Real Estate Intelligence Report, Monday, June 22, 2009

Banks’ credit to realty sector expands in 2008-09

Banks’ credit to realty sector expands in 2008-09
The Hindu Business Line, June 22, 2009, Page 1

Lowering of risk weights may have resulted in higher exposure.

M.V.S. Santosh Kumar

BL Research Bureau Real estate developers may have just got out of a severe liquidity crunch; but data from the Reserve Bank of India suggest that bank credit to the realty sector has actually expanded.

Scheduled commercial banks’ outstanding credit to real estate grew from 1.8 per cent of non-food credit at the end of March 2006 to 3.2 per cent by February 2009. Recently released annual reports of banks also suggest that loans outstanding to commercial real estate have seen strong growth.

PSU banks’ exposure up

Fourteen banks, which have released their 2008-09 annual reports, disclosed that their commercial real estate exposure grew by an average 29.1 per cent, even as total credit grew 25 per cent.

This growth was more significant for public sector banks; their real estate exposure grew 43 per cent over the year against their credit growth of 29 per cent.

Private banks such as ICICI Bank and Axis Bank, on the other hand, posted marginal growth in their real estate credit portfolio. IndusInd Bank, Oriental Bank of Commerce and Indian Bank hold higher exposure to real estate, with the sector accounting for over 8 per cent each of their total credit.

The rapid growth in real estate sector until last year could be explained by the IT boom and increased requirement for quality office space and residential space.

According to CARE’s report on Indian banking, credit to sensitive sectors (real estate accounts for 87.4 per cent of sensitive sector lending) has grown 46.1 per cent compounded annually during 2004-08, while total advances grew 29 per cent in the same period.

However, following the global meltdown, slower demand for property and steep fall in their market prices led to risks of higher slippages in banks’ real estate portfolio. Banks in turn had to tighten credit risk standards and reduce lending to this sector.

Restructuring effect

In its efforts to stimulate the economy, the RBI came up with measures such as revision of risk weights from 150 per cent to 100 per cent on realty exposures of banks and allowed restructuring of credit (until then commercial realty credit was not allowed to be restructured) up to June 30, 2009.

Reduced risk weights meant that banks did not have to set aside more capital towards their real estate loans. This, combined with high commercial real estate yields, may have prompted some banks to step up credit to this sector.

The credit growth in bank books may, however, not be entirely on account of new real estate loans.

Restructuring, which increases the tenure of the existing loans, may have expanded the loans outstanding, even without fresh disbursements.

For instance, if a real estate company has a one-year loan falling due, and got it restructured into a two-year loan, the same may continue to remain as outstanding in the bank’s books.

Easier bidding norms to boost infra projects

Easier bidding norms to boost infra projects
The Financial Express Sunday, June 21, 2009, Page 1

Economy Bureau, New Delhi

Barely a month after regaining power, the UPA on Saturday brought about a major revamp the way infrastructure projects are bid out to private players. The finance ministry issued revised guidelines for request for qualification (RFQ) of bidders for public-private partnership (PPP) projects.

The new RFQ, aimed at removing bottlenecks that have plagued the award of infrastructure projects, has removed many contentious clauses, including the cap on the number of bidders for a project and has also clarified the issue of indirect shareholding.

The new guidelines have also redefined PPP and core sector to include logistics parks and metro rail projects, while excluding petroleum and natural gas. The move comes at a time when the railways is set to build a number of logistics parks for its freight corridor, and states are getting ready to construct metro rails. Similarly, for real estate development, townships and residential complexes would be eligible but standalone housing has been removed from the list.

In the revised guidelines, the number of shortlisted bidders has been increased to six and for projects of less than Rs 500 crore or repetitive projects, it has been hiked to seven. More importantly, a reserve list of bidders will be made. For road projects, the existing exemption from short listing of bidders would continue. The earlier provision, which restricted the number of bidders to a maximum of five, had proved to be a major hurdle in the successful bidding out of road projects.

Another obstacle, the 1% cap of cross holding, or the percentage a common shareholder can have in two companies that are bidding for a project, has now been hiked to 5%. Significantly, banks, pension funds, public financial institutions and insurance companies have been excluded from the clause. “The present limit of 1% of crossholding, relating to conflict of interest has been increased to 5%, and the term ‘indirect shareholding’ has been clarified,’’ the RFQ says.

Indirect shareholding will only constitute if an intermediary is controlled by another company’s management, the company has more than 26% stake in the intermediary. Further, in case of a conflict of interest, a consortium member can withdraw 10 days before the application due date. One of the biggest casualties of this stringent criteria regarding conflict of interest was the modernisation of the New Delhi railway station, where 11 of the original bidders faced disqualification.

Analysts however said increasing the cap to 5% on cross holding might not be sufficient as most private equity funds tend to go for an over 5% investment in a company. “This should ideally have been increased to 10%,” a consultant said.

