Real Estate Intelligence Service, Thursday, July 09, 2009

India’s ratings may be lowered on high fiscal deficit, says S&P

India’s ratings may be lowered on high fiscal deficit, says S&P
The Financial Express, July 9, 2009, Page 13

fe Bureau, Mumbai

Standard & Poor’s Ratings Services has maintained that India’s high fiscal deficits are not sustainable in the medium term and if fiscal consolidation is delayed, there is a risk that the sovereign credit ratings on India (BBB-/Negative/A-3) may be lowered.

Although the Central government Budget deficit of 6.8% of GDP for fiscal 2009-2010 (excluding below-the-line items such as oil and fertiliser bonds) was high at almost double the 2.7% recorded in fiscal 2007-2008, including state government deficits and off-balance-sheet items such as oil and fertiliser bonds, the deficit is estimated to reach about 12% of GDP in fiscal 2009-2010, said Standard & Poor’s.

“We continue to believe that such high levels of government deficits are unsustainable in the medium term, although we were not surprised by the number itself. If India achieves fiscal consolidation in the next two to three years, the sovereign ratings on India could be maintained at ‘BBB-’ and the outlook revised to stable,’’ said the rating agency.

The rating agency has revised the outlook on India to negative on February 24, on expectations of increasing fiscal deficits.

According to the rating agency there was no significant information on the road map for fiscal consolidation or details on the divestment plan for state-owned companies in the Budget speech.

In addition, there were no major tax changes but minor adjustments in the run-up to the planned introduction of the goods and service tax nationally in April 2010.

“We await the 13th Finance Commission report, which must be submitted to the finance minister by the end of October 2009, to garner a broader picture on the fiscal consolidation in the medium term. The contents of the new Fiscal Responsibility and Budget Management Act (FRBM-II) are expected to guide and safeguard fiscal consolidation at central and state government levels. We believe a separate announcement on the divestment plan or other plans on fiscal consolidation is possible,’’ noted the rating agency.

The hefty fiscal deficits and debts outstanding (general government gross debt estimated at 85% of GDP at the end of March 2009) are two of the most significant negative factors on the sovereign credit ratings on India. The other important rating factors for India include its (1) medium term growth prospects; (2) inflation rate and interest rates; (3) progress in structural reforms; and (4) net inflow of funds.

For example, if the pace of recovery of the Indian economy and the medium-term growth prospects are strong, the government will be able to consolidate its fiscal position faster through higher revenue and lower expenditure growth. Progress in structural reforms such as setting automatic adjustment mechanisms for the prices of domestic fuel, fertiliser, and food would also be positive.

In addition, measures increasing the efficiency of the public sector and reducing red tape, as well as facilitating infrastructure investments would be beneficial. On the other hand, higher inflation and interest rates could increase the cost of borrowing and affect the size of fiscal deficits or slow fiscal consolidation. A material deterioration in India’s strong external position—considered unlikely at this stage—could also put pressure on the ratings.

World economy still faces significant risks: G-8 leaders

World economy still faces significant risks: G-8 leaders
The Financial Express, July 9, 2009, Page 18

Reuters, L’Aquila, Italy

G-8 leaders believe the world economy still faces “significant risks” and may need further help, according to summit draft documents that also reflect failure to agree climate change goals for 2050.

Discord over environmental measures was underlined by withdrawal from the meeting of Chinese President Hu Jintao, who returned to Beijing because of unrest in northwestern China in which 156 people have been killed.

Documents seen by Reuters ahead of a G-8 summit cautioned that “significant risks remain to economic and financial stability”, while “exit strategies” from pro-growth packages should be unwound only “once recovery is assured”. “Before there is talk of additional stimulus, I would urge all leaders to focus first on making sure the stimulus that has been announced actually gets delivered,” Canadian Prime Minister Stephen Harper said before the summit began.

Leaders met in L’Aquila, a mountain town wrecked by April’s earthquake and a fitting backdrop to talks on a global economy struggling to overcome the worst recession in living memory. The Group of Eight—United States, Germany, Japan, France, Britain, Italy, Canada and Russia—will kick off with debate on the economic crisis, after what one analyst called a “reality check” in recent weeks on the prospects for rapid recovery. G-8 leaders badly underestimated the economic problems facing them when they met in Japan last year and will now focus on what must be done to prevent another meltdown.

