, Tuesday, May 26, 2009

Krugman: global economy on track

Krugman: global economy on track
The Financial Express, May 26, 2009, Page 11

Reuters, Abu Dhabi

The world economy has avoided “utter catastrophe” and industrialised countries could register growth this year, Nobel Prize-winning economist Paul Krugman said on Monday.

“I will not be surprised to see world trade stabilise, world industrial production stabilise and start to grow two months from now,” Krugman told a seminar.

“I would not be surprised to see flat to positive GDP growth in the United States, and maybe even in Europe, in the second half of the year.”

The Princeton professor and New York Times columnist has said he fears a decade-long slump like that experienced by Japan in the 1990s. He has criticised the US administration’s bailout plan to persuade investors to help rid banks of up to $1 trillion in toxic assets as amounting to subsidised purchases of bad assets.

Downturn to force major correction in realty retail: study

Downturn to force major correction in realty retail: study
The Financial Express, Corporates & Markets, May 26, 2009, Page 1

Sajan C Kumar, Chennai

Taking cue from the lingering downturn, the real estate market across the country is rapidly undergoing major correction in the commercial space sale. While prospective occupiers are waiting for prices to adjust further, worsening market conditions are taking toll on realtors, finds a study by the real estate services firm Jones Lang LaSalle.

The Asia Pacific Digest for the first quarter of 2009 predicts that retail sales in major regional markets are likely to weaken further in the next 12 months due to the deteriorating job market conditions and a slowdown in tourist numbers. The lack of interest in commercial space can be attributed to the difficult trading conditions faced by the retail industry, particularly those at the higher-end. They have become cautious towards expansions and instead started focusing on existing store operations.

According to the study, rentals fell in most prime retail locations in India's tier I cities in first quarter of 2009. Delhi rentals were down 16.7% over the previous quarter, and Mumbai down by 10.5%, with many retailers relocating from malls to high street locations.

The first quarter of 2009 was one of the most discouraging quarters for Delhi's retail realty market. The sluggishness in the last two quarters of 2008 continued in first quarter and resulted in hefty decline in demand for retail mall space. Declining footfalls coupled with fledgling sales volumes resulted in further squeeze in retailers' margins which further pressurised existing occupiers to not only vacate less-profitable micro-markets, but also put off expansion plans for a few months.

Jones Lang LaSalle in its outlook for Delhi's realty market foresees that the revenue-sharing model will continue to be the most-preferred lease model, though the occupiers will stress upon pure revenue sharing. The supply stream will continue to put pressure on existing rentals and it is expected that the rentals will further decline by the middle or end of the year.

In Mumbai, retailers were seen negotiating firmly with developers on their existing deals, shutting unviable outlets and cancelling pre-commitments in under-construction malls. The pressure on retailers to cut costs trickled down to mall developers as occupiers have started looking at available options to cut their operational costs. With rising vacancy levels and strong future supply in the pipeline, retailers have more options to choose from and have more leverage in negotiating with the developers, says study.

On outlook for Mumbai, the study says that considering the diminishing demand, huge supply pipeline, rising vacany levels and asset pricing is expected to see further correction in short term. Retailers are not only negotiating on reduced rentals but also on higher rent-free periods. There are high possibilities of project completion delays and more instances of projects being shelved.

Overall vacany levels in prime malls of Bangalore rose to 1% in first quarter of 2009 from 0.5% in Q4 of 2008. This can be attributed to dampening demand for mall space. The city witnessed negative absorption in Q1, 2009, which pushed its vacancy levels from 0% in Q4, 2008 to 1.7% in Q1, 2009. The study says though these figures seem small and insignificant, they indicate an emerging trend in the Bangalore's retail market.

On outlook for Bangalore, Jones Lang LaSalle says the future supply of malls expected between 2009 and 2011 stands at 6.5 million sq-ft. Owing to huge future supply, overall rental values are expected to decline further during the next two to three quarters.

In Kolkata, developers remained cautious and have started re-valuating their development plans. Some of the proposed malls have been shelved, while the usage of few others has been changed from retail to retail-cum-office or retail-cum-hospitality type, says the study. Average rentals in the city continued to fall, registering a decline of 9.1% over the quarter. Malls in prime area witnessed a rental correction of 23.1% and the outlook for the city foresees more downward trend in rentals as demand remains sluggish and future supply struggles for pre-leasing.

