Real Estate Intelligence Service, Monday, August 24, 2009

World Economy Emerging From Worst Recession

World Economy Emerging From Worst Recession
The Hindu Business Line, August 23, 2009, Page 4

Low interest rates, stimulus packages spur demand

Bloomberg

The global economy may be coming out of the worst recession since World War II as record-low interest rates and trillions of dollars in fiscal stimulus spur demand.

Sales of existing US homes jumped in July to the highest level since August 2007, and German service industries expanded this month for the first time in almost a year, reports yesterday showed. The Japanese economy grew for the first time in five quarters, according to a report earlier this week.

"There is no question the global economy is healing and emerging from recession," Kenneth Rogoff, a Harvard University professor and former chief economist for the International Monetary Fund, said in a Bloomberg Television interview yesterday.

Federal Reserve Chairman Ben S. Bernanke and other global policy makers cautioned that the recovery is likely to be muted, indicating they would not soon remove all the stimulus injected into the financial system.

"Strains persist in many financial markets across the globe," Bernanke said in a speech yesterday at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming. "The economic recovery is likely to be relatively slow at first, with unemployment declining only gradually from high levels."

The US housing market, which led the way into the recession, is showing signs of righting itself after almost four years of declines. The 7.2 per cent rise in sales of existing homes last month was the biggest since the National Association of Realtors began keeping records in 1999.

Housing Stabilises

US stocks gained for a fourth day, sending the Standard & Poor’s 500 Index to the highest level since October. The S&P 500 added 1.9 per cent to 1026.13, giving it a 2.2 per cent advance this week. The dollar and Treasuries fell, while oil rose to a 10-month high.

The news yesterday followed a report earlier in the week that single-family housing starts rose in July for the fifth consecutive month to reach the highest level since October.

"Although some of our markets are still stuck in the mud, many are improving," Robert Toll, Chairman and Chief Executive Officer of Toll Brothers, told Wall Street analysts on August 12. "It does feel as if the fence sitters are looking for reasons to jump in on the side of buying." Horsham, Pennsylvania-based Toll is the largest US luxury homebuilder.

Demand has been boosted by government tax credits for first-time buyers and near record-low borrowing costs engineered by the Fed, which has coupled a cut in its benchmark interest rate to near zero with purchases of mortgage-backed securities.

The index of US leading economic indicators, which is supposed to presage activity three to six months ahead, rose in July for a fourth consecutive month, the New York-based Conference Board reported on August 20.

German Sentiment

In Germany, Europe’s largest economy, "business sentiment among service providers strengthened in August and was the most positive since January 2006," Markit Economics said yesterday, pointing to its purchasing managers’ survey.

"The recession is over," said Klaus Baader, chief European economist at Societe Generale SA in London, who called the Markit data an "incredible reading".

German investors are also upbeat. Their confidence jumped to its highest level in more than three years in August, the Mannheim, Germany-based ZEW Center for European Economic Research said on August 18.

Chancellor Angela Merkel, who faces national elections next month, is spending about 85 billion euros ($US122 billion) in an effort to rekindle economic growth, including a 2500-euro payment for consumers who scrap an old car and buy a new one. New-vehicle registrations in Germany rose 23 per cent in the first five months of 2009 from the year-earlier period.

Japanese GDP

Japan’s economy is also being boosted by government measures ahead of an election. Prime Minister Taro Aso, whose party is trailing in opinion polls before the Aug. 30 parliamentary elections, has put forward a 25 trillion yen ($US265 billion) stimulus plan.

The 3.7 per cent rise in Japanese gross domestic product in the second quarter followed an 11.7 per cent contraction in the first three months of the year. Exports led the revival of the world’s second-largest economy last quarter, jumping by 6.3 per cent.

The IMF may increase its forecast for the global economic rebound next year as signs of growth return, John Lipsky, the fund’s first deputy managing director, said yesterday.

The Washington-based lender last month predicted the world economy will expand 2.5 per cent in 2010 after contracting 1.4 per cent this year.