In a significant change to the earlier norms, each of the consortium members will now also be required to hold equity equal to at least 5% of the total project clause for a period of two years since the project is commissioned. Apart from infrastructure, the revised RFQ has an ‘enabling clause’ so that it can be modified and also be used for social sector projects.

“While most changes are welcome, the finance ministry should give a clear indication that the RFQ should be used as guidelines by line ministry and not as rigid norms. This would allow the bidding criteria to be revised depending on the project and the sector. Otherwise it stops being a ‘model’ concession agreement, said Amrit Pandurangi, executive director PricewaterhouseCoopers.

The UPA has been keen to push investment in infrastructure projects as a means to stimulate economic growth.

Road ahead

•The finance ministry has issued revised guidelines for RFQ of bidders for public-private partnership projects

•Number of shortlisted bidders has been hiked to six and seven for projects of less than Rs 500 crore or repetitive projects

•The 1% cap on cross holding a common shareholder can have in two firms bidding for a project, has now been hiked to 5%

•In case of a conflict of interest, a consortium member can withdraw 10 days before the application due date

Industry remains divided over PPP bidding norms

Industry remains divided over PPP bidding norms
The Financial Express, June 22, 2009, Page 3

Ashutosh Kumar, New Delhi

A day after the Centre changed bidding norms for public private partnership (PPP) projects, industry is divided on the implications.

On Friday, the government redrew the norms for bidding, the chief one being the enhancement of the threshold technical capacity of a company to twice the estimated project cost to be eligible to participate in the bidding for a project.

Parvesh Minocha, MD, (transportation division), Feedback Ventures, an infrastructure consulting company told Fe, this will make more serious players including international players and large domestic companies interested in bidding for the projects. "Since only they will be able to fulfil the criteria, and this will bear results in the long run”.

Earlier, many of the smaller players used to make low bids that were impossible to match. In the process, several projects, especially in the road sector were left incomplete in the last one year. To deal with it, in 2008-09, the government had initially capped the number of shortlisted bidders who could participate in financial bidding of road projects to the top five or six bidders.

But as the economic crisis affected India, the finance ministry had to step in to exempt highways construction projects from the cap, thereby allowing all shortlisted bidders at the technical stage to put in financial bids.

Speaking on behalf of the smaller players, the director general of National Highways Builders Federation M Murali said, “A large number of companies will be alienated from the bidding process in the first phase itself. This will reduce the number of participants for a project. Smaller companies, which may have financial capability to implement the projects will also get alienated from the bidding process”.

The large operators in the Indian space who are likely to benefit from the move include companies like Larsen &Toubro, Reliance Infrastructure, Nagarjuna Constructions and gammon India, among others.

Realtors believe home market can take a price hike

Realtors believe home market can take a price hike
Business Standard, June 22, 2009, Page 2

Raghavendra Kamath & Neeraj Thakur / Mumbai/new Delhi

After nearly 18 months of slowdown, property developers are looking at marginally increasing the prices of affordable homes. Whether it would help these cash-starved firms to improve their profit margins is yet to be seen, but such a move would send a strong signal that the phase of price correction is over.

Unitech, the country’s second largest property developer, has already increased its apartment prices by Rs 50 a sq ft to Rs 3,000 a sq ft. These projects were launched under the brand names The Residency and Uniworld Garden-II in April and May, under the affordable home category, with unit areas of around 1,000 sq ft. These were one of the few projects that help in reversing the downward trend in the realty space.

“We had not thought we will see such a huge success for our mid-income projects. Though the price hike is minimal, it shows our projects are selling quickly, even with increased prices,” said Unitech MD Sanjay Chandra. The company is planning to build 20 million sq ft of property in fiscal year 2010.

But property consultants are wary of developers’ move to increase prices in the current market. “It looks like a pre-decided strategy to increase the valuations of projects or the companies, as most of these firms have lined up public issues or private placements,’’ said Pankaj Kapoor, chief executive of Liases Foras, a real estate research firm.

According to his firm’s research, the sales to inventory ratio of developers has moved up to 1:9.5 (a unit of sales for every 9.5 units of inventory) from 1:2 in 2005. “There is a bit of improvement in property sales, but sales are below sustainable levels. There is no way the market can digest the price increase,’’ Kapoor said.

After the drastic fall in sales in 2007-08, developers have reduced the floor areas by 20-30 per cent and also price per sq ft by around 25 per cent. The top developers such as DLF, Unitech and the Lodha Group, among others, have shifted their focus to mid-income housing to generate cash, even as their margins fell from 50-70 per cent earlier to 20-30 per cent in these projects.

“We were selling homes at Rs 6,800 a sq ft a year ago and at Rs 5,000 before elections. Now markets have revived and we are in a totally different condition than we were seven or eight months ago. Prices will go up here onwards,’’ said Manish Grover, vice-president, marketing, Sunil Mantri Realty, a Mumbai-based developer that is planning to raise its apartment prices from Rs 5,290 a sq ft to Rs 5,590 a sq ft at its Goregaon East project from Monday.

