Real Estate Intelligence Service, Monday, December 21, 2009

Urban Agenda: The Way Forward

Urban Agenda: The Way Forward
Business Standard, December 21, 2009, Page 7

Urban India is in focus. From a time when the focus was mainly on rural India, today we have come to a stage when rural-urban development is of equal importance. This was the essence of the discussion on “Urban Agenda: The Way Forward” organized by Skoch Development Foundation in New Delhi recently.

The discussants argued on the nuances and thinking behind the Jawaharlal Nehru National Urban Renewal Mission, its implementation and status on the ground, and suggested the way forward. Panelists noted that the JNNURM is reshaping our cities, with the local government institutions, the Centre and state government working in tandem to ensure its success. As Jaipal Reddy, Union Minister for Urban Development, noted that the multi-faceted challenge before India was regeneration of old cities and tackling increased urbanization. In this connection, he pointed out that JNNURM was the only flagship programme of the government which was launched not because of any political pressure or because of some doctrine or ideological demand, but because the time for urbanisation had come.

Agreeing, Saugata Roy, Minister of State for Urban Development, pointed out that JNNURM should increasingly focus on the smaller towns and cities as these urban centres lacked the necessary financial resources to take development forward.

The discussants also noted that though population-wise, India is still to reach the world landmark of 50 per cent of its population living in urban areas, the urban issues facing the country are very complex and challenging, and there were no readymade solutions for the short run.

M Ramachandran, Secretary, Urban Development, pointed out in his presentation, there was a need to scale up investment in urban infrastructure, which historically has been only 0.2 to 0.25 per cent of the countrys GDP. Agreeing that the problems of urban areas and their sustained development are no longer accepted stoically, instead, they are beginning to be tackled effectively. In fact, JNNURM is a reforms driven, fast track programme seeking to ensure planned development of identified cities with focus on efficiency in urban infrastructure and services delivery mechanism, community participation and accountability of urban local bodies and parastatals to the citizen. Today, cities can actively and confidently move forward by relying on the various facilitative measures available.

However, an issue of concern raised by all the panelists was the huge quantum of funds that would be required to take the programme to its logical conclusion. As Jaipal Reddy emphasised, the huge investments made so far are only adrop in the ocean and one has to continually focus on making the urban local bodies self-sufficient, with their resources linked to the quality of services they provide.

As Ramachandran noted, if a proper PPP regime is put in position, private participation is possible in building infrastructure or managing the basic services and ensuring that suitable delivery mechanisms are in place. For Hari Sankaran, Managing Director, IL&FS, the issue, however, was not of raising adequate resources, but one of finding the mechanism in which one could implement these projects expeditiously. According to him, private investments are expensive methods if projects are implemented tardily. They are efficient, if one can implement projects expeditiously. In this context, yet another issue that came up for discussion related to the need for levying appropriate service charges for facilities provided by the local government authorities.

On her part, Isher Judge Ahluwalia, Chairperson, ICRIER, said that urban renewal was the biggest challenge that India was facing today. For her, tackling urban issues would not be possible if we did not synergise urban and rural development policies. "The salvation of the rural poor lies in how we resolve the issue of urban development. The issue is how do we create a modern industrial society in which those who are dependent on agriculture find alternatives for higher, more productive employment?" Here, it was important that the government looked for new and unconventional ways to raise the necessary resources to fund urban development programmes. The issue is not about public exchequer doling out funds for infrastructure. What is needed is that revenue bases are created at every level of the government, including at the level of the urban local bodies and state governments and for this we need improved governance.

To this, T K A Nair, Principal Secretary to the Prime Minister, said that today there was unanimity that programmes like JNNURM were needed and all governing bodies-whether local or state or central-were wanting to be part of the growth process.

Importantly, the panelists noted that historically economic development in the country was linked to growth versus distribution, with the result that we achieved neither. It was only in the 1980s that the mantra changed to growth for distribution that we ended up getting higher growth and were now being able to tackle poverty also.

But to ensure that this growth momentum is sustained, Arun Maira, Member, Planning Commission, said it was important that we also looked at capacity building as the huge investment in the urban development space would need a far greater number of qualified people than those are currently available. For our urbanization experiment to be successful, Maira said, the capacity building process for people and of institutions must begin now.

"Also, since the current urban management techniques are outmoded, it was important that we have another closer look at the master plan concept. And one way to address such issues will be to strengthen the role of local governments in line with the 74th Amendment in so far as planning for a city or township is concerned. Community participation in the planning process is another key element that needs to be addressed.”

For T K Arun, Economic Times, the urbanization efforts need greater policy initiatives. We need to think of mixed land use, we need to think of vertical towns, we need to design things in such a way that people actually dont have to spend large amounts of time in traffic or burning up fuel, he added.

