Real Estate Intelligence Service, Tuesday, October 20, 2009

Realty demand up 15% in Q2

Realty demand up 15% in Q2
The Financial Express, October 20, 2009, Page 4

Mona Mehta, Mumbai

The real estate sector saw a growth in demand of 15% in the second quarter of financial year 2009-10, after slowing down to 10% during the first quarter of 2009-10. The rise has, of course, been helped by the base effect of a negative growth in the corresponding quarter of the previous year. This is still way off the 35% to 40% growth witnessed in January to March 2008 in metros. The figures are culled from a cross-sectional survey of the reports of chief real estate tracking firms.

Sanjay Dutt, chief executive officer, Jones Lang LaSalle Meghraj (JLLM), said the Indian commercial office market saw 10 mn sq ft of office space commitment pan-India in top major IT cities, including Mumbai and Delhi. "Of this, the bulk of the demand (almost 70%) came in the second quarter. The supply of commercial properties is all set to touch 55 million sq ft by December, with an expected demand for 25 million sq ft during the period. Moreover, front office space will generate huge demand in comparison with IT parks and SEZ."

Anshuman Magazine, chairman and managing director, Cushman & Wakefield, too agreed that by the end of financial year 2009-10, a number of commercial projects that were pending for the past two years will be completed to take advantage of the rising demand.

As for the residential market, a majority of developers were in a "wait-and-watch mode" in Q1 2009-10 and did not drop prices as required. In comparison, it was between January to March this year that prices dropped by 40% in the real estate market. Added to this was the government effort to reduce interest rates, apart from enough liquidity being infused by investors who were sitting on the fence to capture the price advantage. As a result, residential demand picked up close to 10% in Q1 2009-10.

Industry experts said currently 30% of the demand for residential space lies in the price bracket of Rs 5-15 lakh, 26% between Rs 15 and Rs 25 lakh, 22% in the bracket of Rs 25 and Rs 40 lakh, 12% in the range of Rs 35 and Rs 50 lakh, whereas a mere 6% is for properties priced above Rs 50 lakh.

The residential sector growth comes at a time when HDFC witnessed 30% growth in its mortgage business, a confirmation that the residential mortgage business witnessed growth. Looking at the current market momentum, demand for residential properties is expected to rise further between October to December.

As per a Centrum Broking report, compared to Mumbai, the NCR region is expected to witness an acute oversupply of residential and commercial space over financial years 09-10 and 10-11. Occupancy levels in existing office and retail properties are likely to plunge to 60-70% by FY10 and 30-40% in new projects. Affordability is expected to return to around 49% by the end of calendar year 09 after the price correction and fall in interest rates. Subsequently, transaction volumes are expected to pick up across the region, with Gurgaon being the preferred destination for home buyers and corporates.

Niranjan Hiranandani, managing director of Hiranandani Constructions, said, "The demand for premium properties has grown by 20% in metros in Q2 2009-10."

However, despite the fact that home buyers are reluctant to buy apartments in newly-constructed premium buildings due to steep prices, real estate developers are raising Rs 14,000 crore through IPOs meant for expansion of properties. To this, Anuj Puri, chairman and country head, Jones Lang LaSalle Meghraj, said, "It is pertinent to focus on the advantage for property buyers, which is inherent in developers raising these sums via the IPO route. With these funds at their disposal, developers will be able to put delayed projects back on track. This will result in increased supply, increased market competition and bring prices down. Also, property buyers will have a wider bouquet of locations and projects to choose from."

US housing, leading index improve: eco preview

US housing, leading index improve: eco preview
The Financial Express, October 20, 2009, Page 5

Bloomberg

Homebuilders and real-estate agents were probably busier in September, and the index of leading indicators increased, adding to evidence the next US expansion has begun, economists said before reports this week.

Construction started last month on 6,10,000 houses at an annual rate, the most since November, according to the median forecast of 53 economists surveyed by Bloomberg News before an October 20 Commerce Department report. Sales of existing homes rose to a two-year high and the gauge of the economy's future course advanced for a sixth month, other reports may show.

Housing is stabilising as Americans take advantage of government programmes, including credits for first-time buyers and efforts to lower borrowing costs, aimed at stemming the recession. Some Federal Reserve policy makers remain concerned the economy will relapse should the stimulus be removed too soon, signaling interest rates will remain low for months.

"The housing market is recovering from very depressed levels," said Zach Pandl, an economist at Nomura Securities International Inc in New York. "We're definitely emerging from recession, finding a bottom in some sectors, but the recovery is still uneven and it's not particularly vigorous."