Other developers in Mumbai such as Nirmal Lifestyle and the Lodha Group are planning to increase their home prices by 4-5 per cent from next week. “We have seen very good sales in our projects. We are observing market conditions closely and think there is some room to raise prices,’’ said Abhishek Lodha, director of the Lodha Group, which is planning to raise by 3-5 per cent in its mid-income projects in the city.

BPTP, a Delhi-based developer, is planning to launch a new project at its 1,500 acre township at a higher price than its existing project. “We have received 5,000 applications for only 500 apartments on sale. So, the new apartments we would launch would be in the higher price category and would be different from the existing project,” said a spokesperson for BPTP.

“Developers want to send signals that they are good. But if they are increasing above 10-15 per cent, it would be irrational,’’ said Sanjay Dutt, chief executive of Jones Lang LaSalle Meghraj (JLLM), a property consultant.

RBI may review easy money policy

RBI may review easy money policy
The Hindu Business Line, June 21, 2009, Page 1

‘Negative inflation not a concern’.

Our Bureau, Pune

The Reserve Bank of India may look at reversing the easy money policy that it had adopted from September last following the global credit crisis.

“We must recognise that reversing this expansionary policy is part of economic management. The RBI will reverse the expansionary policies at the appropriate time. I am not saying whether we will do it now or in the near future; but it certainly is on the agenda,” Dr D. Subbarao, Governor, RBI, said while speaking on the sidelines of the National Institute of Bank Management’s Sixth Annual Convocation here, on Saturday.

Dr Subbarao said, “As part of crisis management, countries around the world had used an expansionary fiscal policy. Now, there are concerns and attention is being paid to reverse it. I think we must be looking at them as well.”

Since mid-September 2008, the RBI has cut the repo rate by 400 basis points and the reverse repo rate by 250 basis points. The CRR was also reduced by 400 basis points. In fact, actual/potential release of primary liquidity since mid-September 2008 amounted to Rs 4,22,793 crore.

On inflation, Dr Subbarao said that a negative inflation figure was not a concern going forward. “It must be read more as a statistical feature than a structural issue. India does not suffer a demand constraint and therefore there should be no concern about deflation. Even as the headline WPI index is negative, food article prices are spiralling up. The Consumer Price Index is still around 9 per cent. The RBI looks at a number of inflation variables, not just the WPI. We look at CPI, GDP deflator and inflation expectations and past trends”, he said.

Stressing that growth is the top priority for the RBI, Dr Subbarao said that for India to get back to the high growth path, it was important that the benefits of fiscal stimulus package trickled down, credit flow increased and exports picked up.

The stimulus packages had ensured ample liquidity. The RBI has managed the government borrowing in a non-disruptive manner and will continue to do so, he said.

The impact of the stimulus measures taken by the government and the RBI was being felt in certain sectors such as cement, steel and coal, among others. “Two and three wheelers and passenger cars demand has revived. Cargo traffic and freight revenues have shown positive trends. It is not a complete picture and a number of sectors in the economy are yet to see a significant revival”, he said.

The growth of 6.7 per cent in 2008-09 was much higher than what most people expected. It was largely in line with the growth number of 6.5-6.7 per cent that the RBI had projected in its Annual policy statement.

“We will revisit our growth numbers as part of the quarterly review in July”, he said.

Subbarao allays deflationary fears

Subbarao allays deflationary fears
Business Standard, June 21, 2009, Page 5

Bloomberg

Reiterates RBI's commitment to reversing 'expansionary' monetary policy.

Reserve Bank of India Governor Duvvuri Subbarao said there was no risk of deflation after the benchmark price index fell for the first time in three decades.

“India doesn’t suffer from any demand contraction, therefore there should be no concern about negative inflation,” the central bank governor said today in Pune. Negative inflation “should be seen more as a statistical feature rather than a structural attribute of the economy.”

Wholesale prices fell for the first time in three decades, the government said on June 18. The benchmark wholesale-price inflation index declined 1.61 per cent in the week to June 6 from a year earlier. The dip has only a “statistical significance” and wholesale price gains will quicken to 4 per cent by March 2010, according to RBI.

Inflation has eased from a 16-year high of 12.91 per cent in August last year, enabling the central bank to reduce interest rates to a record to bolster an economy expanding at the slowest pace since 2003. The Reserve Bank last cut its key reverse repurchase rate by a quarter point to 3.25 per cent on April 21.

The central bank estimates that six interest-rate cuts in seven months and three stimulus packages will provide a combined stimulus equal to about 7 per cent of gross domestic product in the $1.2-trillion economy.

Subbarao said, “The Reserve Bank looks at other inflation gauges beside the wholesale price index when deciding its monetary stance.”

Price indicators

India has four price indexes and uses the wholesale price index as the benchmark because the other inflation gauges don’t capture the aggregate price picture.

