Tower of Babel | Too many government gurus confuse the market

Tower of Babel Too many government gurus confuse the market
Business Standard, December 31, 2009, Page 9

Business Standard / New Delhi

Economists are known to be a fairly harmless lot with a penchant for disagreeing with each other. This can be mildly annoying or simply amusing, depending on one’s perspective, and has given rise to a rather tame brand of “economist” jokes. But when the economists happen to belong to different agencies of the government and differ on their forecasts or their opinion on policy, the discord could have deeper consequences. Take the case of GDP growth forecasts for 2009-10. The Reserve Bank of India has a forecast of 6 per cent for the year. The Prime Minister’s Council of Economic Advisers (CEA) has an official forecast of 6.5 per cent, but recent statements by its chairman suggest that it could revise its forecast up to a range of 7-7.5 per cent. The deputy chairman of the Planning Commission believes that growth could be somewhat higher than 7 per cent. The mid-year review of the economy released by the finance ministry earlier this month forecasts growth at 7.75 per cent or more and the finance minister seems to believe that the economy will grow by 8 per cent.

One could argue that this difference is actually good for policy-making. Dissent rather than consensus creates awareness of the risks associated with policy choices and could make policy-making robust. The problem, however, is the fact that financial markets tend to take these forecasts quite seriously and base investment and trading decisions on them. They also, perhaps somewhat naively, expect the different agencies of the government to speak in a common voice. When the government appears to speak in a “babel” of voices instead, it confuses market participants, often leading to a rise in market volatility. The problem becomes even more acute when there are conflicting opinions on specific policy measures. The recent confusion in the government bond markets over the likely monetary response to food inflation is an example. Officials from both the finance ministry and the Reserve Bank of India have repeatedly emphasised that they view the current inflationary episode as essentially “supply-driven” and hurried monetary action would not have much impact. The chairman of the CEA on the other hand suggested a few days back that if food prices did not abate soon, an “early reversal” in monetary policy is warranted. This led to a sharp spike in bond yields. The 10-year bond yield (a commonly-used benchmark for the bond market), fearing an imminent rate hike, went up by almost a quarter of a percentage point in response to the CEA chairman’s statements. It settled down later as the monetary move did not come through and the fear abated. The global financial and economic environment remains fuzzy and financial markets have more than their fair share of risks and uncertainty to deal with. Government economic agencies might want to desist from adding to this with their cacophony of discordant views. This does not, of course, mean that there should be no difference of opinion between them. But it is perhaps best to keep these behind closed doors and present a more consistent view to the public.

Realty mutual funds, investment trusts to open up new channels of funding

Realty mutual funds, investment trusts to open up new channels of funding
The Financial Express, December 31, 2009, Page 6

Sajan C Kumar, Chennai

Initial public offerings (IPOs) in the near-term, real estate mutual funds (REMFs) and real estate investment trusts (REITs) in the medium-term are likely to emerge as new channels of real estate financing in the country. Property funds are also expected to enhance their activities in coming quarters.

The market capitalisation of country’s real estate firms, which equals to just 2.2% of the aggregate equity market capitalisation, far below than the 10-15% level found in advanced economies, is an indicator of the future potential, said Ramesh Nair, managing director (Chennai & Hyderabad), Jones Lang LaSalle Meghraj, a global realty consultancy firm.

According to estimates, the real estate sector will require an additional $3.66 billion to construct undertaken commercial projects and fulfil the unmet housing demand. While sources of funding have become scarce in the aftermath of the 2008 global financial crisis, there are some emerging channels, which are likely to help the sector continue its high-growth story.

With several real estate players having submitted red herring prospectus to the Sebi, a total of $3.31 billion is expected to be raised in coming months. Given that the Sebi has recently allowed anchor investors to participate in this fund-raising channel, IPOs can be an attractive vehicle to tap domestic as well as foreign institutional investment. Additionally, they provide a good exit option for most PE investors that have a short-term to medium-term investment horizon, Nair told FE.

According to a study on emerging trends in real estate finance carried out by Jones Lang LaSalle Meghraj, REMFs and REITs have played an important role in institutionalising real estate investment in many countries. The essential difference between them is that while investment made by REITs are only permitted in income-generating physical real estate assets, REMFs can take exposure in securities of real estate companies as well. Currently, both of these vehicles remain a future prospect in India.