Building permits, a sign of future activity, may have risen to a 5,90,000 pace, also the highest since November, the Commerce Department's report on housing starts may show, according to the survey median.

In April, builders broke ground on new homes at a record-low 4,79,000 pace.

The index of leading economic indicators, due from the New York-based Conference Board on October 22, may have risen 0.9%, according to the survey of economists. The gain was probably driven by the increase in building permits, a drop in claims for jobless benefits and an improvement in consumers' outlooks, economists said.

A sixth consecutive gain in the leading index would mark the best performance since early 2004.

US stocks have risen in recent weeks amid better-than-forecast earnings and signs the economy is improving. The Standard & Poor's 500 Index closed at the highest level in a year on October 15.

Google Inc, the world's most popular Internet search engine, plans to resume hiring and acquisitions after the recovering economy helped third quarter sales beat analysts' estimates. Large customers stepped up spending on Google ads last quarter, a rebound from the first half of the year, chief financial officer Patrick Pichette said.

“We weathered what is an incredible recession,” Pichette said in an interview last week. “If you have all this behind you, the only outcome you should have as management is: OK, let's build now.”

Fed policy makers at their September meeting decided to slow purchases of mortgage securities to avoid disrupting the housing market while extending the duration of the program by three months. In the minutes of the September 22-23 meeting, which were released last week, they noted the housing market and retail sales got a boost from government incentives.

The Fed's Beige Book report on regional economies, scheduled to be released on October 21, will be used by policy makers to gauge the state of the housing market and the economy overall when they meet again in the first week of November.

An October 23 report from the National Association of Realtors may show that sales of existing homes rose to a 5.35 million rate last month, according to the Bloomberg survey. That would be the highest level since August 2007.

On Monday, a report may show builder confidence continued to climb this month. The National Association of Home Builders/Wells Fargo index probably rose to 20 from 19, economists surveyed said. It would be the seventh straight increase. While higher, readings less than 50 still signal that most respondents view conditions as poor.

Finally, a Labour Department report on October 20 may show wholesale prices were unchanged in September, compared with a 1.7% increase a month earlier. Excluding food and energy, prices increased 0.1%, compared with a 0.2% gain in August, according to the survey, indicating inflation isn't a risk as the economy recovers.

New Code may be taxing for capital-intensive cos

New Code may be taxing for capital-intensive cos
The Hindu Business Line, October 19, 2009, Page 3

Vidya Bala

BL Research Bureau The change over to asset-based taxation, proposed in the draft Direct Taxes Code (DTC) could double the tax outgo for at least 40 per cent of the companies in the S&P CNX 500 universe.

This is despite the proposal providing for a lower corporate tax rate of 25 per cent (current 30 per cent). A loss-making company such as Jet Airways, for instance, may have to cough up over Rs 300 crore as presumptive tax in the new regime, when it pays no tax and enjoys refunds now.

Reliance Communications, NTPC, Ranbaxy Laboratories, Power Grid Corporation and Tata Motors are some of the companies that may see a two- to 50-fold jump in their tax liability. The new Code proposes that companies should pay tax at the higher of two parameters: The tax calculated on total profits at the prescribed rates or tax calculated at 2 per cent of the value of a company’s ‘gross assets’ (0.25 per cent of gross assets in the case of banking companies).

Weighed down by assets


A calculation for the S&P CNX 500 companies, using a conservative interpretation of ‘gross assets’, as defined by the Code, suggests that 220 companies from that universe may shell out higher income tax, if the proposal is implemented (based on the 2008-09 tax liability and balance-sheets). A large number of companies in the pharma, steel, telecom, power and non-banking finance companies are likely to see a spike in the tax outgo if the draft takes effect in its current form.

Capital-intensive companies with a large asset base and companies carrying high investments/cash on their balance-sheet would typically be hurt by this proposal. For investors, this could mean lower net profits.

Unaffected

Interestingly, not all asset-heavy companies would suffer under this proposed tax structure. The tax liability for FY-09 of companies such as ONGC, SAIL, Bharti Airtel, BHEL and Larsen & Toubro is already higher than the 2 per cent tax calculated on their gross assets. Higher depreciated assets and consequent higher asset turnover, taken with high profit margins of these companies, are perhaps why this proposal will not hurt them despite their capital-intensiveness. IT companies such as Infosys and Wipro may also avoid the gross asset tax given their relatively asset-light business.

Background

Why would the proposal result in inflating companies’ tax outgo? Under the current tax regime, corporates pay their taxes on profits, at the rate specified by the Income-Tax Act or pay a presumptive tax called the ‘Minimum Alternative Tax’ if they enjoy tax holidays/incentives. The latter is calculated at 15 per cent of their book profits. The draft Direct Taxes Code, in a move to ensure efficient utilisation of assets, proposes to do away with the MAT clause and levy tax on the gross assets.