Prices of food and primary articles were still high, Subbarao said. In a poor country like India, it is important to ensure food prices were reasonable, he said. The central bank would consider all price trends in its July review, when it would also revisit growth and inflation targets, he said.

Prime Minister Manmohan Singh’s electoral victory last month raised expectations that he will implement policies to promote growth. Finance Minister Pranab Mukherjee, due to unveil the Budget in New Delhi on July 6, has indicated more will be spent on roads, ports and a rural jobs programme.

Expansionary policies
That puts the government at odds with the central bank. Subbarao said last month it might be time to start thinking about reversing “expansionary” policies. The Reserve Bank’s next monetary policy statement is due to be released in late July.

“I am unable to say when exactly we will do it, but we must recognise that reversing these expansionary policies is part of the game, is part of economic management,” he reiterated today.

The governor said it was important for stimulus plans to work fully and that they have had some effect on some sectors of the economy, such as steel, cement, two-wheelers and cars.

The governor said the priority was restoring the economy to a high-growth path and making sure exports recovered.

India’s economy is beginning to show signs that it may be emerging from the worst global slump since World War II.

The stabilisation of international financial markets, the restoration of global credit flows and signs of revival in the advanced economies indicated domestic growth might not slow further, said Suresh Tendulkar, Prime Minister Singh’s economic adviser.

Growth expectation

“I am optimistic that growth in the current financial year will be at least as high as in the last financial year, with a resumption of a higher growth trajectory thereafter,” Tendulkar said today at the same event in Pune.

Industrial production unexpectedly rose in April, gaining 1.4 per cent from a year earlier, according to figures released on June 12. Economists were expecting a 0.1 per cent contraction.

The government’s borrowing won’t crowd out other borrowers, Subbarao said.

“I can’t say exactly whether we will increase open-market operations or we will do MSS unwinding, or something else,” Subbarao said, referring to the Market Stabilisation Scheme. “But we will manage the government borrowing programme in a non-disruptive manner.”

The government will unveil its borrowing programme in the July 6 Budget, he said.

Mahesh Vyas: SEZs aren't delivering, time to scrap the scheme

Mahesh Vyas: SEZs aren't delivering, time to scrap the scheme
Business Standard, June 22, 2009, Page 12

Mahesh Vyas / New Delhi

Despite the special incentives they get, SEZs today comprise under five per cent of all fresh investments announced in the country, says Mahesh Vyas

India promoted Special Economic Zones (SEZs) to accelerate economic development by creating islands of investments that were provided preferential treatment in terms of facilities and taxes. The initial objective was to promote exports but this has effectively expanded to include growth and employment in general. While the concept of export promotion through Export Processing Zones (EPZs) and Export Oriented Units (EOUs) has existed for long, this did not attract the scale of investments that has been seen since the SEZ Act was notified in 2006.

Only eight EPZs got established in the four decades between 1965 and 2005. In contrast, 315 SEZs were notified in the first three years of the launch of the SEZs. (The eight EPZs have also been converted into SEZs.)

The growth of the SEZs has been eventful. State governments have been quite active in promoting SEZs in their respective regions. Entrepreneurs have been equally aggressive in proposing large investments in response to the tax incentives, the promise of preferred treatment and most importantly, the lure of acquiring large tracts of land. But, the acquisition of land has literally grounded the SEZ scheme.

Violence in Nandigram and Singur in West Bengal, a less violent but successful opposition to the scheme in Goa and opposition to the Maha Mumbai project in Maharashtra are examples of a policy that has gone astray. Now, with many entrepreneurs seeking extension of time to procure land or to denotify the SEZs they were supposed to develop, the SEZ initiative seems to be a policy gone wrong. The policy may or may not lead to additional growth and employment in the future, but it is generating a lot of resentment. But that is not the only problem.

This is possibly the right time to re-evaluate the merits and demerits of the initiative. We need to assess the scheme’s ability to meet its objectives and to measure the costs involved.(Click for table)

A problem with schemes aggressively trying to promote investments in a particular area is that they skew the behaviour of entrepreneurs to a point that leads to misallocation of scarce resources. Sovereign guarantees and counter-guarantees for investment in power generation in the second half of the 1990s, and the easy availability of private equity funding to dotcom investments around the turn of the century are the best examples of how resources can get misallocated by investment hype. None of these moves succeeded in generating electricity or employment. But, they did postpone the investment that could have gone into manufacturing industries.

Investment into manufacturing picked up only after the dotcom boom went bust. SEZs are doing similar harm today. Investments into these islands are starving investments into the more worthy projects that are outside these islands — investment that get no sops.

What is the size of the SEZ investment and how important are these in the overall investment scenario today? We turn to Centre for Monitoring Indian Economy’s (CMIE) CapEx database to answer these questions.

SEZs accounted for just a shade over seven per cent of the total investment outstanding as of March 2009. Its share has been falling steadily since its peak of 10 per cent as of December 2006.