As per Sebi regulations, REMFs in India have to invest in direct ownership of real estate (that accrues rentals and capital appreciation), mortgage-backed securities and securities of companies dealing in the development of real estate. However, a minimum of 35% of net assets have to be invested in direct ownership, leaving an upper limit of 65% on security exposure by REMFs, says the study.

According to the study, real estate developers HDIL, HDFC, ICICI, L&T and Unitech are some of the players that have expressed interest in launching REMFs. While issues related to valuation and taxation are currently holding back this emerging vehicle, the government is expected to clear these uncertainties soon. Similarly, regarding REITs, many policy issues are yet to be resolved, and authorities concerned have yet to come up with clear regulations.

The study says there are challenges that must be addressed in order to bring about a smooth improvement in the sources of funding. Establishing a nodal real estate regulator will be a welcome step in enhancing transparency and making the sector more organised. Clarifications pertaining to taxation and valuation issues for existing REMF and REIT guidelines will also be expected in the coming quarters.

MCA wants India Inc to set aside part of budget for CSR

MCA wants India Inc to set aside part of budget for CSR
The Financial Express, December 31, 2009, Page 11

Neha Pal, New Delhi

“Companies should allocate a specific amount in their budget for corporate social responsibilty activities that may be related to profits after tax, cost of planned CSR activities and any other suitable parameter,” according to a ministry of corporate affairs report on voluntary corporate social responsibilities.

The report suggests that the corporate social responsibility (CSR) policy of the business entity should provide for an implementation strategy that should include identification of projects, time schedule and monitoring, setting measurable physical targets with time-frame, organisational mechanism and responsibilities.

“Companies may partner with local authorities, business associations and non-government organisations. They may influence the supply chain for CSR initiative and motivate employees for voluntary effort for social development,” says the report.

The report further suggests that companies may evolve a system of need assessment and impact assessment while undertaking CSR activities in a particular area. Independent evaluation may also be undertaken for selected projects from time to time. To share experiences and network with other organisations the company should engage with well established and recognised programmes or platforms which encourage responsible business practices and CSR activities. This would help companies improve on their CSR strategies and effectively project the image of being socially responsible.

The report also says that the companies should disseminate information on CSR policy, activities and progress in a structured manner to all their stakeholders and the public at large through their website, annual reports and other communication media.

As per the report, companies should respect the interests and be responsive to all stakeholders, including shareholders, employees, customers, suppliers, project affected people, society at large and create value for all of them. They should develop a mechanism to actively engage with all stakeholders, inform them of inherent risks and mitigate them where they occur.

Roadmap for CSR initiatives

Roadmap for CSR initiatives
The Hindu Business Line, December 31, 2009, Page 7

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The Ministry of Corporate Affairs has brought out guidelines that identify six core elements as essential to any CSR policy.
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The CSR guidelines exhort companies to function ethically.

Mohan R. Lavi

A company recruiting a candidate stated that it was looking for a responsible person, to which the candidate replied that he was the perfect fit as in all his previous organisations whenever something went wrong he was held responsible.

A series of corporate slip-ups over the past 6-7 years have forced regulators to draw up a series of corporate governance measures which were basically rule-based. None of these however tackled the intent behind the slip-up — a wanton desire to mislead shareholders and, thereby, society.

The Ministry of Corporate Affairs (MCA), at the conclusion of the India Governance Week, has come out with Corporate Social Responsibility Voluntary Guidelines 2009 as a partner to its Corporate Governance Guidelines 2009.

Corporate Social Responsibility

The Guidelines open well by stating that each business entity should formulate a CSR policy to guide its strategic planning and provide a roadmap for its CSR initiatives, which should be an integral part of overall business policy and aligned with its business goals.

The policy should be framed with the participation of executives at various levels and be approved by the board. Six core elements have been identified as essential to any CSR policy — care for all stakeholders, ethical functioning, respect for workers' rights and welfare, respect for human rights, respect for environment and activities for social and inclusive development.

Care for all stakeholders is meant to respect the interests of and be responsive towards all stakeholders, including shareholders, employees, customers, suppliers, project affected people, society at large, etc., and create value for all of them. They should develop mechanism to actively engage with all stakeholders, inform them of inherent risks and mitigate them where they occur. Ethical functioning is meant to be that their governance systems should be underpinned by ethics, transparency and accountability. They should not engage in business practices that are abusive, unfair, corrupt or anti-competitive. Also, companies should provide a workplace environment that is safe, hygienic and humane and which upholds the dignity of employees. They should provide all employees with access to training and development of necessary skills for career advancement, on an equal and non-discriminatory basis.

