Real Estate Intelligence Report, Monday, June 15, 2009

Industrial production claws out of red

Industrial production claws out of red
The Financial Express, June 13, 2009, Page 1

fe Bureau, New Delhi

Industrial production grew by a more-than-expected 1.4% in April, reversing the contraction in three of the previous four months and fanning expectations of a quick turnaround by the economy. Policy advisors said the worst was over, but there is need to push banking, pension and insurance reform to enhance credit availability to the corporate sector, as this would be crucial to sustain investment-led growth.

Analysts said the uptick would put an end to RBI’s rate-cutting cycle, though some believe a last 25-basis point cut in its short-term lending rate could be a possibility during a monetary policy review slated for next month. Stock markets largely ignored the positive data, with the 30-share BSE Sensex ending down 1.13% at 15,237.94 points, as investors booked profits ahead of the weekend after a more than 90% rally since early March.

China’s industrial output also rebounded in May, alongside stronger expansion in credit and consumer spending, adding to hopes it could lead a global revival. India’s manufacturing output, accounting for about 80% of the index of industrial production, grew at 0.7% in April, compared with a 1.6% contraction in the previous month.

“There are signs of recovery. The worst is over. Industrial production is rising,” said Suresh D Tendulkar, former chairman of the Prime Minister’s Economic Advisory Council. “The 9% growth in the last four years was made possible through the corporate sector,” which is facing a scarcity of term lending at present, Tendulkar said. This gap can be closed through banking, insurance and pension reforms, he added.

Most of April’s rise in industrial production came from the electricity segment, which grew by 7.1%, the best since February 2008. Mining grew 3.8%, the best since September 2008. The intermediate goods industry revived sharply by 7.1%, its highest growth in over a year, while the basic goods industry grew by 4.6% in April, more than the previous month’s 2.1%. Capital and consumer goods, however, contracted by 1.3% and 4.7%, respectively.

Within the consumer goods segment, durables (with a 19% weight) grew by 16.9%, while non-durables (81% weight) contracted by 10%. The durables growth could be due to the positive effects of the government’s economic stimuli, while the fall in non-durables could be attributed to a negative 34.4% growth in food products, Axis Bank said.

“The capital goods industry growth is likely to remain weak through 2009-10, which would be reflected in lower gross fixed capital formation number for the current fiscal,” a Kotak Mahindra Bank note said.

“Financial conditions have eased considerably. The economy continues to have significant pent-up demand for investment, especially in infrastructure and affordable housing,” Goldman Sachs said.

Home loans may help you save more on tax

Home loans may help you save more on tax
The Economic Times, June 15, 2009, Page 1

I-T Exemption On Housing Loan Interest May Go Up To Rs 2.5 L

Deepshikha Sikarwar NEW DELHI

THE government is considering a proposal to hike the income-tax exemption on interest payment on home loans to Rs 2.5 lakh a year, to boost demand and help the damaged housing industry rebuild.

The ministry of housing and urban development has urged finance minister Pranab Mukherjee to make an announcement to this effect as part of his Budget presentation in early July, a government official said on condition of anonymity.

At present, taxpayers taking housing loans are eligible for income-tax exemption on interest payment of up to Rs 1.5 lakh every year. Besides this, repayment of the principal amount is part of the investments eligible for benefit under Section 80C of the Income-Tax Act, which has a ceiling of Rs 1 lakh.

The existing tax exemption limit is considered inadequate at a time when a two-bedroom house in big cities costs at least Rs 25 lakh. Considering a person takes a loan of Rs 20 lakh at an interest rate of 9.5%, he would pay Rs 1,88,493 towards interest alone in the first year. His annual interest payment in the first five years would be more than Rs 1.5 lakh.

If the exemption limit is hiked to Rs 2.5 lakh, a person paying a home loan interest of the same amount annually will save an additional Rs 31,000 in tax every year. This saving of over Rs 2,500 a month would be significant for most borrowers, making home purchases more affordable.

However, as per existing norms, the tax benefits start flowing in only after the construction of the house is completed, which usually takes 2-3 years in the case of builder flats. The housing industry has urged the government to allow for the deduction as soon as loan repayment starts as it would give substantial relief to home buyers and boost demand.