SEZs accounted for nearly a third of the new investments proposed during the quarter-ended December 2006. This proportion was high during the June and September 2006 quarters as well since this was the period just after the notification of the SEZ policy in February 2006. After this initial rush, new SEZ investment have dwindled.

This one-time rush followed by very small increments thereafter implies that the scheme has not been very successful in attracting investments on a sustained basis. This is strange: A good scheme need not run out of steam so soon.

Alternately, if the scheme is being rationed out, then possibly, discretion in this rationing can cause huge unfair advantages.

Not all of the Rs 630,000 crore of investments outstanding in the 576 projects as of March 2009 are under implementation. Many are in a limbo. We believe that the investments actually under implementation are close to Rs 200,000 crore. This level of investment is too small to make a significant difference to the country’s growth rate, employment or exports.

Some projects have been completed. The biggest among these is the Rs 27,000 crore Jamnagar refinery of Reliance Industries. But, according to reports, the company is more interested in the domestic market than in the export market which is what its SEZ status requires.

According to the CapEx database, 42 SEZ projects with a total investment of Rs 48,776 crore were commissioned as of June 2009. Thus, the Jamnagar refinery accounts for 55 per cent of the total SEZs commissioned and this project seeks to walk out of its SEZ status.

Reliance’s Maha Mumbai SEZ project is in trouble because of its inability to procure land. This project, with an investment of Rs 30,000 crore, is among the top four SEZ projects in India.

Implementation of at least 17 projects is stalled for a variety of reasons. At least 10 projects have been shelved and four have been abandoned. The largest project shelved is the Rs 22,000 crore Kundli-Sonepat multi-product SEZ being set up by Unitech. The next largest is Essar’s Jamnagar petrochemicals project envisaging an investment of Rs 15,000 crore. The four projects shelved are relatively small.

Given the small size of the overall investment in SEZs, the troubles that these go through while being implemented, the resentment they cause, their non-inclusive nature and the mis-allocation of resources that they potentially cause, it is time to take a re-look at the SEZ scheme.

The author is Managing Director and CEO, Centre for Monitoring Indian Economy.

Realty bets on affordable housing boost, tax sops

Realty bets on affordable housing boost, tax sops
The Financial Express, June 20, 2009, Page 4

Mona Mehta, Mumbai

Following expectations of a fast-paced reform agenda and 8-9% gross domestic product (GDP) growth in 2009-10, real estate developers and international property consultants expect the forthcoming union Budget to be aggressive and investment-led.

According to Sachin Sandhir, managing director, The Royal Institution of Chartered Surveyors (RICS) India, “As indicated by Manmohan Singh and the President, the government would give a further push to public investments, especially in infrastructure, to propel economic growth. The housing ministry has already asked the finance ministry for fiscal concessions for building affordable houses. We hope the housing sector is given ample boost with tools such as a dedicated fund for affordable housing, reintroduction of concessions under Section 80IB (10), waiver or reduction in stamp duty, VAT and other government taxes for the EWS and restoration of tax holidays for low-cost housing projects.”

Sandhir added, from the public’s standpoint, an increase in the housing loan interest deduction limit from Rs 1.5 lakh to Rs 3 lakh per annum, increase in the limit of priority sector lending to Rs 30 or 35 lakh and reduction in interest rates, will all help address housing concerns. Further relaxation of ECB and FDI norms will also prove beneficial. We hope the government would avoid levying any fresh taxes which could adversely impact the real estate sector.

According to Niranjan Hiranandani, managing director, Hiranandani Constructions, “It is necessary for the government to abolish fringe benefit tax, reduce central sales tax and bring in single unified goods and services tax (GST). Moreover, there should be reduction in corporate tax rate from the current rate of 33% to about 26%.”

Apart from this, certain developers feel that an ordinance should be passed to abolish the service tax for rented property as tenancy by definition is a temporary transfer of ownership. Vikas Oberoi, managing director, Oberoi Constructions said, “Measures such as lowering interest rates on home loans and reducing VAT will also enhance customer buying. Service tax (proposed increase from 10.32% to 12.36%) can prove as a deterrent for home buying. An ordinance should be passed to abolish service tax for rented property as tenancy by definition is a temporary transfer of ownership and is not a service provided by the owner of the property.”

The need of the hour is to hold economy-reviving actions and address issues enhancing real estate spending where certain direct and indirect measures need to be taken up on priority. Dhaval Ajmera, director, Ajmera Realty and Infra India Ltd opines, “We hope the government will accord industry status to real estate, which is pending since long. To improve buyers’ sentiment and to make EMIs affordable, home loan rates should be brought down 7% to 8%, with margin money not exceeding 15%.”

Ajmera added that similarly, to help developers to cut down the cost, the lending rate for construction finance should be around 10%. Looking at the high cost in metro cities, the limit of priority sector lending should be enhanced from Rs 20 lakh to Rs 40 lakh. The income tax deduction on interest paid on housing loan should also be enhanced from Rs 1.5 lakh to Rs 3 lakh. Real estate should be treated at par with any other industry for risk coverage ratio while lending. “We also expect the government to declare a special package for affordable housing to overcome about 23 mn urban housing requirements,” he added.