Companies should respect human rights for all and avoid complicity with human rights abuses by them or by third party. Companies should take measures to check and prevent pollution recycle, manage and reduce waste, manage natural resources in a sustainable manner and ensure optimal use of resources such as land and water, proactively respond to the challenges of climate change by adopting cleaner production methods, and promote efficient use of energy and environment friendly technologies.

Finally, the guidelines state what was perceived to be CSR till date — depending on their core competency and business interest — companies should undertake activities for economic and social development of communities and geographical areas, particularly in the vicinity of their operations. These could include education, skill building for livelihood of people, health, cultural and social welfare, etc., particularly targeting at disadvantaged sections of society.

Implementation Guidance

The CSR policy of the business entity should provide for an implementation strategy which should include identification of projects/activities, setting measurable physical targets with timeframe, organisational mechanism and responsibilities, time schedules and monitoring.

Companies should allocate specific amount in their budgets for CSR activities. This amount may be related to profits after tax, cost of planned CSR activities or any other suitable parameter. Companies are also advised to network with other companies on CSR initiatives and disseminate information on CSR policy, activities and progress in a structured manner to all their stakeholders and the public at large through their Web site, annual reports, and other communication media.

A spate of corporate governance guidelines over the past few years have prescribed rules for entities to follow — the CSR guidelines exhort companies to think and act good. Together, they should be a force to reckon with in the years to come.

Retail realty yet to recover fully

Retail realty yet to recover fully
The Economic Times, December 31, 2009, Page 24

PTI MUMBAI

INDIAN retailers may be rejoicing at better sales in the October-December festive season, but a full recovery of the retail real estate sector still hinges on availability of spaces at competitive rates and improvement in consumption, global consultant C B Richard Ellis has said.

“The retail sector will take some time to fully recover, depending on the economic growth or improvement in domestic consumption, consumer sentiment and availability of retail space at competitive costs,” CB Richard Ellis (South Asia) chairman and managing director Anshuman Magazine said in a statement here on Wednesday.

Improving consumer sentiment and competitive retail rentals had, however, resulted in the sector “ambling towards better activity levels, especially in Tier I cities”, he added.

The global real estate consultancy firm also expects an oversupply of new office spaces across the country, which will keep rentals flat in 2010 despite positive indicators that demand for commercial real estate was improving.

“On the office market front, demand is expected to improve although the rentals are expected to remain flat in the medium term due to the forecasted large supply of office space,” Magazine said.

The year 2010 may, however, see “some sustainability in the residential market as activity levels have improved,” he said.

Prices for residential, retail and commercial real estate across the country plummeted in 2009 as a global economic meltdown and tight liquidity froze demand.

Residential sales declined significantly and demand for office spaces saw a substantial drop, triggering a decline in rentals and postponement or cancellation of projects, while retail real estate was also significantly impacted.

However, each of these three segments have witnessed an improvement since the previous year as reduction in prices, softening of interest rates and an improvement in the economic sentiments led buyers back to the market, the consultancy firm said.

MIXED FORECAST

Improving consumer sentiment and competitive retail rentals resulted in the sector ambling towards better activity levels, especially in Tier I cities

On the office market front, demand is expected to improve but global consultant C B Richard Ellis expects rentals to be flat in 2010 on back of oversupply of office spaces.

Real Estate Intelligence Service, Wednesday, December 30, 2009

No rate hike for six months: SBI

No rate hike for six months: SBI
The Times of India, December 30, 2009, Page 21

Surplus Liquidity, Low Credit Offtake Will Force Banks Not To Up Interest

TIMES NEWS NETWORK

New Delhi: India Inc can rejoice. State Bank of India chairman OP Bhatt on Tuesday indicated that there will be no increase in interest rates for next six months despite inflationary pressure.

As inflation is rising, the speculation is rife that RBI might take measures to tighten the money supply, leading to hardening of interest rates, in its review of monetary policy in January. As the global economy is still in the grip of recession, industry captains feel that any hike in interest rates will affect the economic recovery in India.