The budget documents do not provide an estimate of the revenue forgone on account of this exemption but it is unlikely to be very significant. Of the total Rs 38,107-crore tax revenue forgone on account of tax exemptions to individuals in 2007-08, nearly Rs 30,000 crore is on account of the Section 80C benefit. The housing sector in the country has been hit hard by demand slowdown following a rise in interest rates and property prices.

Home Truth: Unlisted realty cos too taking QIP route

Home Truth: Unlisted realty cos too taking QIP route
The Economic Times, June 15, 2009, Page 4

Sachin Dave & Maulik Vyas MUMBAI

AS LISTED real estate firms brace to raise about $2 billion (Rs 9,600 crore) through qualified institutional placement (QIP) routes, their unlisted counterparts are not far behind. These closely-held real estate firms, which are typically family-run enterprises that build limited projects in suburbs of large cities, are also learnt to be tapping qualified institutional buyers and high net worth individuals to raise money for such projects, in exchange for high returns.

The amount involved in such a fund-raising is also high, totalling about $1 billion (Rs 4,800 crore) according to at least four real estate firms that ET spoke to, signalling a trend where institutional investors are not shying from investing in unlisted family-owned building projects. The move also indicates a return of confidence in the realty space, as builders cut down on frills and come up with affordable, viable housing projects.

Most of the deals with such investors are being negotiated via the special purpose vehicle route where the HNIs or the QIBs take a share of the profit once the building project is completed, thereby reducing the investment period compared, to a pure private equity deal. These HNIs are people with money to invest, while QIBs include foreign institutional investors, banks, insurance firms and mutual funds.

“We are considering to raise around Rs 200 crore from certain HNIs for our project in Pune,” said Vinay Phadnis, chairman of the Sahil Group, one of the four firms that ET spoke to. The group has plans to invest in at least two major projects in Pune.

According to industry experts, these private companies are not too big and had not taken “unnecessary risks” during the boom time and are hence better placed. Such projects are an attractive bet as housing rates are improving and home loans are also getting softer. “Strategically all unlisted players are conservative in terms of expansion and focused on completing existing projects than going aggressively on future plans,” said Jitendra Jain, managing director of Neev Group of Companies, an unlisted Mumbai-based realty player. “While bigger listed companies were aggressive on their expansion plans all over India which affected them during the liquidity crunch, smaller players were better placed.”

Most of the QIBs and HNIs invest in projects which involve an investment of anywhere in the range of Rs 300 to Rs 500 crore.

In another deal, a Pune-based developer, who is also present in the infrastructure front and requested not to be named, is looking to raise Rs 800 crore through the QIP route. The deal is expected to be done by July end, said the developer. A wellknown developer, who has projects in Gurgaon, Haryana and in NCR near Delhi, is learnt to have approached a couple of QIBs to raise about Rs 1,000 crore, a leading banker has said.

The option of raising funds through HNIs and QIBs had almost dried out for unlisted players since late 2008, due to a slowdown in the sector. While most of such investors stayed away from taking a risk, the handful of those who did, expected high returns as liquidity was scarce. But with listed companies managing to raise adequate liquidity through the QIP route, confidence in the unlisted space seems to have returned.

Tata to develop unused land through its two realty arms

Tata to develop unused land through its two realty arms
The Economic Times, June 15, 2009, Page 5

Sachin Dave MUMBAI

THE Tata Group is working on a plan to unlock value from unused land belonging to various group companies by developing them through its two realty subsidiaries, Tata Housing and Tata Realty.

According to two persons familiar with the situation, an internal study by the salt-to-telecom conglomerate has identified excess land parcels of 800-1,000 acres across the country on which the group’s two realty companies may develop commercial and residential property. Companies like Tata Motors, Tata Tea, Tata Steel and TCS, amongst others, have considerable land which could be developed.

Tata Housing has already initiated discussions with some group companies for this purpose, said one of the persons, adding that the process will take some time as most of the firms are listed entities which necessitates approval from the respective boards. It is learnt that some of the major group companies could announce their plans by the end of this year. Though it is difficult to put an exact price tag on this land as it is spread across the country, estimates suggest it could be anywhere between Rs 30,000 to Rs 50,000 crore. Importantly, a significant part of the total land bank is housed in prime locations across India.