“We need to create a modern industrial society in which those who are dependent on agriculture find alternatives for higher, more productive employment. I think the approach for this is to simultaneously look at urban and the rural development”

—Isher Judge Ahluwalia , Chairperson, ICRIER

“Private investments are expensive methods of implementing projects tardily. They are efficient if you can implement projects expeditiously and I think that is one singular issue that needs to be addressed in implementing projects, especially in urban areas”

—Hari Sankaran ,MD, IL&FS

“The Urban Renewal Mission has already had a tremendous impact and today there is a great demand from all over the country for including more and more cities in the ambit of the mission”

—TK A Nair , Principal Secretary to the Prime Minister

“The book is comprehensive in the sense that it covers urban reforms, reform agenda for the urban local governments, e-governance, urban mobility, water and sanitation and benchmarking of urban services.”

—MRamachandran , Secretary, Urban Development

“Based on our field research, we did have insights from the felt needs perspective. It is easy to criticize till you actually put yourself on the other side and start looking at the policy challenges and issues.”

—Sameer Kochhar, President, Skoch Development Foundation

“It is not just the hard infrastructure that makes agreat city, it is the soft infrastructure. And I say the soft infrastructure building must precede the hard infrastructure.”

—Arun Maira , Member, Planning Commission

Limit independent directors’ tenure

Limit independent directors’ tenure
The Times of India, December 21, 2009, Page 24

Pankaj Doval, TNN NEW DELHI:

NEW DELHI: Seeking a more effective role by independent directors in ensuring corporate governance, the Institute of Company Secretaries of India (ICSI) has recommended a limited six-year term for them and suggested that nominees of financial institutions should not be treated as independent since they had their own interests to protect.

ICSI, that submitted its recommendations to the ministry of corporate affairs and market regulator Sebi, said the Satyam fraud necessitated a re-look at the regulatory provisions that currently exist.

"The nominee directors have a clear mandate to safeguard the constituency they represent i.e. the financial institution they represent. Hence to term them as independent is an anomaly," ICSI VP Vinayak S Khanvalkar said. Sebi should also make similar changes to Clause49 that governs corporate governance on listed companies, he added.

The statutory body said there should be a fixed tenure for independent directors to avoid any intimacy between them and the management. "Boards need to be regularly refreshed with new blood," it said. Currently, there is no limit prescribed on the tenure of an independent director, though Clause 49 recommends a period of nine years.

ICSI also recommended amendments to Clause49. "It needs to be suitably amended by specifying positive attributes for independent directors such as integrity, experience and expertise, managerial qualities and ability to understand financial statements, among other things," Khanvalkar said.

As recommended by industry chamber CII, ICSI also sought demarcation of the roles of the chairman of the board and that of the MD/CEO. It said this should be done to promote balance of power. Other recommendations of the ICSI included an annual evaluation of the performance of the board, various committees and individual directors.

Valuation concerns

Valuation concerns
Business Standard, The Smart Investor, December 21, 2009

Vishal Chhabria / Mumbai

While the move to integrate DLF Cyber City and Caraf may eliminate the conflict of interest between promoters and DLF, the deal lacks transparency.

In a bid to consolidate the DLF group’s lease-rental business under a single entity, last Tuesday, DLF approved the integration of DLF Cyber City (DCCD) and Caraf Builders & Constructions. The move, which is also aimed at eliminating the perceived conflict of interest between promoter companies and DLF, didn’t seem to have gone down well with the markets. The DLF stock was down by 6.4 per cent as against the BSE Realty’s dip of 5.5 per cent and Sensex’s 2.2 per cent. Analysts were divided over the deal’s valuation, while complaining about lack of complete transparency. For now, most analysts have a ‘sell’ rating on the stock as valuations are not cheap.

The deal

DLF own a 100 per cent stake in DCCD, while promoters of DLF own a 100 per cent in Caraf, which in turn owns almost 96 per cent of DLF Assets (DAL). Post this deal, DLF will hold 60 per cent in the merged entity (DCCD), while promoters will hold the rest 40 per cent; all assets of Caraf will come under DCCD. Besides, the move will also provide stable rental income to DLF Cyber City, while creating a rental conglomerate with over 16 million square feet (msf) of leased portfolio spread across commercial, retail, SEZs and IT parks in India’s top cities.

Key concerns

Although some analysts opine that the deal has been fairly valued, others believe that it is being done at the cost of DLF’s minority shareholders. Since the absolute numbers have not been provided by the company, different assumptions have been used to arrive at the valuation of the assets of the two entities. These assumptions include estimated rentals based on the locations and type of assets.

