Real Estate Intelligence Service, Monday, September 07, 2009

Restoring the growth momentum would require filling a resource gap of Rs. 1.6 lakh cr to finance public investment until 2012

Restoring the growth momentum would require filling a resource gap of Rs. 1.6 lakh cr to finance public investment until 2012
The Financial Express, September 7, 2009, Page 4

Manmohan Singh, Prime Minister

India will end the current financial year with a GDP growth rate of 6.3%, despite a slowdown in the second and third quarters. The planning commission estimate released on Tuesday comes a day after government data showed first quarter GDP growth at 6.1%. The meeting of the commission, chaired by PM Manmohan Singh, said restoring the growth momentum would require filling a resource gap of Rs. 1.6 lakh croe to finance public investment until 2012, the terminal year of the 11th Five-Year Plan. Without mentioning disinvestment in public enterprises, Singh said the plan panel has established the challenge of resource mobilization.

Economy in recovery mode: Ficci survey

Economy in recovery mode: Ficci survey
Business Standard, September 7, 2009, Page 4

The confidence level of India Inc is on the rise, as the impact of fiscal stimulus measures have begun to show on the economic activity. Eighty per cent of the companies believe that the Indian economy is on the road to recovery and expect improvements in growth performance in the months to come.

A survey to gauge business confidence sentiment, carried out by Federation of Indian Chambers of Commerce and Industry (Ficci), for the month of September, also said 60 per cent of the companies reported improved industry performance at present, compared to the last six months.

The survey drew responses from 372 companies with wide geographical and sectoral spread. Companies participating in this survey had a turnover ranging from Rs 1 crore to Rs 1,16,000 crore. Respondents to the survey were from sectors like textiles, cement, steel, leather, chemicals and fertilisers, oil and gas, automobile and auto components, food processing, electrical equipment and machinery, plastic and rubber, among other sectors.

Around 86 per cent of the survey participants, however, have reported that poor progress and spread of monsoon this year could act as a dampener for the economic growth. Besides weak demand, the other factors that are adversely affecting performance of members of corporate India are a rise in the cost of raw materials, manpower and credit, with 55 per cent, 45 per cent and 41 per cent of the respondents complaining about these, respectively.

Moreover, 92 per cent of the companies surveyed said there was enough liquidity in the system and there was not much difference in the loan amount sanctioned and disbursed by banks. However, a significant 70 per cent of the respondents felt a high fiscal deficit and the massive borrowing programme of the government might lead to hardening of interest rates in the coming months.

Confusing signals to private equity investors in realty

Confusing signals to private equity investors in realty
Business Standard, September 7, 2009, Page 10

Vivek K Chandy

At the beginning of 2005 the Department of Industrial Policy and Promotion (DIPP) falling under Ministry of Commerce and Industry, came out with Press Note 2 of 2005 (Press Note 2) under which foreign direct investment (FDI) was permitted in townships, housing, built-up infrastructure and construction development projects.

As a result of Press Note 2, billions of dollars of FDI flowed into the real estate sector through various funds. Press Note 2 was strictly interpreted and all investments were made in companies which were only developing green field projects where the minimum size of each project was 10 hectares in the case of housing plots or 50,000 square metres in the case of construction development projects. In cases where FDI was sought by companies that had projects which did not comply with the criteria set out in Press Note 2 (non-compliant projects), efforts were made to have the non-compliant projects moved out of the companies in question before they accepted FDI.

Press Note 2 also prescribes a minimum capitalisation which is $10 mllion in the case of wholly-owned subsidiaries and $5 mllion in the case of joint ventures. There is a stipulation that the original investment cannot be repatriated for a period of three years from the completion of minimum capitalisation. Based on clarifications that were provided from the DIPP, it was made clear that what was sought to be locked in for a period of three years was the minimum capitalisation of $10 mllion or $5 mllion as the case may be.