Gross asset is defined as the sum of the gross block of fixed assets, capital work-in-progress and book value of all other assets (including cash) reduced by accumulated depreciation and debit balance of profit and loss account. While the definition of gross assets per se is being debated, companies with large fixed assets that are yet to generate high profits may find the proposal unfriendly. Such tax paid would also not be available for any carry forward and set off, unlike the MAT credit now available.

Mall developers rebuild their hopes on housing projects

Mall developers rebuild their hopes on housing projects
Business Standard, October 19, 2009, Page 1

Raghavendra Kamath / Mumbai

With declining demand making commercial projects increasingly unviable, a host of developers are busy converting mall projects into residential ones.

Rituraj Verma, director of retail services at Knight Frank India, a global property consultancy, estimates that about 25 out of the 375 mall projects planned two years ago may see the light of day in the next four to five years. “Developers say they will get only half the value if they go ahead with malls instead of residential projects,'' he adds.

That explains the rush among developers to convert their projects. For instance, Mumbai-based Orbit Corporation has decided to convert its 250,000 square foot (sq ft) Hafeez Contractor House in Lower Parel into a residential project. Its Andheri project will also be turned into a residential complex.

Mumbai is not the only city to see this trend. Prozone Liberty, the mall development joint venture between Provogue and UK's Liberty International, plans to follow suit. Prozone is planning to convert a part of its mall projects in Jaipur and Indore residential development owing to lower demand for mall spaces in smaller cities.

Bangalore is seeing the same trend. A month back, the TTK Group said in a notice to the Bombay Stock Exchange that it was changing its plan for a mall project on a 6.3 acre site in Dooravani Nagar, Bangalore, and was planning to set up a residential project instead.

Dhiraj Shah of West Pioneer Properties says the company initially wanted to build malls and lease them out. “We changed our plans after the slowdown in the retail sector,” Shah says. The London Stock Exchange’s AIM-listed company wanted to develop a 726,000 sq ft mall in Kalyan on the outskirts of Mumbai. The mall, built on a part of the land, is named Metro Junction but the company is now building Metro Residency as well on the remaining area.

Estimates by property consultant Jones Lang LaSalle Meghraj (JLLM) suggest that retail rents have fallen up to 50 per cent across the country in the last one year.

The country has a ready supply of 38 million sq ft of retail space and around 30 million sq ft is expected to hit the markets in the next two years. The absorption of retail space is 4 to 5 million sq ft every year leaving a huge supply-demand mismatch, JLLM says.

Real estate consultancy Cushman & Wakefield gives the break-up of the fall in retail rentals. Mumbai saw the sharpest decline in rental values for both malls (about 42 per cent in Mumbai suburbs) and main streets (about 38 per cent in locations such as Colaba Causeway).

In the National Capital Region, the main street location of Greater Kailash saw a 25 per cent decline in rental values, while mall rental values in Noida dropped 17 per cent. Ahmedabad saw a serious downturn in rental values in malls and main streets, with corrections ranging from 20 to 36 per cent over the last quarter.

Though the housing sector also took a few knocks, the impact was much less. In any case, demand has revived, with several developers cutting prices and interest rates looking more benign.

According to government estimates, the country is facing a shortage of 20 million units, especially in middle and lower income segments – which has caught the fancy of developers such as DLF, Unitech and Omaxe among others.

Costs have also played a part. Malls require a construction cost of Rs 3,000 a sq ft; residential projects Rs 1,500 to Rs 1,800 a sq ft.

Besides, developers pre-sell homes and finance their construction through these advances. Mall developers, by contrast, have to raise own funds and earn returns after they lease space.

Mumbai's high realty prices drive banks to suburbs

Mumbai's high realty prices drive banks to suburbs
The Economic Times, 20 October 2009, Page 7

IST, Mayur Shetty , ET Bureau

MUMBAI: High real estate prices and the advantages of integrating operations within a single premise are compelling banks in Mumbai to move further
north into the suburbs at half the rentals they used to pay in the commercial hubs.

Offices in suburbs are not by themselves a new trend. Banks such as HSBC and Deutsche Bank have been running call centre operations in suburbs for years. Banks have also had their IT hubs in suburbs. For instance, SBI has its IT operations based in Belapur in Navi Mumbai. What is now happening is that some jobs, including senior management, that have traditionally been inside corporate headquarters, are also moving north.