Undeniably, relaxation of a few norms by the banks can vastly accelerate the growth of the real estate sector. Project financing measures need to be restructured by lowering the interest rate and leveraging the foreign exchange reserves. Moreover, relaxing the excise duty and re-introducing Sec 80 IB need to be considered.

All said and done, certain industry experts feel that the government is already on the right track by considering the hiking of income-tax exemption available for interest payment on home loans to Rs 2.5 lakh a year. However, there are still a number of blanks to be filled.

Anuj Puri, chairman and country head, Jones Lang LaSalle Meghraj (JLLM) too agrees that the budget should make high-priority provisions for the laying down of necessary infrastructure so that new areas can be opened up. The concept would be to create and link up satellite settlements to main cities that will help tackle the demand-supply mismatch. He said, “The budget should provide forward momentum for REMFs so that real estate becomes accessible to retail investors, as well. The budget should free the rental income yielded by commercial premises from service tax. The budget should finally and decisively enable the entry of FDI into the real estate sector.”

Looking for stimulus

Looking for stimulus
The Times of India, Times Property, June 20, 2009, page 1

The realty sector has demanded some big-ticket fiscal incentives in the coming Budget to lift the sector out of the current slump, writes Prabhakar Sinha

The Budget was losing importance of late as the economy was on an auto mode, growing at around 9% for five years in succession, prior to 2008-09. But the global slowdown has changed all that, making industries world over look towards their governments for help and stimulus packages. No wonder that the coming Budget will be one of the most important events for the industry in the recent past. Every industry, from export units to real estate, is looking for some packages from the government to regain the high growth path of the recent past.

The real estate sector in particular was very badly bruised by the global financial crisis and is looking for some tax concessions from the government so that demand for housing revives. Real estate sector is a major employment generator - second only to the agricultural sector - in the country. “This Budget has given a historic opportunity to Indian government to give the much needed boost to real estate sector, which has been facing various bottlenecks, and it is time to set t h i n g s right,’’ says Shruti Gupta, head of real estate consultancy firm Hamptons International, India.

Sanjeev Srivastava, CMD of Ass o t e ch group, echoes Shruti and says the sector is expecting an encouraging announcement in the Budget so that the activities could pick up, which is also necessary for the turnaround of manufacturing sector.

Section 80-IB (10)

The reintroduction of Section 80-IB (10) of Income Tax Act in the coming Budget is high on the wish list of developers this year. This section caters to the exemption of income tax on the profit made by developers in constructing small houses of less than 1,000 sq ft in Delhi and Mumbai, and less than 1,500 sq ft in other cities. The provision lapsed on March 31, 2007.

If this provision is reintroduced, the construction of small-size apartments will get encouragement. Council of real estate developers, NAREDCO in its pre-Budget memorandum to the finance minister said there is a huge demand for smaller houses in the country, which requires a lot of private investment. But as the real estate industry is passing through unprecedented slowdown, there is an urgent need to boost housing activity by restoring fiscal concessions available before 2007 under Section 80-IB (10). Also, since a large number of projects sanctioned before March 31, 2007, which were to be completed in four years from the end of financial year in which they were sanctioned to get the tax concessions, have not been completed due to liquidity crunch and fall in demands consequent to economic slowdown, it is necessary that the four years period for construction be increased to six years to take care of prevailing extraordinary economic conditions.

To generate interest among developers in the construction of small houses, where supply is negligible and demand large, NAREDCO demanded reintroduction of concessions under Section 80 IB (10), as available before 2007. Developers feel this measure will also help in lowering the prices of small residential units.

Section 24

Apart from developers, even the urban development ministry has demanded an increase in the deduction from the taxable income on account of interest payment on housing loan, from Rs 1.5 lakh to Rs 3 lakh under Section 24. Under this section, deduction on account of interest payment on housing loans is permissible up to Rs 1.5 lakh for a self-occupied house. Also, the deduction is available after acquisition or construction is completed in three years from the end of the financial year in which capital was borrowed.

NAREDCO in its memorandum has suggested the deduction on account of interest payment available under Section 24 should be made applicable from the year in which capital was borrowed and should be to the extent of full interest paid at least in respect of one house. In case this is not agreed, at least the limit of Rs 1.5 lakh should be raised to Rs 3 lakh for owner-occupied houses. Also, three years period for acquisition/completion from the year of borrowing should be dispensed with. This will provide much needed impetus to housing sector, which has been badly impacted by recession.

If the deduction is allowed on the entire interest pay out on the housing loan, the effective interest rates will be reduced by 2.5 percentage points to 3 percentage points. That means, your home loan rate of 10% will come down to 7%.