The DIPP also clarified the fact that FDI could be infused into companies that had both 'non-compliant projects' and projects that complied with Press Note 2 (Compliant Projects) as long as the FDI was used only for the 'compliant projects' that commenced after the FDI was accepted. In 2008, the Foreign Investment Promotion Board (FIPB) rejected an application made by Vatika Limited to retain 'non-compliant projects' in the company that had received FDI and to bring back 'non-compliant projects' that were earlier hived off. Although this case received huge publicity, it being suggested that the FIPB had taken a stand that there could be no FDI in a company with non-compliant projects, what distinguished the rejection from the earlier positive clarifications, was the fact that permission was sought to bring non-compliant projects back into the company, after they had been hived off. In the recent past the DIPP has apparently stopped providing confirmations that FDI can be sought by a company in which there are both 'compliant projects' and 'non-compliant projects' even if the FDI were to be used only for 'compliant projects'. In the recent past, the DIPP has also suggested that what is locked in for a period of three years is not the minimum capitalisation, but the entire FDI infused into a company.

It is necessary to point out that based on the various clarifications provided by the DIPP, the infusion of FDI into various companies was structured in a manner that was efficient to the various investors that had to comply with the laws of more than one country. The recent conflicting positions that are being canvassed by the DIPP could result in irreparable hardship being caused to investors who have brought FDI into the country based on their reading of Press Note 2 along with the various clarifications that have been available. These investors would have no option but to approach courts of law to seek enforcement of the rights promised to them. Apart from taxing the courts of law, such a change in policy would also send out wrong signals to investors and ultimately prejudice the efforts of the government to encourage FDI.

The foreign exchange regime in India ordinarily permits the free transfer of shares in an Indian Company from one non-resident to another. A reading of Press Note 2 with the extant regulations would make it appear apparent that a non-resident investor that has brought FDI into an Indian Company can transfer its shares to another non resident and that this would not amount to repatriation of the investment.

The FIPB has, however, in the case of ICP Investments held that there could be no non-resident to non-resident transfer before the expiry of three years as it would amount to repatriation of the original investment before the period of three years from completion of minimum capitalisation. The FIPB has taken the view despite the fact that Press Note 2 is concerned with the "Investment" brought into India and not with the "Investor".

It is pertinent to point out that there have been changes in the law after Press Note 2 was issued, including changes which brought optionally convertible debentures and optionally convertible preference shares outside the purview of equity under the foreign exchange regime. These changes were made vide press note dated April 30, 2007 and were brought into force as it was felt these instruments facilitated the easy repatriation of FDI structured more as debt than equity. Although these changes in the law took away several structuring options that were otherwise available, all these changes were made prospectively and could not really be faulted as in the case of what has been discussed above.

It is therefore important for the DIPP to recognise that any change that it makes can only be made with prospective effect and only by changing the law and Press Note 2 in particular, and not by simply providing clarifications which are inconsistent with earlier clarifications that have been provided. While only investors who have received clarifications from the DIPP will be able to raise the ground of promissory estoppel, other investors may be able to make out a case of discrimination and legitimate expectation.

The critical issues relating to Press Note 2 that need to be resolved are:

1. Whether FDI can be made in a company which has Compliant and Non-Compliant Projects, provided FDI is used for Compliant Projects commencing post FDI coming into the company?

2. Whether it is only the minimum capitalisation of $10 million or $5 million as the case may be, that is locked in for a period of three years?

3. Whether there should be no restriction on the transfer of shares made by one non resident to another even if the transfer is before the expiry of three years from the minimum capitalization?

What the DIPP also needs inter alia to clarify is:

i. Whether the 50,000 square meter minimum built up area criteria would include basements, terraces and other areas not taken into consideration for the purposes of floor area ratio and floor space index calculation?

ii. Whether FDI can be used for Compliant Projects at the initial stages of development, including those that are about 20-30% completed?

Clarity provided by the DIPP will go a long way in boosting the FDI inflow into India in the realty space.

Vivek K Chandy is a partner at J Sagar Associates.

The views contained in this article are those of the author and not necessarily of the firm.

On stable grounds

On stable grounds
The Financial Express, September 6, 2009, Page 4

Mona Mehta

The upcoming festive season promises to bring in the much-needed joy to the real estate sector. With improved market conditions, competition has started gearing pace up in the Rs 10,000-crore real estate sector with top builders charting out new plans to launch many residential apartments in the metros in next six months to a year. According to industry experts, residential sector constitutes more than 70% of the total current realty market.

Demand for residential projects in a number of cities is picking up on account of lower home loan rates, property price cuts by developers and job market recovery, indicates a study by Religare Capital Markets. The study expects residential prices in the premium and luxury space to rise 10-15% as valuations have bottomed out in a few locations with property registrations in cities like Mumbai and Pune rising about 20-22% in April-June quarter over January-March quarter.