Earlier on February 14, ET, had reported that Tata Housing plans to leverage its tie-up with banks and financial institutions by developing properties on surplus land owned by other Tata group companies. Now after the internal study it is believed that the total excess land bank owned by Tatas would be developed after raising capital through the private equity route in case of Tata Housing and through the $ 1 billion raised in case of Tata Realty.

A mail sent to Tata Realty did not elicit a response while Brotin Banerjee, Managing Director, Tata Housing refused to share details and merely said, "We are studying various options though it would be premature to comment." According to the plan charted out by the group, the process of developing the land could be done in three major ways. Elaborating on this, one of the officials said, "One option could be Tata Housing working with the company that owns the land. Tata Housing can also take the SPV route and then decide on the profit sharing ratio.

Single corporate tax minus cess & surcharge on cards
The Economic Times, June 15, 2009, Page 17

Finance Minister May Do Away With Add-Ons, Tax Rate of 34% Likely

Mahima Puri NEW DELHI

THE upcoming Union Budget may bring some pleasant surprises for corporate India. Apart from doing away with the fringe benefit tax (FBT), the government is also considering removal of cess and surcharge on corporate taxes. Instead, the government may levy a common rate of direct tax on corporate income this fiscal onwards.

According to those familiar with the development, the details are being worked out by the finance ministry. The final decision is expected to be taken by finance minister Pranab Mukherjee in consultation with the Prime Minister Manmohan Singh.

At present, Indian companies are charged a corporate tax of 30%, along with a surcharge of 10% and an educational cess of 2% on tax payable. As per the Finance Bill of 2007, the surcharge on income-tax was not levied on all firms with a taxable income of Rs 1 crore or less. The total tax payable, including surcharge and cess, stands at about 34% for a domestic company. The government is now looking to charge a single tax close to 34%.

The Indian industry has been demanding abolition of educational cess and surcharge on corporate tax in order to make the tax structure more simplified. Those privy to the development told ET that this time, the government is actively pursuing the recommendation. “Although there have been many such recommendations in the past, this time, many officials in the central government are in favour of making these changes. We may see the changes coming through this year,” said an industry representative.

He also added that the government has so far kept away from abolishing the corporate surcharge and cess because they are charged separately and go into different accounts. The government charges the cess separately so that it is easier to use it later for investments in education. Industry associations such as CII, Ficci and Assocham have recommended that the government should divide the total tax paid into separate accounts itself.

Besides, the government is also likely to re-introduce Investment Allowance under section 32A of the Income Tax Act, on acquisition of new capital equipment such as plant & machinery, new ships and aircraft.

Industry associations had sought the re-introduction of investment allowance in order to attract more capital and infuse more investment into the economy. The chambers had recommended that the Investment Allowance be provided at 25-30% of cost in the assessment year in which the investment is made. “The government may introduce the allowance, but is also likely to provide it at different rates with each consecutive year,” the official said. The rates of allowance are being worked out.


UNTYING KNOTS

What is the current tax structure?

Companies have to pay 30% corporate tax

They also have to pay a surcharge of 10% and an educational cess of 2% on tax payable
The total tax payable, including surcharge and cess, stands at about 34% for a domestic company.

Why has govt not removed these yet?

The government has been reluctant to abolish surcharge and cess because they are charged separately and go into different accounts. Industry associations have recommended that the government should divide the total tax paid into separate accounts itself.
What are the other tax sops possible?

The government is also likely to re-introduce Investment Allowance under section 32A of the Income Tax Act, on acquisition of new capital equipment such as plant & machinery, new ships and aircraft.

LIC Housing Finance sees spurt in demand

LIC Housing Finance sees spurt in demand
The Hindu Business Line, June 13, 2009, Page 6

Eyes disbursements of Rs 13,000 cr this fiscal.

Mr R.R. Nair, Our Bureau, New Delhi

LIC Housing Finance on Friday said that consumer demand for housing is on a revival path, and that the company is targeting loan disbursement of up to Rs 13,000 crore in the current financial year. The disbursements last fiscal stood at Rs 8,764 crore.