Banks increase margin to 25% on housing loans

Banks increase margin to 25% on housing loans
The Financial Express, May 26, 2009, Page 3

Praveen Kumar Singh, New Delhi

In what could reverse the effects of lower interest rates on home loans, some financial institutions have increased the margin requirement on housing loans to 25%. By doing so the financiers have made owning a home difficult, as people will have to contribute a higher sum from their own pockets.

LIC Housing Finance and HDFC have increased the margin requirement to up to 25%, which means they would finance only up to 75% of the house cost. While LIC Housing Finance has set the limit at 25%, HDFC has made it 20%, visits to the branches of these institutions revealed. The earlier level was 15% for both the institutions.

Although no formal comments could be obtained from the two institutions, officials dealing with clients said the financiers have raised the margin requirement on home loans. Rise in margin requirement means reduction in maximum limit that the bank would finance and increase in borrower’s contribution.

“We have raised the margin requirement to 25% from 15% earlier as the condition was such in the last few months. Now we finance upto 75% of the house price,” an official at one of the branch of LIC Housing Finance said. A client executive of HDFC said, “We finance between 75% to 80% of the home cost”. Ironically, official websites of both the institutions still state the maximum financing limit as 85%.

Last year, the government had asked public sector banks (PSBs) to extend home loans upto Rs 20 lakh at lower interest rates, seeking to increase the demand for houses. Following the call, PSBs under the umbrella of Indian Banks’ Association had reduced the interest rate on housing loan of upto Rs 5 lakh to 8.5% and above Rs 5 lakh to Rs 20 lakh to 9.25%.

Aping the PSBs, private sector banks and housing finance companies also slashed the interest rates on home loans. LIC Housing Finance is offering home loan of upto Rs 20 lakh at floating rate of 9.75%, while HDFC gives loan of upto Rs 30 lakh at 9.5%. “By doing so (raising the margin requirement), the financiers have nullified the impact of reduced interest rates. The aim at this moment should be to increase lending for housing,” Indian Banks’ Association chairman and Bank of India chairman and managing director (CMD) T S Narayanasami told FE.

Bank of Maharashtra CMD Allen C A Pereira said, “Risk weight on home loans is very high. That may be one of the reasons why these institutions have raised the margin requirement.” At present, the risk weight as set by RBI is 75% on home loans up to Rs 20 lakh. For housing finance companies, risk weight ranges from 50% to 100%, depending on the amount of loan. Financing institutions have been demanding for a cut in risk weight so they could have more capital available for lending and earn higher revenues. UCO Bank chairman and managing director SK Goel said, “Higher margin requirement is a consideration for financing institutions for giving loans at lower interest rates. Also, continuously reducing home prices may put to risk the funds given by the financiers.” Home prices have fallen 20-25% in major cities. Goel said his bank could also raise the margin requirement by 5% in the future. “If the home prices come down by another 20%, we would think of raising the margin requirement by 5% from 15% at present,” he said.

Avoid commercial real estate financing: RBI to coop banks

Avoid commercial real estate financing: RBI to coop banks
Business Standard, May 26, 2009, Section II, Page 2

BS Reporter / Mumbai/new Delhi

The Reserve Bank of India (RBI) on Monday instructed state and central co-operative banks to desist from financing the commercial real estate sector, as exposure in this sensitive area would not be in their interest.

The central bank reminded that the primary role of these banks is to lend for activities related to agriculture and rural development. “...State and central cooperative banks should desist from financing the commercial real estate sector,” RBI said in a notification to the banks.

The central bank said it has come to its notice that certain state and central cooperative banks have extended finance to the sector. "Further, taking exposure in sensitive areas would not be in the interest of short term cooperative credit structure,” it said.

Regarding the credit facilities already extended to the sector, the apex bank said it should be ensured that such exposures are well secured and adequate provisioning is made according to the existing prudential guidelines. “It may also be ensured that the credit facilities are not renewed,” RBI said.