Supply and returns

Niranjan Hiranandani, MD, Hiranandani Constructions says, “The supply of residential real estate in India is expected to increase by 15% to 20% in metros in the next eight to nine months. During the second quarter of the financial year 2009-10, the supply of ready-to-move properties is only 5%. Our residential projects would be coming up at Powai, Thane, Panvel and Chennai in a phased manner in the next few months.”

Since the projects were delayed due to recession, the supply had decreased. Now, that the industry is showing positive signs and the delayed projects are getting completed. “There is a supply in the industry. All those people who chose to wait and watch are now investing in properties thus rates are again going up”, says Jitendra Jain, MD and CEO, Neev Group of Companies. Many developers are looking at converting luxury homes into more than affordable homes and sell them at reduced rates depending on the location. Nayan Shah, CEO, Mayfair Housing says, “We have converted luxury homes into affordable homes by doing away with the usage of premium products, so that flats are provided to them at affordable rates.”

Jain further adds, “We are expecting a minimum of 20% net returns from its upcoming projects in residential development. Rates are bouncing back from rockbottom and it has been noted that since last three months the price of real estate space has already gone high, the price increase is in the range of 15-30% everywhere in Mumbai.”

Due to global recession, a negative sentiment was generated and sales had come to a standstill. As the business in India achieved its stability, people who had postponed their buying decision have now entered into buying market. The lack of enough supply is also one of the major cause in driving the sales. “We do expect that the price increase will continue in the next quarter too,”Jain adds.

On the current residential market scenario, Abhishek Kiran Gupta, Head, Research, Jones Lang LaSalle Meghraj says, “All things considered, price rises at this early stage of recovery would not be considered either warranted or wise. Overpriced locations and projects corrected so steeply in the recent past would have conveyed a clear message. Nevertheless, demand for residential property is high in end-user driven markets and is witnessing little supply. Here, developers who have managed to offload a sizable component of their projects are now beginning to test price stretchability to establish whether the market is able to sustain such upward pressures, and whether further rises can be initiated in such locations in the future.”

Launch and delivery

Raheja Developers have been planning a slew of developments in Gurgaon region, with the projects expected to be ready between the end of 2009 and early 2013. Dharuhera residential rates are in the region of Rs 1,200 per ft2 till Rs 1,600 per ft2 depending on the location and other specifications. Sohna residential rates are in the region of Rs 10,000 till Rs 12,000 per yard2. Prices in Gurgaon have already started firming up. Dharuhera and Sohna will see upward movement after a period of around three months or so.

Competitor, Godrej Properties is planning to launch five to six new residential projects and two commercial projects in the financial year 2009-10. Milind Korde, MD, Godrej Properties says, “In Ahmedabad, we are launching Godrej Garden City soon. In Kolkata, Godrej Pramanik will also be launched. Besides, Godrej Hill is coming up at Kalyan apart from Planet Godrej in Mumbai. We have completed 1.7 mn ft2 Phase I of Godrej Waterfield in Kolkata and 6 lakh ft2 of Phase II is currently under construction. We are soon planning to launch two new commercial properties, called Godrej Genesis in Kolkata and Godrej Eternia in Chandigarh. In Ahmedabad and Kolkata, apartments would be offered at the rate of over Rs 2,000 per ft2.”

According to Korde, Godrej Properties hopes to achieve 20% to 25% returns from the upcoming projects in the near future.

Delhi-based Parsvnath Developers are planning to launch five to six new projects in the next six to nine months in tier II and tier III cities. It includes, Parsvnath City each in Sahranpur and Lucknow apart from other residential projects whose brand names are yet to be decided. Pradeep jain, Chairman, Parsvanath Developers says, “We are expecting 15% to 20% returns from the upcoming projects.”

Recently, Mumbai-based Neev Group of Companies had launched a residential project at Parel. According to Jitendra Jain, CEO and MD, Neev Group of Companies, “In a month of its launch, we sold 80% of the project. Few projects lined up for launch in next eight months are — Andheri, Khar, Vileparle, Mulund and Lower Parel.”

With such a positive response, developers and the real estate market are hoping to end the year on a positive high.