“Although there have been signs of stability in the economy and the sentiment has improved, the real economy has not recovered yet with job and wage conditions still stagnant,” said Takao Hattori, senior strategist at Mitsubishi UFJ Securities.

But few big initiatives are expected as the G-20, a broader forum that also includes the main emerging economies, is tasked with formulating a regulatory response to the crisis and meets in September in Pittsburgh after an April summit in London.

Not mentioning China’s push for a sensitive debate about a long-term alternative to the dollar as global reserve currency, the draft talked only of global “imbalances”. G-8 diplomats had said this might be the only oblique reference to currency. “Stable and sustainable long-term growth will require a smooth unwinding of the existing imbalances in current accounts,” read the draft prepared for the G-8 talks.

China complains that dollar domination has exacerbated the global crisis and worries that the bill for US recovery poses an inflation risk for China’s dollar assets, an estimated 70% of its official currency reserves.

IMF revises growth projection upwards

IMF revises growth projection upwards
Business Standard, July 9, 2009, Page 10

BS Reporter / New Delhi

India’s growth projection raised to 5.4% for '09

The International Monetary Fund (IMF) has revised upwards India’s growth projection by 0.9 percentage point in calendar 2009 and 2010 because of positive impact from fiscal and monetary stimulus packages.

The multilateral financial institution now expects Asia’s third largest economy to grow at 5.4 per cent in calendar 2009, compared with 4.5 per cent projected in April this year.

In 2010, the Indian economy is expected to grow at a much faster rate of 6.5 per cent.

China’s growth projection was also revised upwards by 1 percentage point in calendar 2009 and 2010. India’s northern neighbour is expected to register 8.5 per cent growth in 2010. “Growth projections in emerging Asia have been revised upward to 5.5 per cent in 2009 and 7 per cent in 2010. The upgrade owes to improved prospects in China and India, in part reflecting substantial macroeconomic stimulus; and a faster than-expected turnaround in capital flows,” said IMF in its latest World Economic Outlook.

However, the outlook warned that further acceleration in growth would depend on recovery in advanced economies. “The recent acceleration in growth is likely to peter out unless there is a recovery in advanced economies,” IMF said.

Recently, the Economic survey for 2008-09 projected Indian economy to expand by 7 per cent with a range of 0.75 percentage point on either side.

The higher growth is dependent on the US economy recovering by September this year. The IMF projects US economy to contract by 2.6 per cent in 2009 before recovering to 0.8 per cent in next calendar.

“In the US, high-frequency indicators point to a diminishing rate of deterioration, including in the labour and housing markets. Industrial production may be close to bottoming out; the inventory cycle is turning; and business and consumer confidence has improved,” the report said.

Thus, the IMF expects the world’s largest economy to stabilise in the second half of calendar 2009, followed by “gradual recovery” in the following year.

DLF sells Akruti JV stake for Rs 200 cr

DLF sells Akruti JV stake for Rs 200 cr
The Economic Times, July 9, 2009, Page 6

Sanjeev Choudhary NEW DELHI

INDIA’S largest real estate developer DLF has sold its stake in a 50:50 joint venture with Mumbai-based Akruti City for developing a commercial project in Mumbai to a US-based real estate fund for over Rs 200 crore, two senior executives at DLF said, asking not to be named.

The JV firm is developing two office buildings spread over 9 million sqft area at Andheri, Mumbai. These two buildings are part of a larger slum rehabiliation project being developed by Akruti City.

DLF had picked stake in the project over two years ago with the strategy of spreading its footprint across the country. DLF exited the project as part of its asset sale programme to raise Rs 5,500 crore by the end of this fiscal.

As part of stake sale in Andheri project, DLF will receive Rs 200 crore plus the proportionate cost of construction done so far in the project. Around 20% of the construction work is complete, which may fetch DLF another Rs 20-25 crore, a DLF executive said. DLF has already received the token amount for the deal.

The identity of the real estate fund that bought DLF’s stake couldn’t be immediately ascertained, but a person familiar with the development said, the fund already has some investments in the Indian real estate sector.