The National Bank for Agriculture and Rural Development (Nabard), which regulates the rural credit institutions, said these institutions have low-deposit base and if, they divert resources to other sectors, the lending to farming and rural sector will suffer.

"We will carefully look at such exposure while inspecting the books of these cooperative bodies for FY09. We would also see if they have adequate securities\collateral for exposure to commercial real estate," official added.

According to the latest RBI data, the balance sheet of state cooperative banks (SCBs) expanded significantly in 2006-07. On the liabilities side, deposits continued to account for the largest share of the resources of SCBs, despite the modest decline in the share during the year. The high growth in borrowings, which outpaced the growth of other components during the year indicates that SCBs continued to rely heavily on outside sources for their expansion.

On the asset side, while loans and advances grew at an accelerated pace, investments declined by 12.8 per cent. During the year, the NPAs of StCBs declined in both absolute and percentage terms. The gross NPAs to total loans ratio at 14.2 per cent during 2006-07 was lower than that of 17.0 per cent in 2005-06, RBI said.

The improvement in asset quality was also discernible from the decline in "loss" assets and partly due to migration from the lower categories. Thus, there was an increase in the 'sub-standard' and 'doubtful' assets categories.

PEs homing in on affordable buys

PEs homing in on affordable buys
The Economic Times, May 26 2009, Page 5

Sanjeev Choudhary & Paramita Chatterjee, ET Bureau, NEW DELHI

The new wave of launches in the affordable housing segment is attracting the attention of private equity (PE) players, which had for more than a year shunned the real estate sector struggling with diminishing sales, tight credit and clouded economic forecasts.

Although PE firms are yet to strike any fresh deal in the realty space, which hit a downturn last year, funds such as Red Fort Capital Advisors and Kotak Realty Fund are scouting for opportunities in low-cost and mid-income housing projects.

“The top-end category in the real estate space is saturated. Several firms are coming up with affordable housing projects ranging from Rs 3 lakh to Rs 10 lakh across India and we are keen to invest in them,” said Red Fort Capital Advisors director GB Singh.

The firm plans to invest 75% of its Rs 400-crore corpus in affordable housing over the next two years and is close to clinching two deals in the NCR region.

Red Fort Capital’s current portfolio includes investments in Prestige Group (Bangalore ), Godrej Properties (Kolkata) and Indu Group (Hyderabad). Kotak Realty Fund CEO S Srinivasan is looking to close some deals in low-cost and mid-income housing projects over the next few quarters.

Mr Srinivasan, who manages $800 million in asset, struck his last transaction 16 months ago. “Now the valuations have come down and the gap between developers’ and our expectations has narrowed,” he said.

The four-year realty boom ending in 2007 saw demand for houses, offices and mall spaces surge as companies expanded and consumers, encouraged by rising incomes and easier access to credit, bought homes. A strong demand also saw home prices going up almost three times and developers shifting focus to high-end homes lured by higher margin.

But a downturn, caused by poor investor sentiment, sky-high property prices and high interest rates, has forced developers to focus on low-priced homes.

“Private equity players are interested only in affordable housing these days. No one wants to invest in high-end housing projects or commercial projects these days,” says Unitech MD Sanjay Chandra, who has been negotiating with a couple of PE funds for middle-income housing projects.

Recently, Tata Housing’s launch of low-cost residential project near Mumbai received tremendous response. Many other players, including Raheja Developers, Unitech, Omaxe, Gaursons and BPTP have either launched low-cost housing projects or are in the process of launching them.

Tatas tie up with Micro Housing

Tatas tie up with Micro Housing
The Hindu Business Line, May 26, 2009, Page 15

Our Bureau, Mumbai

Tata Housing Development Company has tied up with Micro Housing Finance Corporation (MHFC) to provide easy housing finance for its lower income group project, ‘Shubh Griha’, coming up at Boisar near Mumbai.

The company has also extended the deadline for submission of application forms to May 28 for the 1,000-unit integrated township. Bookings will be accepted along with the initial booking amount of Rs 10,000 through bank pay orders at the Tata Housing office at Fort and the site office at Boisar, said a press release.

The first ‘Shubh Griha’ property will be priced between Rs. 3.9 lakh and Rs 6.7 lakh.