Red tape worries keep builders away from cheap housing plan

Red tape worries keep builders away from cheap housing plan
The Economic Times, September 9, 2009, Page 9

Sanjeev Choudhary NEW DELHI

MOST real estate developers have been focusing on building affordable houses after property prices slumped, but none of them has made use of a central government scheme that offers subsidy to developers of small-sized dwellings, citing redtapism and lack of clarity in the scheme.

Almost six months ago, the ministry of housing and urban poverty alleviation announced the scheme which allows state governments and private developers to build houses for the lower-income segment and avail of a central grant.

This grant could be either Rs 50,000 per housing unit or 25% of the cost of all civic services proposed in a housing project. But projects must have a minimum of 200 houses, which could range in size from 300 sqft to 1,200 sqft of super built-up area.

An official at the ministry of housing and urban poverty alleviation says Uttar Pradesh and Maharashtra governments have separately sent proposals under the scheme to construct about 18,000 houses in total, but developers have not come forward so far. “Under the scheme, funds will be channelled to developers through state governments, which is what realty companies don’t want as they fear red-tapism. They want the central government to disburse funds directly,” said the official requesting anonymity.

The government had introduced the scheme with the view that it would help developers, saddled with unused land in a realty slump, to build more homes at an affordable rate. But developers seem doubtful about the execution of projects under the scheme.

Said Kumar Gera, chairman of Punebased Gera Developers and chairman of real estate industry lobby CREDAI, “Developers may not be willing to deal with so much of bureaucracy for such a small incentive.” He also questioned the economic viability of such projects saying land still remained costly.

The houses built under the scheme are to be allotted by the state governments through a draw of lottery and will have a ceiling on sale price. The state governments are supposed to propose a price, which is to be approved by the Centre. “Price cap is not a bad idea, but this has been left open to all state governments. We need a clearer formula on the pricing for us to work out the viability of any project,” said Sunil Malhotra, vice-president (finance) at Delhibased developer Omaxe.

India has a massive shortage of residential units and the government hopes to solve the problem by incentivising developers to increase housing supply.

Making affordable housing workable

Making affordable housing workable
The Hindu Business Line, September 6, 2009, Page 15

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At the ‘Housing for All’ seminar, the emphasis was on involving the private and cooperative sectors in developing housing with land made available by the public sector.
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— Bijoy Ghosh

A focussed policy is needed to lower cost of housing and encourage public-private partnership to bring land available with the public sector for development by the private sector, said Mr D. P. Yadav, Managing Director, Tamil Nadu Housing Board.

Addressing a seminar on ‘Housing for all’ organised by the Confederation of Indian Industry – Chennai Zone and the State chapter of Confederation of Real Estate Developers Association of India (CREDAI), he said State governments need a policy approach to address the housing needs of the economically weaker sections and the low-income groups. Some States such as Gujarat, Karnataka and Punjab have moved towards making available land to the building industry to set up affordable housing.

Transport bottleneck

Transport infrastructure gap was another important cause for the bottleneck in supply of affordable housing, he felt. In the 1960s and 1970s, the TNHB had developed suburban areas which were now a part of the city. But areas more to the periphery could not be developed because transport was not available for people to move efficiently at affordable cost. Even now the city could grow and affordable housing supply increased if adequate transport was available to tap the land in the peripheries.

Mr Surjit Chaudhary, Secretary, Housing and Urban Development, Tamil Nadu, said that it was ironic that developers focussed on the creamy layer of the market while 98 per cent of the market demand was in the middle- and low-income groups, which need affordable housing. Builders need to shift their focus to the segment where there is demand.

Mr Vikram Kapur, Member Secretary, Chennai Metropolitan Development Authority, said that the Centre’s National Urban Housing and Habitat Policy 2007 highlights that 99 per cent of the housing shortage was in the economically weaker and low income segments.

The shortage of 26 million residential units would involve an investment of over Rs 3.61 lakh crore to bridge. Chennai alone would need over 1.23 million dwelling units, but the current supply was about a fifth of that.

The Centre has provided for subsidies under the JNNURM for increasing supply of housing to the economically weaker and low income segments. The State Government has provided for additional built-up space for builders to cater to these segments.