Besides existing the Andheri project, DLF has in the past two months raised around Rs 1,000 crore through asset sale across different cities in the country. It recently sold off its 66% rights in a land parcel in Prabhadevi, Mumbai for Rs 310 crore to Chennai-based investor C Sivasankaran. It also sold off land parcels meant for hotel and commercial projects in Baroda, Gangtok and NCR.

The company expects to raise additional funds through sale of hotel plots in Lucknow, Kasauli, Goa, Mumbai and NCR. DLF has already exited from township projects in Bidadi in Karnataka and Dankuni in West Bengal. It is also in the process of selling its wind power business.

The fund raising through asset sale will go towards reducing the company’s debt. DLF plans to raise around Rs 10,000 crore through asset sale in the next three years and halve its outstanding debt of Rs 14,000 crore by the end of the current fiscal. A downturn in the Indian real estate sector, which dramatically reduced demand for homes, offices and shops, led to a cash crunch at most realty companies forcing them to liquidate assets to generate cash.

With a majority of real estate companies facing cash crunch, it was difficult to find buyers for realty assets. But now with private equity funds and some high networth individuals becoming active again in the property market, deals have picked up.

PICK ‘N’ DROP

DLF had picked stake in the project over two years ago to spread its footprint across the country

It exited the project as part of its asset sale programme to raise Rs 5,500 crore by the end of this fiscal

As part of stake sale in Andheri project, DLF will receive Rs 200 crore, plus the proportionate cost of construction done so far

DLF has in the past two months raised around Rs 1,000 crore through asset sale across different cities

Cement prices may soften by Rs. 3-10 a bag

Cement prices may soften by Rs. 3-10 a bag
Business Standard, July 9, 2009, Section II, Page 4

How government has made it tough for RBI, industry

How government has made it tough for RBI, industry
The Financial Express, July 9, 2009, Page 6

Sunny Verma

Corporate India could find it difficult to raise bank finance at attractive rates in the near term. The Centre’s heavy debt programme could potentially eat up a large chunk of funds. The government’s gross borrowings are estimated to rise to Rs 4,51,093 crore in 2009-10, up from Rs 3,62,000 crore announced in the interim budget. To get perspective on this debt plan, note that it is significantly higher than the amount of deposits households parked with banks. Indian households’ financial savings stood at Rs 7,34,653 crore in 2007-08, of which over 55% or Rs 4,06,631 crore was in bank deposits, as per the latest estimates available with RBI.

One can argue that the government will be borrowing more than the savings generated by small savers in the economy. The government’s net borrowings, excluding repayments, are pegged at Rs 397,957 crores in 2009-10 up from an interim budget estimate of Rs 308,647 crores.

The Centre will raise market loans to bridge as much as 99% of the projected fiscal deficit of 6.8% of GDP in 2009-10. RBI, the government’s de facto debt manager, will have a tough time, especially in the second half of this fiscal that starts from October. By that time, which is also considered the busy season by bankers since credit demand is high, the economy is expected to turn the corner. That will sharply push up demand for credit from the corporate sector. The only comfort one can draw is from the net amount RBI will have to raise in the remaining part of this fiscal: Rs 1,69,000 crore. RBI has already raised Rs 1,62,000 crore. It can turn Rs 33,000 crore of market stabilisation scheme bonds into normal debt. This leaves extra borrowings of Rs 38,000 crore.

Still, this will be a daunting task in light of the fact that state governments also plan to raise significant funds from the market. States have completed borrowings of only Rs 20,000 crore in the first quarter out of their estimated borrowings of Rs 1,26,000 crore, in 2009-10. So, another Rs 1.06 lakh crore worth of bonds can potentially be pumped into the market. This would put upward pressure on interest rates, bond yields and negative pressure on India’s ratings. These factors, coupled with the crowding-out effect these borrowings will have on corporate investment, could potentially obstruct the recovery process.

Hotel, hospital loans may not come under commercial real estate exposure

Hotel, hospital loans may not come under commercial real estate exposure
The Hindu Business Line, July 9, 2009, Page 6

Internal cap on lending could be relaxed for such projects.