Recovery 'Anticipated'

"We’re on track in broad terms for the kind of recovery we had anticipated," Lipsky said in a Bloomberg Television interview from Jackson Hole. "But to get that recovery requires continued policy effort -- accommodative monetary policy, stimulative fiscal policy -- to make sure that growth shows up."

European Central Bank President Jean-Claude Trichet sounded a similar note, telling the Jackson Hole conference that it’s too soon to say a recovery can be sustained and that policy makers need to maintain efforts to restore confidence.

"We know that we have an enormous amount of work to do and we should be as active as possible," Trichet said. The ECB has cut its benchmark interest rate to a record 1 percent and is buying covered bonds and flooding banks with money.

GDP likely to clock 7% in 2009-10: CII

GDP likely to clock 7% in 2009-10: CII
The Financial Express, August 24, 2009, Page 2

Press Trust of India, New Delhi

With various segments of the industry showing signs of recovery, a CII-Ascon survey on Sunday said the county’s economic growth could go up to 7% during 2009-10 against 6.7% in the previous fiscal.

Projecting a 6.5-7% growth rate for the current fiscal, the survey said, “the corporate results for the first quarter of 2009-10 showed some incipient signs of stablisation.”

The corporate results available for a sample of 515 companies for the quarter ending June, revealed that net sales growth has declined, while net profit growth has improved. “...as a result of decline in cost of raw materials and power and fuel and moderation in growth of interest expenses the net profit grew strongly by 26% in the June quarter after having contracted by 7.2% in the previous quarter,” it said.

The survey said key segments like fertiliser, cement and two-wheelers have entered in the excellent growth category from higher growth levels during April-June 2009-10 compared to the same period previous year. Sectors reporting excellent growth are industrial gases, automobile like scooters, it said. “The number of sectors in both excellent and high growth category has recorded an increase reflecting that industry is building on marginal signs of recovery,” it said.

Sectors like polyester staple fibre, all three wheelers and nuclear energy shifted from negative to moderate growth during the first quarter of 2009-10. The domestic industry recorded a year-on-year growth of 7.8% in June, marking a 16-month high compared to 5.44% in the same period last year.

Rates may rise by up to 50 bps in fourth quarter

Rates may rise by up to 50 bps in fourth quarter
The Economic Times, August 24, 2009, Page 12

PTI NEW DELHI

INTEREST rates are likely to rise in the last quarter of this fiscal by up to 50 basis points as bond yields may go up and RBI may tighten money supply to rein in inflation, which is likely to be fuelled as food prices could move upwards, according to IDBI Gilts.

“...There has not been fundamental change in the economy. Despite that, the yields on the government papers have hardened in the range of 30-55 bps in the last one-and-half months and if this is the trend... then interest rate will rise by 25-50 bps from December to March,” IDBI Gilt managing director & CEO G A Tadas said.

The bond yield may have hardened due to the government’s high borrowing target in the current fiscal.

The government’s borrowing target stands at Rs 4.51 lakh crore for 2009-10, with 66% of the borrowing in the first six months.

Mr Tadas added that in case of failure of agriculture due to drought-like situation in the country food prices would rise, which could lead to inflationary pressures in the coming months.

Agriculture minister Sharad Pawar has described the situation in 246 districts in 10 states as “grim” due to scanty rainfall.

In such a situation, the Reserve Bank of India might tighten its monetary policy and as a result banks will have to respond by raising interest rates, Tadas said. If this happens, this would be reversal of RBI’s soft money supply policy since global financial crisis deepened in the middle of September 2008.

IDBI Gilts is a subsidiary of state-run lender IDBI Bank and it operates in debt markets as a primary dealer.

Earlier, the country’s largest private sector lender, ICICI Bank, had said lending rates will start rising any time now.

“I really believe that interest rates are not going to go down from here. Gradually they would go up. When? ...would really depend on how fast the credit growth takes place”, ICICI Bank CEO and managing director Chanda Kochhar said.