MHFC has set up a stall at the Boisar site to help potential customers. The loans will be long-term micro mortgages for need-based housing. The finance company will be flexible in documentation requirements and also make interest rates affordable.

Mr Brotin Banerjee, Managing Director, Tata Housing, said, “One of the issues stalling the development of low-income housing is the lack of finance available to buy such homes and the alliance (with MHFC) will particularly address this gap. We have also extended the date of submission of the forms in order to give the applicants a chance to arrange for finance.”

Parsvnath board approves proposal to raise up to Rs 2,500 cr

Parsvnath board approves proposal to raise up to Rs 2,500 cr
The Hindu Business Line, May 26, 2009, Page 3

Our Bureau, New Delhi

Parsvnath Developers announced on Monday that its board of directors have approved a proposal to raise up to Rs 2,500 crore by issuing fresh shares to institutional buyers.

The company informed the BSE that the board at its meeting held on May 23, “has decided to raise funds by various means including through issuance of further securities to persons other than the existing equity shareholders of the company, and also by way of Qualified Institutions Placement (QIP) to qualified institutional buyers for an aggregate sum of up to Rs 2,500 crore.”

Ever since the Unitech’s QIP last month, realty firms have been lining up to ‘cash-in’ on the improved investor sentiments for realty stocks.

In April, Unitech’s raised Rs 1,625 crore through a QIP issue and this was followed by a stake sale by DLF promoters, to raise for Rs 3,860 crore.

Indiabulls Real Estate, too, raised Rs 2,656 crore through issue of shares on institutional placement basis; and Housing Development & Infrastructure Ltd (HDIL) last week announced plans to raise over Rs 2,800 crore from sale of shares.

Parsvnath to raise Rs 2.5k cr via QIPs to tackle resource crunch

Parsvnath to raise Rs 2.5k cr via QIPs to tackle resource crunch
The Financial Express, Corporates & Markets, May 26, 2009, Page 1

fe Bureau, New Delhi

Faced with severe resource crunch, realty firms are increasingly opting for the qualified institutional placement (QIP) route to raise funds. The latest to look at raising funds through this route is the Delhi-based realtor Parsvnath, which is planning to raise Rs 2,500 crore.

"The board has decided to raise funds by various means, including through issuance of further securities to persons other than the existing equity shareholders of the company and also by way of QIP to qualified institutional buyers for raising a sum of up to Rs 2,500 crore," Parsvnath said in a filing to the Bombay Stock Exchange.

Pradeep Jain, chairman, Parsvnath told FE, “We are not going to raise the entire fund at one go. By end of June when we get shareholder’s approval, we will decide how much of funds will be realised and how much of stake dilution will take place.” Jain also said, “We will be paying off around Rs 800-900 crore during this financial year. This will not only come from the fund we raise just through the QIP route but also from internal accruals.” The debt of Parsvnath stands at Rs 1,600 crore and the debt equity ratio is 0.8. Jain also informed that the fund will be utilised to speedily complete the ongoing projects, which include residential, both mid-segment and premium, integrated township, Delhi metro retail projects, hospitality and SEZs.

Industry analysts believe that the freshly raised funds will go into projects which will fetch quick returns rather than long gestation projects. Integrated townships need a lot of investments and take a lot of time to develop, so these projects will probably be at the backburner right now. Projects which will generate cash immediately like SEZs and hotels will get a thrust.

DLF recently raised Rs 3,860 crore with the promoter family of K P Singh selling their 9.9% stake in the company. The country's second largest real estate firm, Unitech raised Rs 1,625 crore through QIP. Promoters' stake in DLF is at 78.8% from the earlier 88.5%, and in Unitech at 51.2% from 64% previously.

Realty firms had leveraged themselves too much during boom time. Right now, however, they are reeling under huge debt and cash crunch to go forward with their ongoing projects. The debt of DLF is Rs 16,358 crore, Unitech's at Rs 8,500 crore, HDIL's at Rs 4,000 crore, Sobha Developers' at Rs1,850 crore, Parsvanath's Rs 1,600 crore and Omaxe's at Rs 1,500 crore.