Our Bureau, Mumbai

Commercial banks may have more flexibility to lend to hotel and hospital projects. The RBI, in its draft guidelines on commercial real estate (CRE) exposure, has said that loans for construction of hotels and hospitals will not be classified as CRE exposure.

According to bankers, the internal cap on lending could be relaxed if projects do not carry the CRE tag.

The RBI, however, is silent on how banks should classify their exposure to information technology parks.

Loans extended for construction, among others, of a cinema theatre, amusement park, hotels and hospitals, and educational institutions to entrepreneurs who themselves run these ventures would not be classified as CRE.

Loans to entrepreneurs for acquiring real estate for the purpose of carrying on business activities, which would be serviced out of cash flows generated by those business activities, may not be classified as CRE, the RBI said in its draft guidelines.

Loans which will not be classified as CRE include those extended to a company (engaged in a mixed activities including real estate) for a specific purpose, not linked to real estate activity; exposure towards acquisition of units in special economic zones; and exposures to industrial units set up in SEZs.

According to the RBI, among others, loans to builders; exposure to mutual funds/ venture capital funds/ private equity funds investing in real estate companies; loans extended against the security of future rent receivables generated by CRE exposure; exposure towards purchase of land for developing SEZs, loans for integrated townships etc will be classified as CRE.

The Reserve Bank of India said commercial banks should classify an exposure as income producing real estate (IPRE)/ commercial real estate (CRE) exposure if the funding leads to the creation/ acquisition of real estate where the prospects for repayment would depend primarily on the cash flows generated by the asset.

The draft guidelines on CRE have been issued in order to align RBI’s definition of CRE with that of Basel II.

The prospect of recovery in the event of default, according to the revised draft guidelines, would also depend primarily on the cash flows generated from such funded asset which is taken as security.

NHB to set up mortgage guarantee firm by March

NHB to set up mortgage guarantee firm by March
Business Standard, July 9, 2009, Section II, Page 2

Newswire18 / Mumbai

National Housing Bank (NHB) plans to set up a mortgage guarantee company by March, Executive Director R V Verma said today. NHB, which will hold majority stake in the mortgage guarantee company, has identified Asian Development Bank and International Financial Corporation as the two other stake holders.

The mortgage guarantee entity would have an initial capital of Rs 120 crore, against the minimum requirement of Rs 100 crore set by the Reserve Bank of India, Verma said.

Verma was talking on the sidelines of the India Securitisation Summit 2009 organised here by National Institute of Securities Markets.

“Mortgage guarantee will be a product offered by the company that will support loans and advances given by lending institutions,” Verma said. The formation of the company will trigger more credit flow and help lenders reach out to larger geographical areas, he said. Separately, Verma said, there is revival in the housing sector due to low interest rates, improvement in credit availability and fall in property prices.

NHB hunts for foreign investors for mortgage guarantee company

NHB hunts for foreign investors for mortgage guarantee company
The Hindu Business Line, July 9, 2009, Page 1

Bank to be majority stakeholder in firm.

--------------------------------------------------------------------------------
Foreign hand
Tied up with Asian Development Bank and International Finance Corporation
Looking for two more international investors
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Our Bureau Our Bureau, Mumbai

National Housing Bank (NHB) is scouting for international investors for its much-delayed mortgage guarantee company.

NHB has already tied up with the Asian Development Bank and International Finance Corporation, and is looking for two more international investors, Mr R.V. Verma, Executive Director, NHB, said.

The company is in talks with two or three investors and will finalise the remaining two partners soon.

Default protection

The mortgage guarantee company (MGC) was envisaged in 2002 to compensate lenders such as banks and housing finance companies in case of defaults by home loan borrowers.

With this guarantee, banks will find it easier to securitise their loans as the MGC will encourage standardisation of loan documents and processes, and provide additional credit enhancements to the portfolios of mortgage lenders.

Shareholding

When the MGC was conceptualised, NHB was supposed to hold 26 per cent stake with Asian Development Bank and International Finance Corporation holding 13 per cent stake each. Canada Mortgage and Housing Corporation and Canada-based United Guarantee Company were to be the other partners. However, NHB is now having second thoughts about the shareholding pattern.