In April, ICICI Bank was the first to cut lending and deposit rates by 50 basis points after announcement of the annual credit policy by he Reserve Bank of India.

However, State Bank of India chairman O P Bhatt said rates would not rise till Diwali and may even soften by 25-50 basis points before the busy season in October. After Diwali, there is great demand of credit due to the bust season.

HDFC chairman Deepak Parekh has also said interest rates are unlikely to decline in the next three to six months due to high government borrowings.

Environmental clearance - Balance Development And Eco-Concerns

Environmental clearance - Balance Development And Eco-Concerns
The Economic Times, August 24, 2009, Page 10

PRIME minister Manmohan Singh’s call to ease the problems with environmental clearance provides entrepreneurs the hope that the Centre would soon take measures to address their concerns. Several projects involving thousands of crores of investment are stuck for want of clearances from environment ministry or other concerned departments. These include mega power projects, airports, mining projects, national highways, townships and lowcost housing. All of which contribute to improving the infrastructure necessary to raise economic growth and provide people a better quality of life. The PM has rightly alluded to environmental clearances becoming a new source of licence raj and corruption. As the PM stressed, there is need to remove these hurdles with a sense of urgency, while balancing development and environmental concerns. An attempt to ease some of the conditions for environmental clearances stipulated in September 2006 notification of the ministry of environment and forests is already in public domain for discussion. Many of these suggestions have drawn sharp reaction from the green lobby, some which are in order as the cost of development, disregarding concerns of the local people and the ecology, can prove to be heavy later.

Yet, maintaining the status quo on procedures for environmental clearances will not do the country any good. No one disputes that every project, particularly those that are intrusive in nature or produces significant amount of pollutants or effluents, needs to be assessed for its impact on the ecological balance. That is why we need to have an efficient environment impact assessment (EIA) processes in place, with clearance being granted within the stipulated time period. Sadly, many states are yet to establish state EIA authorities that would take on this responsibility. There is also the need to establish an effective coordination mechanism between the Centre and states to pave way for a credible and efficient system of assessment and clearance as environment falls in the Concurrent List, and states exercise control over many natural resources. In any case, policies should be geared towards pulling people out of poverty without compromising the country’s environmental security.

Other factors that brings property down

Other factors that brings property down
The Economic Times, 21 August 2009

Namrata Kohli, ET Bureau

Recession, while being the primary cause for correction in property prices, is not necessarily the only reason. Scratch deeper, and you will find other factors responsible for correction in values such as increase in land supply/finished products, revision in specifications of buildings by developers, and increase in floor area ratio (FAR).

A noteworthy point is while all new projects are being launched at realistic (corrected) prices, many of the existing projects have also corrected their pricing. A broker cites some examples of projects in Gurgaon and Noida, "In Gurgaon, various projects under DLF, Unitech, and Vatika, which were available in and around Sector Road and Sohna Road, near NH-8, in the range of Rs 4,000-8,000 per sq ft almost 7-8 months ago, are now available in the range of Rs 3,500 to Rs 4,500 per sq ft on basic selling price." In Noida, the broker adds that projects on the expressway under Jaypee, Omaxe, Unitech, and Eldeco, were available in the range of Rs 5,000 to Rs 7,000 per sq ft, 7-8 months ago. But new projects of Jaypee, 3C, Unitech, Amrapali are available in the range of Rs 2,500 to Rs 3,500 per sq ft on basic selling price within the same vicinity.

There has been a significant price correction and this is apparent in the average values prevailing in the NCR. While in upcoming projects at Gurgaon the basic selling price ranges between Rs 2,000 and Rs 3,200 per sq ft, depending on the location/sector, in Faridabad, it is between Rs 1,500 and Rs 3,000 per sq ft, while in Noida, the range is between Rs 2,500 and Rs 3,200 per sq ft.