Analysts at Edelweiss Securities have given an equity value of Rs 3,073 crore to DCCD and Rs 1,827 to Caraf (consolidated), which works out to a ratio of 63:37. Likewise, Emkay’s analyst has arrived at a ratio of 67:33, whereas the same is at 57:43 as per Alchemy’s analyst. Last year (2008-09), DLF Cyber City had reported revenues of Rs 1,443 crore and profit before tax of Rs 1,195 crore, which gives a gross PBT margin of 83 per cent.

Thereafter the liabilities of the company have increased by about Rs 1,500 crore to Rs 4,140 crore. A Mumbai-based analyst says, “This increase in liabilities is quite likely towards creation of new assets. In this context, it is difficult to digest that the company has an annualised net property income of only Rs 416 crore; even if that is the case, there is no details about the other source of income and how they manage to earn such high margins. So, there is clearly more than what meets the eye.” While there is no doubt about the lack of complete transparency in the deal, which has left the Street making different assumption, SP Tulsiyan, investment analyst, sptulsiyan.com believes that the deal is favourable to the promoters who stand to benefit by about Rs 3,300 crore—in other words, an equivalent loss for DLF, leave aside the loan repayment liabilities that DLF will now have to shoulder.

Among other issues that come to the fore is that DLF Cyber City has a very lucrative asset profile. Of its 6.73 msf operational leased assets, 5.8 msf is office space based in Gurgaon with the balance being retail malls in Delhi. More so, the potential developable area of 11.8 msf is equally divided between office and retail space. Of this, 5.8 msf of office space is based in Gurgaon and 3 msf each of retail space in Mumbai and Gurgaon. While rentals are relatively higher in the case of such assets, there is usually no dearth of customers for such assets. However, it will be between 3-5 years before this 11.8 msf area becomes operations. Apart from the above, DCCD also has notified SEZ land of 18 acres and interests in facilities and utility management.

On the other hand, Caraf’s 9.65 msf is spread across IT parks in Kolkata and Chandigarh and two commercial properties in Gurgaon. Besides, it owns a 96 per cent economic interest in DAL, which owns 6.4 msf of IT SEZ space. Tulsiyan says, “The asset profile of DCCD is better and even if there has been a fall in rentals (due to market conditions), it would have been more in the case of SEZs (which are owned by Caraf).”

Conclusion

With the company not having provided complete details, including the actual valuation figures, it has left some questions unanswered like those pertaining to DLF’s receivables from DAL. Also, there is no clarity on how much stake SC Asia will own in DAL up on conversion of the Rs 2,725 crore worth of compulsorily convertible preference shares (CCPS) issued to SC Asia (or how the company would fund its buyback using the call option it has). Among other issues in the immediate term is that DLF’s debt burden will rise by Rs 2,460 crore due to Caraf’s debt. While Caraf has taken a loan against the lease income of some of its assets, the lease income it earns will be used to repay this debt (over 7-9 years). However, it also means that such lease rental will not accrue to DCCD.

Analysts though believe that DLF Cyber City should gain from the expected listing of DAL on the Singapore exchange, which is likely to happen post March 2010. Nevertheless, considering the overall environment in the real estate space, a majority of analysts feel the stock is not cheap at current valuations.

Real estate firms turning to top B-Schools

Real estate firms turning to top B-Schools
The Hindu Business Line, December 21, 2009, Page 2

Anjana Chandramouly, Anjali Prayag, Bangalore

With demand no longer driving the real estate sector, developers are turning to top management institutes to ‘improve and look at the future.'

Real estate services firm Jones Lang LaSalle Meghraj (JLLM) and developer Brigade Group, for instance, will together have eight students interning at their offices during the summer of 2010. And summer internships generally get translated into final job offers the next year for the same students.

As Mr Jagan Mohan, Senior General Manager, HR, Brigade Group, says this is the right time to get people on board to do projects, to improve and get ahead. The real estate firm has also made an offer for a student at Institute of Management and Technology, Ghaziabad.

Quality hiring

Mr P.B. Nageshwar, Head - HR, JLLM, says it makes sense for organisations to focus on quality hiring as a wrong hire can cost them dearly. “The value creation by the talent is immediate and by careful career planning and deployment of the talent, they can aspire to occupy important positions in the near future.”

The sector is witnessing activity in areas such as public private partnerships, joint ventures, consortia, and fund raising through both global investment banks and IPOs. “This requires certain professional skills that these graduates can offer,” points out Dr Mangesh G. Korgaonker, Director-General at NICMAR (National Institute of Construction Management and Research), who has also taught at IIM-Indore and IIT-Mumbai.

In fact, private equity firm Blackstone Group recruited a summer intern from IIM - Bangalore for its real estate desk in London. At Brigade Group and JLLM, the interns will gain the experience of working in a management role, from an operations-specific perspective, says an official source from the Placement Committee at IIM-B.