“We have seen a 100 per cent growth in loan approvals and sanctions so far this fiscal, and a 40 per cent rise in the number of loan applications. In the first two months of the fiscal, our disbursement has been Rs 2,000 crore, while the approval was about Rs 3,000 crore for the same period,” Mr R.R. Nair, Director and Chief Executive, said on the sidelines of the ‘Homes For All’ Expo. The three-day real estate expo is being organised by LIC Housing Finance and is targeted primarily at the first-time home buyers.

Mr Nair said that the demand is coming back into the market since mid-February. “Demand is a function of factors such as property prices, lending rates, income of the individual and value perception. I think that the prices may have bottomed out,” he said.

Sanctions

Asked about the loan sanctions targeted for this year, Mr Nair said, “Last year, the approvals stood at Rs 10,000 crore whereas this year it is likely to be Rs 15,000 crore.” LIC Housing Finance plans to issue one crore equity shares through a Qualified Institutional Placement (QIP). Mr Nair, however, declined to comment on the amount that would be raised through the QIP issue.

The company plans to raise debt of Rs 15,000 crore in the current financial year, compared with Rs 11,000 crore it had raised last fiscal.

“We have already raised Rs 3,000 crore so far this year. The debt would be raised via NCD, CP, term loans from banks and financial institutions and our own deposits,” he said.

Showcasing properties

Meanwhile, the expo saw builders showcasing properties in the Delhi-NCR region.

The builders who participated in the expo included Ashiana Homes, Ajnara, Amrapali Group, Emaar MGF, Gaursons, MVL Ltd, Omaxe, Optus Developers, Parsvnath Developers, Raheja Developers, SVP Group, TDI Infrastructure, Today Homes & Infrastructure, Triveni Infrastructure, Unitech, V3S Group, Vatika Group and Vipul Group amongst others.

Markets close in red, but post weekly gains on high profit-booking

Markets close in red, but post weekly gains on high profit-booking
The Financial Express – Corporates & Markets, June 13, 2009, P VIII.

fe Bureau, Mumbai

Indian equity indices closed the day below the dotted line following weak cues from the European market and profit-booking at higher levels. However, markets continued its weekly gains.

The 30-share Sensex of Bombay Stock Exchange (BSE) lost 173.53 points or 1.13% to close the day at 15,237.94 points. The broader S&P CNX Nifty of National Stock Exchange (NSE) was down 54.30 points or 1.17% to end the day at 4,583.40 points.

Dealers in the market also added that the sentiment in the markets remained weak despite positive Index of Industrial Production (IIP) numbers for April, which stood at 1.4% as against negative 0.7% in March.

In the last one week, domestic markets had witnessed huge volatility as domestic institutional investors (DII), along with retail investors, continued to book profit in the market. On Monday, markets closed in the red, but on Tuesday and Wednesday market remained positive, after Prime Minister Manmohan Singh said that India can achieve a growth of 8 to 9% with a high savings rate.

However, on Thursday once again, markets closed the day marginally lower. In the last one week, Sensex gained over 130 points, while Nifty was marginally down by over 3 points.

Amitabh Chakraborty, president (equities) at Religare capital markets, said, “Till budget is declared we will witness huge profit-booking in the markets. However, next week we might see markets turning volatile and there are chances that Sensex might even touch 14,500 mark before the budget is declared on July 3. Apart from that, some buying was also seen from the FII, while some selling was seen by the DII.”

On Friday, domestic markets opened the day with positive gap and turned unstable during the trading session and finally closed the day in the red. An analyst from the leading broking house said, “There are some money waiting to get into the market, but they are waiting for the right time to invest in the markets. Apart from that, retail investors will be cautious ahead of budget.”

Foreign institutional investors (FII) continued their buying, as per the provisional figures provided by the BSE, FII were net buyers on Friday at Rs 469.35 crores, while DII were net sellers at Rs 250.71 crores.

