Wednesday, January 03, 2007

The housing bubble is set to burst

Probably the first and only guy to call the real estate industry's bluff.,

He's just listed a fund at the AIM stock exchange in the UK - the fund, which controls around 4 per cent of Unitech's land bank, has raised �362 million (Rs 3,168 crore).

Unitech's 10,500 acre-plus land bank makes it one of the largest real estate firms in the country - according to investment firm UBS, this can translate into 400 million square feet of commercial and residential space.

While the group is primarily into residential complexes today, it is a 40 per cent partner in the high profile 40,000-acre project with Indonesia's Salim Group in West Bengal, which includes SEZs, integrated townships, expressways and even two bridges over the Hooghly and Haldi.

Unitech's MD Sanjay Chandra is of the view that a lot of the enthusiasm over hotels and malls, especially in tier II and III cities is unwarranted, as is the rush to build luxury apartments. Excerpts from an interview with Surajeet Das Gupta and Nayantara Rai:

Are you happy with the AIM listing?

Yes, we've listed Unitech Corporate Parks and have got a valuation of Rs 3,168 crore (Rs 31.68 billion) - the company has a portfolio of 197.5 acres and will build up 21.5 million square feet space in six IT parks across the country. This portfolio represents approximately 4 per cent of our total land bank in India.

Apart from the valuation we've got, what's more important is that the world's leading funds and financial institutions have invested in us. I've been told this is the second or third largest real estate float in the UK. That's quite an achievement.

But why did you list at AIM?

One of the reasons is that we needed to create a platform for REITs [Real Estate Investment Trusts]. We have created a development fund, which can now be sold overseas.

What is the size of your current land bank?

As per our disclosure in September this year, our land bank was 10,400 acres. After that, we have acquired 77 acres in Chandigarh, 100 acres for a housing project in Greater Noida, and another 25 acres in Noida.

Are you looking to grow from M&As?

Not at all. We are only interested in adding value to our projects.

What about your foray into hospitality?

We've learnt that it's not a good idea to be in a hurry to sign management contracts with hotel operators. Unlike others who have forged joint ventures with hotel operators, we will be more flexible and neutral in our approach. Therefore, we will require different partners in different locations.

At present, we have three hotels in Gurgaon, two in Kolkata and one at Noida. One of the hotels in Gurgaon will be a luxury hotel and we are in talks with potential partners.

Why is that you don't participate in hotel auctions?

All our hotels will be a part of a mixed-use development - we don't believe in stand-alone projects. So land agencies auctioning these isolated sites do not fit in with our overall strategy.

Besides that, people are paying exorbitant rates that I just don't understand. It doesn't make sense to pay Rs 450 crore (Rs 4.5 billion) for a hotel site in Dwarka. You can make a Ritz Carlton in Singapore for that amount.

What are your plans for retail? Everyone seems to be entering it...

We don't plan to be retailers. Retail has very low margins, and being in the real estate business, I'm used to high returns.

We are in the business of developing retail destinations. We have had a soft opening in Rohini (west Delhi) and our mall in Noida will open in two and half months. There are obviously many more plans on the radar.

Will you tie up with any retailer for your malls?

No, we don't want to limit ourselves. We want to do business with everyone. So why should we get into exclusivity clauses with any retailer?

Do you perceive a property bubble in the near future?

I think some pockets are heading for trouble. The realty run-up in the tier-II cities in north India are outrunning the employment opportunities available there. And today, all of us developers are chasing the upper middle class.

There is all this talk of Ambala, Rudrapur and Haridwar and so on. But how many job opportunities coupled with high purchasing power will actually become a reality in these towns?

What about all the talk of IT/ITES companies starting operations in tier-II cities?

So what? Even if they do, there will still be trouble. These companies will probably have business process outsourcing outfits in these towns and about 90 per cent of the employees won't be able to afford housing. The rest may be supervisors who may have the purchasing power, but 10-15 per cent of them would be living with their parents.

Hospitality will be another troubled sector. Those buying sites at exorbitant prices haven't factored in the fact that room rates will fall. A few years from now, the supply will increase considerably, and hotels will no longer be able to command today's room rates.

Even retail is heading for trouble. Retailers cannot be expected to make profit from the rentals charged by developers today. Rentals in authorised shopping complexes skyrocketed after the MCD (Municipal Corporation of delhi) sealing drive in the capital. This directly affects the retailer's business.

How much rent do you charge for your malls?

In Noida, we leased about 80 per cent of the mall before building and the average rate was Rs 120 per square foot. The last 20 per cent was rented out at an average of Rs 300 per square foot.

In Rohini, we started leasing after the construction was complete. While we were targeting Rs 60-70 per square foot, we actually ended up charging Rs 170 per square foot.

Is the market in Gurgaon slowing down?

We feel there is an overdose of luxury housing in Gurgaon. So we have made a conscious effort to stay away from that and concentrating on the upper-middle class segment. The average size of our houses is 2,000 square feet and these are available for Rs 80-90 lakh (Rs 8-9 million). Even that is probably too much.

Is there speculation in the market still high?

No, it's much better. From 70 per cent last year, I think, it is down to 10 per cent. Buyers now seem to be selling after possession. This is good news for us in the industry.
Earlier a person would buy a house at the time of the launch - with discounts offered which would vary from developer to developer - and sell in just a few months. By the time the construction was completed, a house or apartment had been resold five to 10 times.

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