Developers attribute fall in realty values to something else. They feel price matrix is only determined by demand-supply equation. With global financial crisis and unabated rise in Indian inflation index, the cost of buying a house went up. Home loan interest rates also became much higher than the rates many could afford. All these resulted in waning of demand for property. According to Rajeev Rai, vice-president of Corporate Assotech Ltd, "To counter decreasing demand and to gain confidence of all stakeholders of Indian real estate, developers association like NAREDCO and CREDAI decided to bring down prices of various properties by reducing overheads and marketing costs. In some cases, ticket size of the property was reduced with reduction in size of apartment to make it more affordable for the masses."

One view is also that in bringing down prices, developers are compromising on certain specifications. According to Arjun Kumar, director of AsiaPac International India, "One can see that there has been a compromise on specifications, especially in furnishing and finishing part of the house such as wooden flooring, modular kitchen, wardrobes, fittings in bathroom, etc. Having said this, it would be wrong to say developers have started compromising on the basic structures of buildings."

Another view is that prices have come down due to increase in FAR, especially in Noida, and increase in land supply in Gurgaon and Faridabad. Says Kumar Arjun, "Gurgaon and Faridabad fall under Haryana and there has been increase in land supply because of the revision in master plan. In the new master plan, many more residential sectors have been added and licences for new projects have been approved. All this has added to the supply in market. This has of course given enough room for developers to be competitive in tight economic situation. Noida and Ghaziabad, which are in Uttar Pradesh, are witnessing an increase in supply primarily because more land have been auctioned and given to developers for group housing. The FAR applicable has also been revised from 1.75 to 2.75 and restriction on going vertical has virtually been relaxed. This has definitely led to price competitiveness."

But Rajeev Rai of Assotech argues that any addition in FAR always comes with additional charges, which has to be paid to the development authority. "In case of ongoing projects, the foundation work and ground coverage norms do not provide much scope for full utilization of additional FAR. So it doesn't have much bearing on the price level."

However, the fact is, higher FAR is what makes affordable housing possible - for instance, Falcon constructed houses on NH-8 by providing greater number of apartments at reduced sizes and by incorporating cost effective technology. According to Bhim Yadav, CEO, Falcon Realty Services Pvt Ltd, "A higher FAR not only brings in more supply to the market, it is vital for creating room for more affordable housing and control the steep rise in prices. This will ultimately benefit the common man."

NCR brokers do a realty ‘check’ again

NCR brokers do a realty ‘check’ again
The Economic Times, August 24, 2009, Page 1 & 14

If Price Bets Backfire, Recovery To Be Hit

Sanjeev Choudhary NEW DELHI

THE broker-builder nexus that propelled property prices to unreasonable levels to beguile home buyers in the National Capital Region (NCR) during the realty boom of 2006 and 2007 seems to be back in action.

Brokers are increasingly underwriting properties in new projects being launched by developers—blocking a large number of apartments during so-called soft-launches, hoping to offload them at a premium to end-buyers after the formal launch.

This will help builders claim huge sales immediately and create an artificial scarcity in the market. But if brokers fail to offload the stock to end-users or long-term investors, property prices may take a beating and the nascent recovery in the residential market may be hit.

“End-users are back in the market and we think we will be able to sell the properties we underwrite,” a property dealer in Noida said, claiming he has underwritten several apartments in new projects launched in the area. “Given the interest among home buyers, prices will soon start rising and we can easily extract a premium,” he said, requesting anonymity fearing an exposure could spoil his relationship with builders.

The Indian economy, which expanded by a creditable 6.7% in the financial year ended March 2009 despite a global economic downturn, seems to be encouraging speculators in the property market.

Property prices had fallen around 25% in the past one year in Gurgaon, Noida and Faridabad. Some analysts had anticipated a further correction in prices this year with a large number of property firms announcing launches after a gap of almost two years. The combination of builders and brokers have now managed to keep prices steady despite a huge increase in supply.

New properties in Gurgaon are being offered at around Rs 3,600 per sq ft while in Noida and Faridabad, prices are hovering around Rs 2,925/sq ft and Rs 2,250/sq ft, respectively.

Brokers usually charge a commission from developers, generally 3-4% of the value of the property. But during the boom, several brokers started underwriting properties slated for launch with the backing of a bunch of investors.