The breath of the market remained negative as out of 2,774 stocks traded on BSE, 706 stocks advanced, 2,020 declined while 48 stocks remained unchanged. In Sensex only four stocks closed the day in the green, while remaining 26 stocks ended the day in the red.

SBI cuts term deposit rates

SBI cuts term deposit rates
Sunday Business Standard, June 14, 2009, Page 1

BS Reporter / Mumbai

Lending rate review by month-end.

State Bank of India (SBI), the country’s largest bank, will reduce interest rates on term deposits across various maturities by 25 basis points from Monday to bring down its cost of funds. It is expected to review lending rates towards the end of the month.

This is the fourth cut in term deposit rates by SBI since April and has brought the cumulative reduction to 150 basis points. The new rates will be applicable to fresh deposits and those that come up for renewal.

Since December, deposit rates have come down by up to 300 basis points. In contrast, the benchmark prime lending rate has been cut by 150 basis points. SBI Chairman OP Bhatt had said last week that there was scope to cut lending and deposit by 25 basis points. Earlier this week, Finance Minister Pranab Mukherjee had prodded public sector banks to cut lending rates further.

While other public sector banks like Punjab National Bank have slashed their lending rates by up to 300 basis points, SBI has gone for a lower reduction as its net interest margin — the difference between the lending and the cost of funds — had dropped by 14 basis points to 2.93 per cent during the 12 months ended March 2009. The bank is trying to ensure that its NIM stays above 3 per cent but is grappling with high-cost funds mopped up in the third quarter of the last financial year when it was raising over Rs 1,000 crore a day by paying 10.5 per cent a year to retail depositors.

SBI’s cost of deposit for 2008-09 was 6.30 per cent, up from 5.59 per cent for 2007-08.

Following SBI’s latest move, which comes three days after the meeting with Mukherjee, other banks are also expected to lower rates. Bank of India Executive Director B A Prabhakar said there was room for a cut of 50 basis points in the deposit rates.

Asked about the benchmark prime lending rate, an SBI executive said that the bank’s first priority was to bring down the cost of funds and then pass on the benefit to customers.

Developers seek sops for affordable homes

Developers seek sops for affordable homes
The Hindu Business Line, June 14, 2009, Page 3

S. Shanker, Mumbai

Incentives for affordable housing, higher income tax exemptions for home loans and infrastructure status for the realty segment rank high on the wish list of real estate developers.

The Confederation of Real Estate Developers Association of India (CREDAI), the apex body of developers in the country, is hoping that the Centre will accord infrastructure status to the industry, which is an off-take conduit for over 350 other small and medium industries, besides the cement and steel sector.

Mr Kumar Gera, Chairman of CREDAI, said developers were looking at incentives for units of 1,000 sq ft and below in the residential segment similar to Section 80 IB (10). Restoration of the exemptions under the Section, which has not been extended from 2007, is also high on his agenda.

Under Section 80 IB (10), in the case of construction of housing projects, hundred per cent of the profits derived in the previous year from a housing project can be deducted if the total commercial space in the project did not exceed five per cent of the total built-up area or 200 sq feet, whichever is less. CREDAI wants the Government to cap the unit price in the affordable segment at Rs 40 lakh and also classify townships of 20 acres with such homes as infrastructure development.

Industrial Parks

Another demand is for extension of the tax holiday under Section 80-IA (4) (iii), where developers enjoy tax benefits for developing and operating or maintaining and operating industrial parks. The benefits are for such parks notified up to March 31, 2009. It wants the Government to extend it to 2015. Mr Gera said some moves to extend the provision for a period of three years were on.

This apart, CREDAI looks forward to total removal of service tax for the construction industry. The association is hoping for a greater focus on rehabilitation and settlement of notified slums with provisions of tax breaks and special incentives for developers to take up projects.

FOR Buyers

For the home seeker, CREDAI wants removal of the time limit and ceilings on the deduction of interest paid on loans for acquisition/ construction of residential homes and the benefits raised to Rs 3 lakh. In the case of Tier-I cities it wants total benefit (interest and principal payment) hiked to Rs 5 lakh. 

Incentives are required for rental housing, and developers want the income tax exemption on rental income raised from 30 per cent to 50 per cent.