Standard Chartered Bank was the first to move a significant part of its operations to the north-western suburb of Goregaon. The bank purchased an over 136,000 sq ft building in Goregaon (Standard Chartered Tower) to house its consumer bank management and central units.

Earlier this year, Kotak Mahindra Bank also moved its operations into a five-lakh square-foot tower at Raheja’s Infinity Park in Goregaon (E). Around December Deutsche Bank will move a large part of its operations into new premises measuring 1.9 lakh sq ft, again in Goregaon.

Interestingly, until a few years ago, Kotak’s promoter Uday Kotak was opposed to the group having its own headquarters, describing it as a ‘Taj Mahal’, a sobriquet for the high maintenance cost at a time when premises were available at economical rates on rent in south Mumbai. Today, with rentals of over Rs 500 per sq ft in south Mumbai, banks are finding that it is possible to invest in their own premises using a couple of years’ rentals.

Also, even if a bank wished to consolidate operations within single premises, space is simply not available. ‘Our operations had grown substantially and our current locations were not scaleable. We were looking for a good working environment,” said Shrinath Bolloju, chief operating officer, Deutsche Bank, explaining the bank’s rationale for moving to Goregaon.

While Deutsche’s objective was to acquire space enough to meet the next 5-7 years of growth in India, the choice of the location was also influenced by the cost. According to Mr Bolloju, the rentals in Goregaon are nearly 40% lower than the present locations in south Mumbai. The departments that will move to Goregaon are largely those that support its operations including HR, finance, support and technology.

“By moving we are able to ensure a far better quality of life for employees. Employees now have a lot more space. Earlier because of real estate costs people were packed together and space was restricted to less than 50 sq ft per person” said Mr Deepak Gupta, executive director, Kotak Mahindra Bank. There are other intangible benefits as well. Building a common IT infrastructure is easier when all departments are in the same premises. It is also easier to organise in-house meetings.

Because of Mumbai’s linear rail and road transport structure, shifting to the suburbs has had a mixed impact on commuting for employees. For employees living in western suburbs, the relocation is a blessing while others find the time for commuting has gone up. However, companies are addressing these issues by organising dedicated bus services.

Is this a new trend?

Offices in suburbs are not by themselves a new trend. Banks such as HSBC and Deutsche Bank have been running call centre operations in distant suburbs for years. Banks have also had their IT hubs in distant suburbs But now some jobs, including senior management, that have traditionally been inside corporate headquarters, are also moving north

Who are the players?

Standard Chartered Bank was the first to move a part of its operations to the north-western suburb of Goregaon. Earlier this year, Kotak Mahindra Bank also moved its operations into a five-lakh square-foot tower at Raheja’s Infinity Park in Goregaon (E) Around Dec, Deutsche Bank will move a large part of its operations into new premises of1.9 lakh sq ft in Goregaon.

Difficulty in commuting?

Shifting to suburbs has had a mixed impact because of Mumbai’s linear rail and road transport structure. For employees living in western suburbs, the relocation is a blessing while others find the time for commuting has gone up.

Welcome new price index

Welcome new price index
The Economic Times, 20 October 2009, ET Editorial

ET Bureau

The government has decided to release data for manufactured goods in the wholesale price index (WPI) with a monthly frequency, even as data on
primary goods and fuels would continue to be released every week. Further, the revamped WPI would cover about 900 items instead of 435 at present, and the base year is being brought forward from 1993-94 to 2004-05. These changes would make the price index more reliable as a policy guide. However, the government needs to press on with its agenda of price index reform: a producer price index, several and combined services indices, and an expanded consumer price index that better reflects today’s urban consumption.

There is little sense in releasing manufacturing price data on a weekly basis, when only 16-20% of the WPI items are updated. For the rest, the common practice has been to repeat the data of the previous reported week, as companies continue to be indifferent on reporting price data on a weekly basis. The Collection of Statistics Act is yet to become operational law, shielding truant companies from penal action. So price data have been subject to high volatility: the revised numbers come eight weeks after the provisional ones and often look vastly different, too. The monthly release of inflation data should give the Office of the Economic Adviser, attached to the department of industrial policy & promotion, enough time to improve reporting to cover perhaps 60% or more of manufactured products.

Shifting to the new series was overdue, after nine-and-a-half years. Ideally, price series as well as other series such as the ones for industrial production must be revised more frequently, say, every five years, to capture the changes in the economy, industrial activity and the consumption basket. India is notoriously backward on this count. For instance, prior to shifting to the 1993-94 series for WPI in April 2000, the reference year was 1981-82. The efficacy of the new index would be proven only if the margin between the revised numbers and the provisional numbers is narrowed.