The problem started arising when the property market went into a deep downturn and these broker-underwriters were left with huge unsold stock.

Brokers active again

IN MOST cases, brokers managed to dump the unsold stock back on developers, as they had paid hardly 5-10% of the total property value.

With the property slump seemingly close to its end now, brokers have again become active and started underwriting projects. Several developers, including Unitech, Jaiprakash Associates, BPTP, Emaar-MGF and The 3C Company, claim they have been able to sell thousands of apartments since April.

It’s impossible to verify these claims because these companies are either privately-held or don’t give out quarterly balance sheets. Also, since realty companies follow a percentage of completion method (POCM) for accounting, the revenue from sale of new launches starts getting recognised only after a quarter or two. Under POCM, sales are recognised as per the pace of execution and are first shown in books only after 30% of the project is complete.

Unitech, which claims to have sold 3,500 units since April in Gurgaon and Noida, said it is doing brisk sales through its own sales network as well. “There is nothing wrong in using brokers as they are an established channel for sales,” said Unitech’s head of corporate planning, R Nagraju, adding that brokers have not been underwriting their projects and a vast majority of its buyers are end-users.

The 3C Company, another property firm that has launched a project in Noida, claims to have sold 1,100 units in just a month—‘all to endusers’. “Not a single flat in our project has been underwritten by any broker. The moment you do it (get brokers to underwrite), they (brokers) go and sell it to investors. Other developers are doing it, but not us,” said Brijesh Bhanote, the company’s senior vice-president (marketing).

The developers’ claims too are hard to believe. “We still estimate there are unsold stock with developers who claim their projects have been sold out,” said Anshul Jain, India CEO of international consultancy DTZ.

A combination of end-users, investors as well as broker-underwriters are driving the market at present. When the market anticipates prices to go up, more investors and underwriters will enter, which is what is happening now. That is also the reason why underwriting at present is limited to low-priced projects. Brokers are part of all property markets, but developers’ dependence on brokers in the NCR seems to be much higher.

“Traditionally, brokers have played a very strong role in the NCR,” Knight Frank India chairman Pranay Vakil said. Developers have been forced to deal with brokers in the NCR as they would otherwise ‘bad-mouth’ projects, hampering sales, said a top executive of a NCR-based listed real estate firm had earlier said.

PPPs today are nothing but business deals

PPPs today are nothing but business deals
Business Standard, August 24, 2009, Page 15

Praveen Bose & Bibhu Ranjan Mishra / New Delhi

The Indian Institute of Science (IISc) has been at the forefront of scientific research in India for nearly a century. The institute, the brainchild of the visionary Jamshetji Nusserwanji Tata, has produced many luminaries in science who have been at the vanguard of India's progress. At a time when the government is looking to setting up more IIScs across the country, the credibility of the new institutes could come under a cloud. Professor P Balaram, Director of IISc has a tete-a-tete with Praveen Bose & Bibhu Ranjan Mishra on the status of research in the country and challenges. Edited excerpts:

Has the economic slowdown had any impact on research activities at IISc?

I don't think the recession has had a major impact yet. The impact may be felt later. So far, there has been no decrease in funding. The public funding remains at reasonable levels though.

Is the government providing enough funds for research works?

Organised science with funding from the government is a recent phenomena. It is only in the ‘80s that some amount of moderate funding started coming from the government. In ‘90s, we have seen more money coming in. There has been more funding with the change in the economic condition influencing government investment in various sciences.

What is the main source of your funding?

The government is the primary supporter of research and education. We get about Rs 200 crore from the government every year as maintenance and development grant. Besides, we generate about Rs 150 crore from various projects sponsored by government departments and institutions. However, despite being the prime source of our funding, the government does not get as much mileage as private funders.

What about contributions from the private sector?

At the moment, private funding is insignificant. Private funding does not account for more than 10 per cent of our research expenses.

Individual faculty try to get projects on their own, but it does not benefit the institution enormously. Private funding today is not philanthropic.