Mr Gera said the realty sector was in dire straits and even if the Government looked for providing such incentives on a short term basis of about 12 months, it would stimulate demand and induce fence sitters to take a buy call.

Other pending issues, such as double stamp duty in sale of developed property, simplification of the Income Tax Act to reduce the assessee category to two – individual and corporate – among others appear to have been overshadowed by an unified call for infrastructure status.

Real estate stocks: A trader's delight

Real estate stocks: A trader's delight
Business Standard, June 14, 2009, Page 6

Devangshu Datta / New Delhi

Investors cannot follow a buy-and-hold strategy, but there can be short-term gains.

In early 2008, at the height of the real estate boom and the bull market, it seemed to make more sense to buy real estate shares than land itself. Between January 2007 and January 2008, land prices appreciated by 150-200 per cent. However, share prices of stocks with real estate exposure did much better.

Housing finance major HDFC saw a price rise of 275 per cent between 2006 and 2008, and developers delivered even better capital gains. The 14-scrip BSE Realty index rose 700 percent between January 2006 and January 2008

Some of the excess returns were the result of creative financial restructuring by real estate developers. Unitech started the trend with a combination bonus-cum-split in 2006 that meant one Unitech share circa April 2006 turned into 65 shares by June 2006. DLF went through a similar, even more complex process that eventually generated a 440:1 split ratio.

By late 2007, Unitech was up around 4,000 per cent in terms of split-adjusted prices, while DLF re-listed at levels that yielded 8,000 per cent returns. By contrast, HDIL, Purvankara, Peninsula, IndiaBulls Real Estate etc “only” generated returns in the 500-1000 per cent range.

In the subsequent recession, land prices have fallen between 20 per cent to 50 per cent. But realty stocks corrected much more violently. By February 2009, the BSE Realty index was down 90 per cent from its highs and many real estate stocks traded lower than they had in January 2006. In the past four months, the realty index has made a spectacular recovery, gaining 170 per cent from its February lows. It is still 70 per cent down from the peak January 2008 levels.

The last two quarters have been terrible for developers. Some are cash-strapped to the point of near-bankruptcy. There has been a drastic drop in sales volumes. In Q3 and Q4 of 2008-09, net profits shrunk by over 90 per cent in some cases and revenues dropped by more than half. Margins – the difference between construction costs and sales prices – came down by anywhere between 30 per cent and 80 per cent.

There have been many stalled projects. SEZs in particular have been shelved for lack of takers. Massive discounts have been offered to get unsold inventory moving. Almost every real estate major has tried to raise cash. Many have sold equity stakes in private placements and qualified institutional placements (QIPs). Some have refinanced via long-tenure loans to settle short-term obligations. Commercial real estate developers have tried lease-discounting, trading future rental incomes for current cash advances.

There are some signs of hope. QIPs are still willing to buy into realty stocks, albeit at big discounts. Anecdotally, there has been some pick-up in residential bookings, especially at the lower end. But commercial and retail segments have been blitzed and supply far exceeds demand. Office rentals and retail (mall) rentals have seen continuous downwards renegotiation.

Real estate corporatised relatively recently with a spate of IPOs between 2004 and 2007. This was also when banks and other financial institutions started offering floating rate mortgages and the retail industry took off. So this is the first full cycle that the industry has ever experienced.

It has become obvious that the sector is very strongly correlated to the macro economy. It has high volatility and therefore, realty shares are high beta. Commercial and retail space sees more violent fluctuations than residential. Therefore, developers with higher residential exposures are slightly more stable.

Analysts have learnt to their cost that next year’s sales volumes and margins cannot be predicted by examining this year’s numbers because of the exaggerated nature of cycles. Nor can one use the popular NAV metric to value land banks because land prices are mutable. This is quite apart from the location-specific variations in prices.

All this makes the sector difficult to buy and hold for the long-term except for those who have very specialised knowledge. But it is always going to attract traders and speculators who are looking to make a quick buck. That makes real estate an ideal vehicle for traders.

If you’re looking to maximise returns during a bull run, buy real estate shares. If you want to short during a bear market, sell real estate stock futures. The exaggerated volatility could work wonders for your portfolio.