Bhatt said there was surplus liquidity in the system and credit offtake was slowly picking up. This situation of liquidity surplus will force banks not to increase interest rates. Because of this surplus liquidity, banks have cut deposits rates. But they are not cutting the lending rates due to slow credit offtake, despite the speculation that RBI can increase key rates (repo or reverse repo) to contain inflation.

In the eight months of the current financial year till December 4, while the deposits with the commercial banks rose by 3,69,535 crore, credit offtake was only Rs 1,44,151 crore. This forced the banks to park around Rs 100,000 crore with the RBI at reverse repo rate of 3.25%.

When the interest rate condition was benign, SBI had cut its lending rates, particularly home loan rate. Bhatt claimed that the 8% interest rate on home loan announced by SBI had helped reviving real estate market. The buyers have started coming back and cement and steel sectors have also started improving, he said. In fact, SBI’s decision to cut the rates forced other banks to follow suit, he added.

Bhatt does not think Indian economy had been affected by global recession. ‘‘The recession did not hit India the way it had affected European countries last year. There was only a slowdown in the growth rate which came down to 7% from 9%,” he said.

Replying to a question on withdrawal of stimulus package by the government in the prevailing situation, Bhatt said it should not be taken back but ‘phased out’ in staggered manner.

Referring to the ongoing merger process of SBI associate banks, Bhatt said SBI is a major stakeholder in SBI associate banks like State Bank of Saurashtra and State Bank of Indore. “In fact, we did not have less than 75% stake in any of these banks and owned 100% in State Bank of Hyderabad and State Bank of Patiala which were with us for the last 50 to 60 years,” he said.

State Bank of Saurashtra has merged while process was on in regard to State Bank of Indore, Bhatt said. The merger would improve SBI in terms of efficiency in operation, release of capital.

RBI hints at tighter money supply

Bangalore: Concerned over the spiralling food prices, the Reserve Bank has indicated at tightening money supply to contain the rising inflation pressures.

“Effective assessment of the inflation process, and using monetary policy actions at the right time would be critical to enhance the effectiveness of the inflation management policy,” RBI deputy governor Shyamala Gopinath said. She further said there is a risk of high inflation in essential commodities affecting inflation expectations over time and give rise to generalised inflation. “Given the dominance of food price inflation in shaping the overall course of the inflation path, the policy challenge is to address the supply constraints,” Gopinath added.

The food inflation was nearly 19% last week while the overall wholesale price inflation rose to 4.78% in November compared to 1.34% in October. PTI

Economy to grow 7.5%: Rangarajan

Economy to grow 7.5%: Rangarajan
The Times of India, December 30, 2009, Page 21

Hyderabad: Indian economy will grow between 7% and 7.5% during the current financial year despite poor performance of the agriculture sector on account of drought and floods, said PMEAC chairman C Rangarajan.

“The economy will grow between 7% and 7.5% overall but agricultural growth may fall by 1% to 2%,” Prime Minister’s Economic Advisory Council (PMEAC) chief said. Flagging food inflation as a major concern, he said, “agricultural growth rate should not fall below 4% for food security as 60% of the population are in rural areas.” Although the economy did well during second quarter recording a growth of 7.9%, the output of agriculture and allied sector slipped to below 1%.

Referring to the impact of the widespread drought and devastating floods on the farm sector, Rangarajan said., rice output might decline by 13 million tonnes. However, he hoped, the rabi crop) would to some extent make up for shortfall in kharif crop). PTI

GDP growth may be 7-7.5% this fiscal, says Rangarajan

GDP growth may be 7-7.5% this fiscal, says Rangarajan
The Hindu Business Line, December 20, 2009, Page 4

Agriculture may show negative growth.

Our Bureau, Hyderabad

Dr C. Rangarajan, Chairman of the Economic Advisory Council to the Prime Minister, on Tuesday forecast the GDP to grow at 7 to 7.5 per cent this fiscal, signalling an improvement in the domestic economic climate.

Speaking at a meet on ‘Challenges before the Indian Economy' here today, he cautioned that agriculture could show a negative growth of 1-2 per cent, while the industrial and services sectors are projected to grow at 8.6 per cent and 8.7 per cent respectively.

Dr. Rangarajan also noted with concern the rising food inflation, which is at an 11-month high now, stating that the task ahead was to check food inflation.

He advocated a two-pronged strategy that included improving supplies by issuing out part of the foodgrain reserves through the PDS and importing certain additional foodgrain.