If land could be made available by the public sector, then the private and cooperative sectors could be involved in developing housing. Some element of cross subsidy could also be enabled by allowing middle income housing and commercial development and make the project attractive to the builders.

Builders’ view

According to Mr R. Kumar, Managing Director, Navin Housing and Properties (P) Ltd, the options available for builders to bring down prices was by cutting down on the size of residential units and introducing modern technology. But significant reductions could be achieved if land cost could be controlled, the time taken to obtain statutory clearances reduced and taxes and levies brought down for the benefit of the buyers.

For a project within city limits, these costs alone worked out to over Rs 8,100 a sq.ft and in the suburbs to about Rs 3,800. Under these conditions, housing supply could never be affordable anywhere in the vicinity of the city.

Mr Prakash Challa, President, CREDAI – Tamil Nadu, proposed the development of Special Residential Zones, a concept being suggested by the builders’ body.

Along the lines of the Special Economic Zone for industry, such residential zones could be promoted to encourage affordable housing. Costs could be brought down through incentives and land made available by the Government.

OUR CHENNAI BUREAU

Dry walls, the next tech

Dry walls, the next tech
The Hindu Business Line, September 6, 2009, Page 15

Dry walls are the next major technological development in Indian construction industry as they offer benefits of speed, cost savings and utility, says Mr John Nelson, Global Marketing Manager, Saint-Gobain Gyproc, UK.

Dry walls are prefabricated structures, primarily involving use of metal frames and gypsum-based sheets to put up interior walls in buildings.

POPULAR ABROAD

These are a norm in most countries but yet to make a mark in India, and that is set to change as the company gears up to convince builders to use its drywalls, Mr Nelson says.

Saint-Gobain Gyproc is in touch threewith architects and builders to familiarise them with the product. Of course, the entry of multinational players in industry, particularly hospitality, IT and manufacturing sectors, into India, has helped the company get a base of potential customers who are familiar with the brand and the product.

That is what Saint-Gobain Gyproc will exploit in growing the market for dry walls, says Mr Nelson.

First it will tap the commercial segment, prove itself in the market and move into homes, he says.

Gyproc is not a new name in India, earlier it was India Gypsum, an associate company of British Plasterboards.

Following the acquisition of British Plasterboards globally by the ?44-billion Saint-Gobain group in 2006, India Gypsum became Saint-Gobain Gyproc.

In India, gypsum boards are used in false ceilings and panelling and the market is estimated at about 25 millio ket leader with sales of about 20 million sq.m. It has an established production capacity of about 40 million sq.m from four production facilities in Delhi, Mumbai, Bangalore and Chennai.

This is not just about selling sheets to substitute existing material but Gyproc is also offering total solutions and systems for building.

Look at any of the construction sites in India and the first point that hits you is the amount of water everywhere, says Mr Nelson. But a dry wall is faster to construct and takes up little time - time is money, he says.

LIGHTER, SMOOTHER, CRACK-FREE

A leading hotel, and one international airport has used Saint-Gobain's dry wall, says Mr N.E. Subramanian, General Manager Marketing, Saint-Gobain Gyproc. Spelling out the advantage of dry wall over brick and mortar, he says, a dry wall would be 8-10 times lighter than an equivalent brick wall, three five times faster to construct, offer better aesthetics as it is smoother and crack-free as the boards are machinemade and can be tailored to specific needs to offer better insulation, moisture protection, fire safety with onehour to four-hour rating, better insulation and acoustics.

With buildings growing taller, costs and space constraints growing, lighter structures that also save on space and are faster to build offer obvious advantages, says Mr Subramanian.

Mr Nelson is optimistic on growth opportunities, look at the US with 4 per cent of the global population, plaster boards consumption is about 40 per cent of the global market at about 300 million sq.m annually. India accounts for nearly a fifth of the world's population. It is also training contractors on the proper techniques to install drywalls - it is not rocket science but there is a proper way of doing it for the best value, he says.

OUR CHENNAI BUREAU

NHB Residex to cover 63 cities by next year

NHB Residex to cover 63 cities by next year
The Hindu Business Line, September 7, 2009, Page 1

K. R. Srivats, New Delhi

National Housing Bank (NHB) aims to cover all cities with population of over 1 million under its NHB Residex, which is the country’s first official residential property price index.