Companies such as Nitesh Estates are also looking at deploying this talent in sales and customer relation management (CRM) roles. “Aggressive sales and collection strategy could bring down interest costs, shorten working capital cycle and also reduce construction costs, which this talent can help achieve,” reasons out Mr L.S. Vaidyanathan, Executive Director, Nitesh Estates.

“Now we have to create the demand in the market, which was purely demand-driven at its peak, and that's where we need these professionals,” he adds.

Ansals eye school biz

Ansals eye school biz
Hindustan Times, December 21, 2009, Page 23

Downturns in industries can often make companies think afresh and make them seek new frontiers of business. It now seems to be happening in the realty business.

With an eye on diversification, the Delhi-based Ansal Group has laid down plans to go big on education, broadening the emphasis from offices and homes to think of school buildings to serve the education sector, which along with healthcare is a high-growth industry serving a demographic explosion as hundreds of millions of children seek learning opportunities.

The promoters of Ansal API have rolled out an ambitious plan to construct and lease 50 schools in a period of five years at an investment of around Rs 750 crore.

“We believe that there will be a demand for good schools over the next 10 to 15 years and it will also help us in diversifying our business,” said Pranav Ansal vice-chairman and managing director, Ansal API.

The Ansals expect the schools to generate a stable revenue for it as its schools that have begun operations are generating a rate of return of 20 per cent per annum.

Even though Ansal’s have been present in the school business for around 30 years now, Pranav Ansal feels that it is the sunrise sector in India as there is a big gap between the demand of supply of good schools.

“We will get consistent revenue in rentals and will also have profit sharing after a period of five years of the beginning of the operation,” added Ansal.

The company already has four schools leased out to service provider Educomp and one school to the Middle East based school operator GEMS Education.

“We are in talks with several operators that include names like Shriram, Zee and several others,” said Ansal.

Cement prices firm up on wagon constraints

Cement prices firm up on wagon constraints
The Financial Express, December 21, 2009, Page 2

Smita Joshi Saha, Mumbai

After seeing a fairly sharp fall of around Rs 50-60 per 50 kg in the southern and western regions of the country, cement prices are firming up again. The increase, say industry watchers, has more to do with logistical constraints resulting from a shortage of railway wagons, rather than some sudden spurt in demand from users of the material.

Prices have firmed up in the western and southern regions since early December and could move up by another Rs 5 per bag in Mumbai this week, say cement dealers. “We have been informed by all the major cement producers about the price increase of Rs 5 per bag from Monday onwards,” said a Mumbai-based cement dealer requesting anonymity.

After falling sharply by Rs 30-80 a bag over the past three months, cement prices in the southern market of Andhra Pradesh have registered a slight increase of Rs 10-15 a bag. Prices in the southern markets are currently ruling in the range of Rs 135-180 a bag, whereas in some pockets, it is also being sold at Rs 230-250 a bag.

In the western region, which includes Mumbai and Gujarat, cement prices have seen an increase of Rs 8-10 a bag since December 1 onwards. Cement prices in Mumbai are in the range of Rs 220-250 a bag, whereas in Gujarat, a bag of cement is being sold at Rs 170-190.

Confirming the move to hike prices, Binani Cement managing director Vinod Juneja said, “There will be a price rise of about 2-5 per bag from Monday onwards in some markets, including Mumbai.” According to Juneja, apart from the shortage of railway wagons, there has been some increase in demand for the commodity due to construction work and for the 2010 Commonwealth Games. That, together with the fact that fuel costs have risen, has prompted producers to raise prices. Price of imported coal has increased and is currently being imported at $80 per tonne from $50-55 per tonne in September.

Industry watchers say this upward trend appears unsustainable as excess supply continues to flood the market. With the current capacity at 233 million tonne, Indian cement industry is growing at the rate of 7-8% and is expected to add another 40-50 million tonne in the next one year.

However, cement prices in the northern and central regions have recorded pricing dips of Rs 10-15 in past one month, while the eastern market remains stable.

Industry sources say, with small producers increasing capacity multifold and new players entering the southern and western markets, pricing discipline is tough to emerge.

Steel price hike in new year

Steel price hike in new year
The Financial Express, December 21, 2009, Page 1

Steel prices which had come off the cliff in June-July last year to suffer a precipitous fall consequent to the demand crunch caused by the global economic crisis, are going to look up in the new year, SAIL chairman S K Roongta told FE. The imminent price hike of the metal, a key input for infrastructure projects, would also mark an early recovery in the steel industry, which had to defer expansion plans in the face of the demands lump that lasted for over a year. The price hike, incidentally , comes at a time when the policy managers are worried over high inflation.

"We see prices recovering in January. The overall demand for steel in 2010isexpectedtobeback at the 2006-07 level. In that sense, the recovery would be faster than expected as earlier it was seen only by 2011-12," Roongta said.