He indicated that the Reserve Bank of India could look at raising the CRR to suck out excess liquidity from the system, even though the central bank may watch the price movements for some more time before taking any decision on rate hike.

“I am not saying that a rise in the CRR is imminent,'' he said adding that the supply position of the food products and the seasonal decline in prices would also be factors in deciding the tools to deal with inflation.

Dr Rangarajan said the challenge next year would be to bring down fiscal deficit by 1-1.5 percentage points of the GDP. Agricultural growth should not be allowed to fall below four per cent, as a decline in growth by even one to two percentage points would translate into a significant shortfall in food production. Low yields and power shortage were the major challenges before increasing farm productivity.

In the long run, he felt that if there were to be a consistent growth of four per cent in agriculture and nine per cent in industrial and services sectors over the next two decades, India could be propelled into the club of developed nations.

He also called for prudence to improve the fiscal situation, identifying the root cause for the recent global economic crisis as proliferation of derivative products.

“The lesson to be learnt from the crisis is that all segments of the market need to be regulated,” he pointed out.

Deposit-based banking was more prudent than the practice of short-term borrowing from capital markets by banks, he felt.

Demand for mall space yet to pick up as retailers go cautious

Demand for mall space yet to pick up as retailers go cautious
The Economic Times, December 30, 2009, Page 21

Markets In NCR, Bangalore & Mumbai Record 53% To 40% Fall In Rentals In Q4

Ravi Teja Sharma NEW DELHI

THE year 2009 has been bad for the real estate sector, particularly the retail sector. While residential real estate picked up in the last two quarters, retail is still seeing very low demand. According to a report by Cushman & Wakefield, of the 44 malls proposed at the beginning of Q1 2009, just about 18 were delivered by the year end. A number of developers postponed mall projects in 2009 but with a revival of demand in the end of the year, 2010 is expected to see a number of mall projects getting back on track.

“The outlook for the retail sector in 2010 is looking brighter. The festive season has been good and has seen a lot more footfalls. As the market picks up, there will be a revival of demand for retail spaces again,” says Rajeev Talwar, executive director at DLF. Year 2009 saw fresh supply of 5.7 million sq ft of mall space. Approximately 9 million sq ft of mall space was deferred to the future, which is a reduction of 60%. Almost 80% of new mall space in Bangalore was postponed which meant the city saw a vacancy of only 3%.

“I see retailers being cautiously optimistic in 2010. They will expand but with caution unlike earlier,” says Jaideep Wahi, director, retail agency, Cushman & Wakefield. Most large developers had postponed their projects as it was hard for them to lease retail space, he says. In the early part of 2009, developers also faced a credit crunch which slowed down mall plans.

This slowdown in mall construction need not be viewed as a negative. The slowdown has helped in maintaining a good supply demand equation, especially for markets which were staring at an oversupply situation.

Delhi-based developer Omaxe launched its mall in Patiala a month back and the response has been good, says Omaxe CMD Rohtas Goel. The company though had decided to postpone its 1.5 million sq ft mall Connaught Place in Greater Noida because of lack of demand in 2009. “The retail segment is seeing renewed demand over the last 4-5 months. We are seeing new leasing activity start at our mall in Greater Noida where construction will start in early 2010,” Mr Goel adds.

Across the major cities, rentals hardly saw any upward movement since the markets crashed late 2008. Mall as well as main street rentals (except a few locations) continued to remain below the average rental rates of Q4 2008, says the report.

Some micro markets in the NCR, Bangalore and Mumbai saw a 53% to 40% decline in rentals in Q4 2009 over the same period last year. Bangalore’s prominent high streets (Brigade Road and Commercial Street) were the only micro markets to post an approximate 10% rise in rentals over last year, indicating the existing demand for premium retail precincts over emerging locations in the city.

Of the 5.7 million sq ft of fresh mall supply in 2009, the largest share of the supply — 1.8 million sq ft came up in Mumbai, followed by Hyderabad (1.1 million sq ft) and the NCR (0.9 million sq ft). Kolkata saw fresh supply of 0.7 million sq ft.

Retailers are now very cautious about signing up new space. “It has been a learning for both developers and retailers. The retailer is now asking a lot more questions and is very cautious,” says V Muhammad Ali, head, mall operations, Forum, Prestige Group’s mall division. They area asking questions about the location, about anchor tenants. Ali recalls that during the boom time, no one was asking these questions. “LoI’s were being signed at conferences at that time.”