Large private universities in the US have endowments that are phenomenally large; even bigger than the GDP of some countries.

With the government planning more IIScs, will this affect the quality of research?

Many new institutions have been planned or started. But they will be separate institutions and grow on their own. The government is not setting up institutions like the IISc. We are almost completely post-graduate and predominantly research-oriented. All new institutes planned by the government will be science-based with no focus on engineering. However, we focus equally on engineering and science.

Why are not enough PPP projects taking off at IISc?

People are only now talking about PPP model. IISc is the first example of PPP. It came up with an endowment from Jamshetji Tata and the government (then British and Mysore government). In case of this PPP, the philanthropist (Tata) was a philanthropist in the true sense. He wanted no control over the institution. This PPP model has not happened over the last 100 years. Now, PPP is nothing but almost business deals.

But what about the private chairs you are setting up?

Setting up a chair actually entails some money (may be a crore) as endowment, and a crore of rupees is nothing when people buy apartments for much more. It is not enough for meaningful research. They are token gestures. But we are making major efforts to increase private participation.

Who owns the IPs that result from joint research?

We have licensing agreements with the partners according to which we own the IP generated from the research.

What proportion of your research (IPs) gets productised?

About 99 per cent of our research don't translate into products. Only a small fraction results in something practically useful. But you can't get that 1 per cent till you do the 99 per cent research. Many a time scientists do research for their understanding. R&D can't be wasteful as it could always lead to further studies and research. A lot of it is being spent on educating people in methodologies.

Are you able to attract the same quality of people today as you used to do earlier?

Here we take a very small proportion of the applicants. Earlier we used to select about 600 students from a base of about 6,000 applicants, but now we are selecting may be the same number of people from amongst 60,000 applicants. So my personal feeling is that the overall quality of the students remain the same.

What other areas is IISc planning to enter?

We are launching a Centre for Earth Sciences for which we have begun to recruit faculty. We have also started the Centre for Neuroscience. We felt that research on neuroscience will play a big role in future. As our population grows older, you take more interest in the subject. The department will only expand in future. We have also set up a Centre for Climate Change. In partnership with the Karnataka, a Centre for Infrastructure, Urban Planning and Transport has started work in areas of civil and transportation engineering.

What are your plans on expanding infrastructure?

This year we are spending about Rs 140 crore on setting up new academic buildings and visiting houses. We are establishing new hostels since our existing ones are stressed. In the next 2-3 years, we will spend Rs 70 crore on these projects.

DLF mulls restructuring of business, management

DLF mulls restructuring of business, management
Business Standard, August 22, 2009, Page 3

DLF, the country's largest property developer, is mulling restructuring of its management, as the company is looking to reorganise its business into two vertical divisions from the existing five.

Ramesh Sanka, chief financial officer (CFO), is expected to head the newly created Leasing division, while Ashok Tyagi, currently executive director, is likely to become CFO.

"Since the company is integrating its business into two verticals, it wanted Ramesh Sanka to take up bigger responsibilities and that is why the management is likely to be restructured in the coming days," said an informed source.

However, a company spokesperson said, "We do not comment on market speculation."

Sanka has been group CFO for over five years and managed the finances during the toughest times. He handled the divesting of 12 per cent of DLF's equity for Rs 9,200 crore in June 2007. Of late, his strategy to exit the non-core business like hotels helped DLF bring its debt down from over Rs 14,000 crore to less than Rs 12,000 crore.

"The commercial segment needs a lot of negotiation with the corporates, as well as investors. DLF is also looking at raising a substantial amount of money through private equity and listing of DLF Assets Ltd on the Singapore Stock Exchange. Sanka would be the right person to head that segment," said Rupesh Sankhe, analyst at Centrum Broking.

Currently DLF has five verticals - home, retail, commercial, infrastructure and hospitality - which would now be integrated into two, sales and leasing. In the commercial business segment, DLF has constructed nearly 17 million sq ft and another 17 million sq is under construction.