“We are revisiting the shareholding pattern. NHB will be the majority stakeholder in the company. However, our stake will be less than 50 per cent,” said Mr Verma.

He was speaking on the sidelines of the India Securitisation Summit here.

Mr Verma expects the MGC to be operational by the end of this fiscal.

The mortgage guarantee company will initially have a paid-up capital of Rs 120 crore. The capital will increase to Rs 1,000 crore in four to five years, he said.

On home loan interest rates, Mr Verma said they should come down as the risk of default reduces for the lender. The formation of the company will also improve the credit flow to borrowers in the high-risk category, he added.

National Buildings Corp plans to enter affordable housing market

National Buildings Corp plans to enter affordable housing market
The Financial Express, July 9, 2009, Page 3

Praveen Kumar Singh, New Delhi

Joining the band of private realtors like Unitech, Parsvnath and Tata Housing Development Company, public sector firm National Buildings Construction Corporation (NBCC) has planned to build ‘affordable’ houses. The company has carried out initial surveys among the employees of PSUs and government offices to ascertain the demand for the houses that will be constructed in Uttar Pradesh and Gurgaon in the first phase.

“We are working on the development of upto 6,000 affordable houses in Uttar Pradesh and Gurgaon. These flats may be sold in the price bracket of Rs 6 lakh to Rs 45 lakh. We have received demand for 20,000 flats in the surveys conducted for the two projects. After the two projects, we are going to develop such flats in other parts of the country as well,” NBCC chairman and managing director Arup Roy Choudhury told FE.

In Uttar Pradesh, the company will build 1,500-2,000 apartments with two and three bedrooms at Loni Road. It will also construct about 4,000 flats with two, three and four bedrooms at an undecided location in Gurgaon. “In UP, we are starting at the price range of Rs 6-7 lakh to Rs 9-10 lakh. The higher-end flat will be sold at Rs 12-15 lakh. In Gurgaon, we will sell the flats between Rs 25 and Rs 45 lakh,” Choudhury said, adding that the company will open the UP project for booking within 2-3 months.

Initially, the company is targeting the employees of PSUs and government offices. “The company will launch a scheme for the general public after the demand from the government and PSU employees is met,” the NBCC chief said.

In the last few months, various private sector developers including Parsvnath, Unitech and Tata Housing Development Company (THDC) have announced low-cost housing projects. While THDC is developing houses in Mumbai in the price bracket of Rs 3.9 lakh and Rs 6.7 lakh, Unitech wants to sell 15,000 affordable houses this financial year out of 20,000 it will build at the investment of Rs 1,700 crore in the country. Parsvnath Developers has also launched such a project in Lucknow.

Commenting on the projects announced by his competitors, Choudhury said, “Today, you have to create lifestyle at minimum cost to the buyers. What do 250 sq ft mean to build a flat? Do you want to shift a person from a bamboo hut to the one built of concrete? The minimum size should be above 400-500 sq ft If we get land at around Rs 200 a sq ft, we would be able to sell such flats at Rs 6-7 lakh.”

Govt to widen tax net for property transactions

Govt to widen tax net for property transactions
The Hindu Business Line, July 9, 2009, Page 1

Certain deals to be taxable in the hands of recipients.

K.R. Srivats, New Delhi

Tax planning around gifting of immovable and movable properties will soon turn out to be a difficult task for taxpayers if a Budget proposal gets Parliamentary nod.

The Government plans to amend the income-tax law to curb “black money” transactions in the property market.


Come October 1, the value of any property received without consideration or received with an inadequate consideration will be included in the computation of total income of the recipient. Simply put, such transactions would be taxable at the hands of the recipient under the head “income from other sources”.

The proposed change in law would cover immovable property (land, building), shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures or any work of art.

Some Centre and State politicians have been using the gifting route to get away from the taxman’s net. They have been contending that properties and jewellery had been given to them out of love and affection by party workers and loyalists.

Income head

Currently, any amount in excess of Rs 50,000 received without consideration by an individual or a Hindu Undivided Family is chargeable to income-tax in the hands of the recipient under “income from other sources”.

So far, anything received in kind having “money’s worth” – property – was outside the purview of tax provisions.