Currently, the NHB Residex gives relative movement of residential property prices in different localities in 15 cities.

“By next year (December-end 2010), we want to cover 63 cities — all cities with over 1 million population,” Mr S. Sridhar, Chairman of NHB, told Business Line here.

He also said that NHB Residex will, from now on, be available on a half-yearly basis. The values for the index are derived from the market, and not from Government data.

Valuation norms

Meanwhile, NHB is in the process of developing valuation standards for residential properties to ensure some uniformity in valuations. “There have been wrong practices in the valuation of property that have led to frauds in the banking system. We are trying to plug them by adopting new standards of valuation. It is still work-in-progress,” Mr Sridhar said at the Annual Finance Summit of International Management Institute here.

Pending regulatory action by the Government, bankers will use only valuers who conform to the standards issued by the Indian Banks’ Association, Mr Sridhar said. He also expressed confidence that the banking industry would be able to adopt these standards by the end of this year.

HDFC PE-Temasek eyes Prestige

HDFC PE-Temasek eyes Prestige
The Economic Times, September 9, 2009, Page 1

Deal May Be Delayed As Bangalore-Based Realtor Seeks $1-B Valuation

Boby Kurian & George Smith Alexander BANGALORE MUMBAI

HDFC Property Ventures and Temasek are in talks to invest about Rs 625 crore ($130 million) in Prestige Estates Projects, the holding entity of Bangalore-headquartered Prestige Group, as cash-hungry real estate companies continue to tap private equity funds to meet critical funding needs.

People close to the transaction said HDFC’s real estate fund, along with Singapore’s Temasek, is in discussions with Prestige, which is seeking a valuation of $1 billion for its business. But the deal could take some time to fructify as both sides need to iron out a number of issues, including pricing.

“Pricing of the deal remains a hiccup even as talks are very active,” one source added. Prestige Estates is seeking a valuation of about $1 billion. It is not clear if Temasek and HDFC are willing to do a deal at that price. They may look at something between $800 million and just under $1 billion.

The two funds may jointly pick up a little over 15% stake in Prestige Estates Projects, the people mentioned earlier said.

“Pricing is the only issue left between the company and these funds. The company is also keeping the option of hitting the IPO market for raising funds,” said one official close to the transaction.

Temasek and HDFC declined to comment. Repeated attempts to contact Prestige CMD Irfan Razack over the weekend did not fructify. Phone calls and messages left with another company official also failed to elicit any response. However, Mr Razack had denied talks with private equity funds when ETcontacted him a week ago.

IPO-bound may have to pare valuations

IPO-bound may have to pare valuations
The Economic Times, September 9, 2009, Page 1

Poor Show By Adani, NHPC Prompts Rethink; QIPs Seem More Appealing To HNIs

Arun Kumar & Deeptha Rajkumar NEW DELHI MUMBAI

COMPANIES on the threshold of going public may have to settle for lower valuations after the lukewarm response to two recently-listed highprofile scrips, said bankers, who see prices in the overheated primary market dropping to realistic levels. Share prices of Adani Power and NHPC, two issues that were heavily subscribed, have already fallen below their offer prices. “The poor performance of these IPOs will bring some sanity in the market,” said Samir Arora of Helios Capital, adding this “would certainly bring down the expectation of the promoters”. Around 25 companies, including Lodha Developers, Sahara Prime City, Emaar MGF, Den Network and Great Eastern Energy Corporation, are expected to file draft red herring prospectuses by the end of this quarter. Of this, more than a third are from the real estate sector. “Indian companies are planning to mop up more than Rs 50,000 crore from the market through primary issues in the current financial year,” said a banker with ICICI Securities who asked not to be named. A combination of factors such as high valuations and the absence of a mechanism to hedge the risk could make high net worth individuals (HNIs) and institutional investors sceptical of IPOs. Active participation of HNIs and institutions is key to the success of IPOs.

Indian promoters believe in price perfection, said Madhu Kela of Reliance Mutual Fund. “What is important is how much they leave on the table for the investors so that there is sufficient cushion to insulate investors from downside risk,” he said.

Banking circles are already abuzz with talk of issues being priced more competitively, keeping in mind volatile market conditions. “Prices will have to be competitive if you want the (IPO) market to sustain,” said Fortune Financial Services MD Nimish Shah.