Developers also demanded the government should take special measures to cut the interest rates on home loans. Despite reduction in rates in the recent past, the current rate of interest on home loans is around 9.5%. Developers feel the rates should be brought down to 7%. Reduction in the interest rates increases the affordability of the end users and particularly in the lower-income families. This will lead to increase in the demand and will help in the revival of the sector.

Section 54

At present, capital gain arising from transfer of any capital asset is exempt from tax in cases where sale proceeds are invested in acquiring one residential house. Such a restriction, NAREDCO says, is a deterrent to the object of boosting housing sector, and wants it removed and the scope be broadened by allowing the exemption as long as the entire capital gain is invested, whether in one or more houses.

Incentives for promoting rental housing

Tax on rental income: In view of the housing shortage in the country and meeting the objective of providing shelter to all, NAREDCO says availability of houses on rents should be promoted. “In a situation when all cannot afford ownership housing, we need to give a big boost to ‘Rental Housing’” it said.

For this, NAREDCO suggested a number of measures:
1. Income from renting of properties be taxed at a flat rate of 10%
2. Depreciation allowance of 50% be allowed on investment made by employers in e m p l oye e housing. Such depreciation should be 100% in case of e m p l oye e housing with plinth area of less than 500 sq ft.
3. Deduction from rental income for the calculation of taxable income under Section 24 be increased from 30% to 50%.

Future Group goes into home construction

Future Group goes into home construction
Business Standard, June 20, 2009, Page 2

BS Reporter / Kolkata

The Kishore Biyani-led Future Group is going into the real estate business through a 50:50 joint venture with Kolkata-based developer Sumit Dabriwal, for building affordable, branded, ready-to-move-in homes.

This is part of the company’s plan for a turnover of Rs 13,000 crore by July 2011, a growth of 35 per cent over last year.

At a press conference here today, Kishore Biyani, CEO, said FH Residencies, part of the Future Group (it is a 100 per cent subsidiary of Home Solutions Services, also part of the Group) had formed the 50:50 venture with Dabriwal for ‘branded apartments’ that would be ‘affordable’. Biyani declined to comment on the pricing policy. Dabriwal could not be spoken to.

“We intend to be a Rs 13,000 crore company by 2011 and the foray into real estate business for building ready-to-move-in houses is part of the plan. We are yet to work out the pricing strategies, but it would be affordable. This is a national tie-up with Sumit Dabriwal and movement could be seen this year. The target buyers would be young, working class, who are pressed for time, so we would take care of everything needed for a home,” Biyani said.

IPO plans

Biyani said their venture capital company, Future Venture, is in the final stages of announcing its initial public offering (IPO) within the next 30 days. “We had deferred the IPO plans because the economy did not look suitable. But now that consumer sentiment is improving, we are ready to go ahead with it,” he said.

Retail plans

Pantaloon Retail India (PRIL) will invest close to Rs 250 crore within the next year-and a half for setting up 10 malls in the country. With this, India’s largest listed retailer will add close to 1.7 million sq ft to its existing retail space of 14 million sq ft.

“Our target is to have a total of 30 million sq ft by 2013, which would entail an investment of Rs 4,000 crore. There will be 9-10 Central (a brand name) malls in the country within the next 12-18 months. The average cost of setting up a Central is about Rs 25 crore,” Biyani said.

Fund raising plans

The company also plans to raise additional long term funds of up to Rs 1,000 crore in one or more tranches through issuance of securities to various investors.

The company today opened its largest HomeTown store, spread over 200,000 sq ft, at Rajarhat, a Kolkata suburb.

DLF plans first foreign loan of $300 m

DLF plans first foreign loan of $300 m
Business Standard, June 20, 2009, Corporates & Markets, Page VIII

Agencies, fe Bureau, New Delhi

In what could be the after effects of economic slowdown, DLF Ltd, India's largest real estate developer, plans to borrow $300 million in its first overseas loan, a person close to the development said.

According to the source, on condition of anonymity, the company would borrow the money from Standard Chartered for a period of seven years and this will help the real-estate company lower its average cost of borrowing to about 12.2%, as against 12.5%.

While Arijit De, spokesman for the London-based bank, declined to comment, Sanjey Roy, spokesperson for DLF, did not reply to an e-mailed query.

Back home, the company is looking to sell land assets over the next one year to raise Rs 2,000 crore in a bid to retire debt. The plots include hotel land, residential plots and commercial land. The company has a net debt of Rs 13,958 crore, of which Rs 3,591 crore is due this fiscal. It already has a new long-term loan of Rs 2,500 crore sanctioned.

DLF has already reduced its land bank by about 43%, primarily by exiting two large township projects, since the long gestation period of the projects did not gel with its immediate plans. Its land bank is currently at 425 million square feet (msf), down from 751 msf earlier.

DLF will also monetise assets by selling its wind power business for Rs 900 crore. Exit from the Delhi convention centre would fetch Rs 850 crore. Then, there is a refund of Rs 400 crore from the state governments through the exit from two townships and the cash flow from residential projects.