In the case of an immovable property received without consideration and where the stamp duty value of such property exceeds Rs 50,000, the stamp duty value of such property is proposed to be taxable as income from other sources. Where the consideration is less than the stamp duty value, the stamp duty value reduced by the consideration received would be taxable as income from other sources.

However, the proposed change will not apply when the property is received from any relative or on occasion of marriage of the individual, or under a will or by way of inheritance or in contemplation of death of the payer or donor or from any local authority or certain registered trust.

Also, money or property received from any fund or foundation or university or other educational institution or hospital or medical institutions will be excluded from the purview of the proposed change.

Return of gift tax

Some tax experts see the proposed law as a return of the “gift tax”, albeit in a different form and also as a tax on income.

“To a limited extent, this is a return of gift tax,” Ms Neeru Ahuja, Tax Partner, Deloitte Haskins & Sells, told Business Line. She also said that the proposed changes would curb shifting of tax base from one assessee to another to avoid tax.

Mr G. Ramaswamy, Member of the ICAI’s Direct Tax Committee, said in the case of inadequate compensation for an immovable property, the transferor and transferee may now be required to pay tax (though under different provisions).

He also noted that litigation between the taxpayer and tax department could increase on account of the proposed changes. There is a need for clarification as the tax department may now see a “gift element in any normal property transactions done through transfer deeds,” Mr Ramaswamy said.

Coming soon, cheaper loans for SEZ developers

Coming soon, cheaper loans for SEZ developers
The Economic Times, July 9, 2009, Page 9

Amiti Sen NEW DELHI

THE government may soon release a new set of rules that will make domestic borrowing cheaper for developers of special economic zones (SEZs), thereby boosting investment in these tax-free manufacturing hubs.

The Reserve Bank of India (RBI) recently granted infrastructure status to projects in these SEZs that will let them access cheaper funds. The central bank will now release revised commercial real estate exposure (CREE) guidelines for banks to identify activities that can be classified as infrastructure.

The draft norms have been circulated for comments to banks and general public, and once they are finalised, SEZ developers will be able to source funds at about 2% cheaper rates for most activities in the processing areas that are likely to be classified as infrastructure, a government official said.

The move will benefit both small and big SEZ developers such as Reliance, Adani and Essar, and IT companies such as Infosys and Wipro.

“The development is definitely positive as SEZs have been facing a cash crunch due to the global slowdown. Once banks adopt the new guidelines, the zones will get access to funds earmarked for infrastructure projects at lower interest rates, giving them a much-needed boost,” the official added.

As per the draft guidelines, the exposure of banks towards purchase and development of land for SEZs that will be repaid from the sale proceeds or rental of the plots given on lease to the units in SEZs will be classified as CREE exposure. The cost of plots would include the cost of land acquisition as well as the cost of land development.

However, if a single company is developing an SEZ completely or partially for its own use and its repayment will depend on the cash flow generated by economic activities of the units in the SEZ along with the general cash flow of the company rather than the level of real estate prices, it should not be classified as CREE but as infrastructure lending.

Similarly, if there are co-developers in an SEZ who undertake a specific job such as provision of sewerage and electrical lines, among others, and are paid by the main developer based on the work in progress, such exposure will be classified as infrastructure lending, the draft notification said.

What draft GUIDELINES SAY

Exposures of banks towards purchase and development of land for SEZs that will be repaid from the sale proceeds or rental of the plots given on lease to units in the zones will be classified as real estate exposure. Cost of plots would include cost of land acquisition as well as cost of land development

If an SEZ is being developed by a single company entirely or mainly for its own use and the repayment will depend on the cash flow generated by the economic activities of the units in the SEZ and the general cash flow of the company rather than the level of real estate prices, it should be classified as infrastructure lending

If there are co-developers in an SEZ who undertake a specific job such as provision of sewerage, electrical lines etc and they are paid by the main developer based on the work in progress, such exposures will be classified as infrastructure lending

What THEY MEAN

SEZ developers will be able to source funds at cheaper interest rates for most activities in the processing area that are likely to be classified as infrastructure

Infrastructure projects usually get loans at interest rates that are cheaper by about 2% than those offered to real estate

Move to benefit both small and big players, including Reliance, Adani, Essar and IT companies such as Infosys and Wipro