This is part of the company's efforts to reduce its outstanding debt by half this fiscal by raising about Rs 5,500 crore, including proceeds of the plot sales.

Meanwhile, the developer has also put 11 million square feet of office and retail projects on hold as it will wait and watch for the current macro trends to improve. It has about 36 msf under construction, and an additional 12 msf that has been launched but where construction is yet to commence.

Shares of DLF jumped 2.56% on BSE on Friday to close at Rs 330.55 after touching an intra-day high of Rs 334.

Pricing it right

Pricing it right
HT Estates, June 20, 2009, Page 1

Does the real estate scenario look as bleak now as it was six months ago? Not really, thanks to the concept of ‘affordable’ that met with a positive response from the consumers targeted and generated some kind of a movement in the market. And now, another concept has been worked out that’s likely to get the buyers a little more excited — it’s referred to as right pricing. Projects like BPTP’s ParkElite Floors in Faridabad and Jaypee Aman in Noida, among others, come in this category and the market is defined by projects where costs range from Rs 15 lakh to Rs 25 lakh.

What is right pricing? It is neither low-cost housing nor it is affordable housing. Low cost housing means compromising on many aspects of construction, and affordable housing comprises flats in the range of Rs 25 lakh to Rs 35 lakh. With right pricing the product is developed keeping in mind the facilities required bythe end-user and giving him value for money.

No compromise

“It need not result in a compromise on quality or amenities.

Land acquisition rate for many developers, the current construction cost and right judgment of price points should be the key drivers.

Only in case of low cost or affordable housing would quality and amenity level change as compared to high cost/ luxury housing,” says Prashant Kaura, co-founder of realty consultancy GenReal.

Right designing

So, how do the developers manage to get the prices right? Amit Raj Jain,VP (marketing), BPTP, clarifies, “It is all about right designing and efficiency.

We used to, earlier, have larger homes of 1500 sq.ft or more for three bedrooms but now with maximum utilisation and proper designing we are being able to achieve it in smaller spaces and hence the benefit of cost cut is being transferred to the end-user.” Seconds Manu Goswami, head (marketing and sales), Jaypee Greens: “Aspects of designing are helping us develop products with right pricing. Developers are cutting down on circulation spaces;we are planning keeping in mind the target area.

And to say that the spaces will look cramped will be wrong – our three bedroom apartments cover around 1200 sq.ft.” The trend has picked up recently as the demand for right pricing has increased.

“Earlier people used to speculate while purchasing a house. If the requirement was for 1200 sq ft of space, they would opt for more than that keeping future needs in mind; but now if the buyer requires 1200 sq ft, he is settling for lesser space area keeping in mind his budget. So the question of congestion doesn't arise as it all comes to right efficiency and better designing,” says Jain.

However, Kaura is of the view that “Congestion could be a fall-out of increased FSI norms.Also, it could put pressure on physical infrastructure put up by the government authorities.”

The need

Now the question is, why are developers suddenly going in for ‘right priced’ projects? The inventory, in this case land or built up space, didn’tsee much movement during Q4 2008 and Q1 2009, for most developers across India. This prompted many developers to determine the price range where endusers/investors would re-enter the market. “It was critical for developers to start closing transactions and see cash flow to kick- start new projects while continuing their attempts to complete the half done developments,” says Kaura.

The Government, more specifically RBI, reduced the risk weightage for housing loan up to Rs 20 lakh, resulting in relaxation of lending norms for housing loans.

“This has resulted in an increased interest from one segment of end-users. Also in some locations the development authorities have increased FSI allowing the developers to pass the benefit to end-users, making right pricing possible,” says Kaura.
The developers,adds Kaura, are able to afford the right price concept because of several reasons,which are:

 In some areas the FSI has increased allowing the developers to pass on the benefit to the buyers.
 Correction has taken place in values across all cities and micro markets. All new projects would have rates that are more rational compared to the highs seen in 2007-08.
 New areas have now come up for development such as the extended golf course road or Sector 33 in Noida.These locations,while slightly on the outskirts, are good investment opportunities in the long run and are already very well connected to the rest of the developed areas
 Confidence levels among both developers and investors have increased ever since a stable government was formed.

Also, the economy has started showing signs of stability if not a revival.

Realty expert Abdul Bari says that because of this the cost of construction has come down.

“In open floors the developer does not haveto put up a lift and other utility areas are also not required.The usable area is less, say, for an open floor of 300 sq yd the built-up area is around 1400 sq ft and for 250 sq yd it is around 1200 sq ft. So the construction cost becomes less and here the developer has to build atthe most two floors.All these translate to cost savings,which in turn translate to right price for the end-user.”

Where do you get the price right?

Right priced projects can be found at extended Golf Course Road in Gurgaon, Sector 33, Gurgaon, Greater Noida Expressway, NH 8 and Faridabad. According to Jain, right pricing does not mean that a developer should develop the property in some far off and remote area. "Right pricing is all about right value for money," adds Goswami.