Friday, January 12, 2007

The sudden surge

More pump from the bullish realtor. with 70% of Mumbai living in dilapilated conditions, I think he has a point

Times of India
The trend towards rising real estate prices is not a bubble, but a shoot-off of the boom in the country's economy, says Chetan Narain

Continuing from my last column on which way the prices are heading and what factors are pushing the prices up, here is my view keeping an outlook for 2007 and beyond.
With the current scenario the hike in property prices is being questioned and labelled as a bubble by many, and it becomes essential to understand what lies beneath this sudden surge. Especially in the past one year, the prices have gone up tremendously, even by 100 per cent or more in many cases. This has left a lot of residential buyers unsatisfied, especially first-time home buyers, as they don't get the benefit of the hike while selling a previous property. Also, the home loan rates have increased by almost two per cent.
However buyers need to understand that this trend is not a bubble but a shoot-off of the boom in the country's economy and the attention it is getting from the rest of the world. With India becoming the fourth largest economy, it is only but obvious that MNCs from all over the globe are now setting up in India. While other cities like Bangalore, Hyderabad, Pune still have spaces for development, Mumbai is facing the maximum pressure as the city lacks land supply and the demand is high in the financial hub.
With MNCs, the preference is towards buying properties that are located in prime locations as budgets are manageable for them but compromise on locations is not. This has led to shooting prices in areas like South Mumbai, Mid-town and other locations too.
Apart from this, today people are seeking to live not just in comfort but luxury. People are becoming highly conscious of their lifestyles. And when it comes to luxury, as the case has always been, no price can be termed as exorbitant as far as there is a buyer for it. In fact, it is the price that forms an important part of terming a product or service a luxury. It is not an over-statement but a fact that today buyers look not just for well-constructed projects but those that provide a minimum of two parking spaces per unit in a city that ideally cannot afford such extravagances. Also, with not just the concept of nuclear families, but people looking to stay by themselves apart from their families has triggered off a small but significant demand, which will only rise in the near future.
With a lot of focus being on improving Mumbai's infrastructure, standards of living in the city are definitely going to rise within the next three to five years. The rates have increased tremendously in locations that are on the thrust of an infrastructural makeover as self-sufficient and well-planned locations are every Mumbaikar's dream. For instance, Navi Mumbai is bound to become one of the most sought after destinations with the proposed developments of an international airport and development of two huge SEZ projects Maha-Mumbai and Navi Mumbai.
Most importantly, the highest demand is from investors: Local, Institutional and International investors through the foreign direct investment route who are all willing to spend high amounts for that longterm profit based on return on Investment through rental incomes and silent capital appreciation based on futuristic predictions.
The current price levels are, in fact, controlling to some extent most of their demands and making them tread slowly, which would have otherwise led to further pressure on the market. Also, investors are not willing to sell, which has further increased the lack of supply. All in all, it is the current rate of demand and futuristic expectations from the city that are causing a severe hike which is not going to decline in the near future.

Mumbai : Khar co-op hits 180 cr jackpot, wants more

Nauzer Bharucha | TNN

Mumbai: Middle-class residents of housing societies in Bandra, Khar and Santa Cruz are turning into crorepatis. Builders, flush with funds, are scrambling to offer them astronomical amounts in exchange for redeveloping their properties and converting them into residential towers and malls.
And if you thought Khira Nagar in Santa Cruz would be the mother of all redevelopment deals (the developer here is offering each flat owner over Rs 1.50 crore to move out), wait until you hear the mind-boggling figures being doled out to members of a tranquil housing society near the landmark Khar Gymkhana.
Tucked away in a corner of 17th Road, Khar (west), the Bharatiya Bhavan Cooperative Housing Society finds itself sitting on a gold mine—a Navi Mumbaibased builder has upset the calculations of leading developers by offering Rs 180 crore to the society, which works out to an average of a whopping Rs 4.87 crore for each of the 37 flat owners.
The society comprising six buildings—ground plus two floors—is spread over an acre with ample open spaces and car parking. There are just 37 flats, each between 650 and 850 sq ft in size.Each occupant could get a minimum of Rs 3.5 crore, going up to Rs 5 crore, to move out permanently. Members of Khar society hold out for Rs 20 cr more
Mumbai: In a stunning redevelopment offer, a Navi Mumbai-based builder has approached the Bharatiya Bhavan Cooperative Housing Society in Khar with a Rs 180 crore deal—about Rs 4.87 crore for each of the 37 flat owners. The residents who wish to stay back will be rehoused in the new buildings.
But are the residents biting the bait? Although residents were tight-lipped when contacted by TOI, market sources observed that the society was not yet ready to accept the offer made by the little-known Navi Mumbai developer known by the initials APA. “They are still not satisfied with this unusually high offer and are expecting an amount in the range of Rs 200 crore,’’ said a builder, who made an unsuccessful bid for the property. TOI has learnt that other developers in the fray included Tata Housing (Rs 179 crore), Wadhwa Developers (Rs 130 crore), Naman Developers and Acme Housing.
The society had invited sealed bids from various developers last year. “The successful bidder shall make full payment within 30 days of written acceptance of his bid. Else, his bid will be disqualified. Members of the society shall be given a period of 120 days to arrange for alternate accommodation and vacate the premises after the successful bid is accepted and full payment made,’’ stated the bid document.
Said local BJP corporator Ashish Shelar, “Residents of Bharatiya Bhavan felt that since their families have grown and the size of their flats are inadequate, it would be a better option to move out and buy a bigger place elsewhere.’’ The society, which is about three decades old and has well-maintained buildings, has not consumed its entire floor space index.
In recent months, there has been a rash of redevelopment proposals involving housing societies. The MIG colony in Bandra (east) and Worli is already on the block.
A cluster of Mhada tenements at Tata Colony in the Bandra Kurla Complex is also expected to undergo a makeover with a builder, M K Enterprises, offering each tenant up to Rs 80 lakh to move out. Each tenement comprises a room. The developer plans to construct a residential and commercial complex on the four-acre plot.

Prelaunch economics

Source realtyplusmag:

What is this pre-launch business all about? Pre-launch is being resorted to by developers in order to raise funds and to sell a major part of the project in advance and also to create a hype in the market. This creates curiosity among buyers and as they go on a property-buying spree, the developers sell it on a premium price. And all this without taking the pain of developers getting bank loan for which the builder has to make certain disclosure about his project and finances. Through pre-launch, the promoter can manage to raise 25-30 per cent of his total project cost which is sufficient to purchase land and pay for the necessary approvals as total project cost includes development cost, administrative and promotional expenses including profit margins.

By just paying the booking amount one can claim his or her right to residential and commercial property offered on pre-launch basis. The understanding is that the builder or developer will do the actual launching of the project at a higher price so that investor at the pre-launch stage can book a profit and exit the project. The company keeps on increasing the price of original booking to create resale market. The rates of return can be quite high as investors make only partial payment to the company at the pre-launch stage.

But then there is a risk involved here as pre-launches are normally done for projects which have yet not been approved by the authorities. In many cases, the developer doesn’t even have the land for his project. There are several instances where developers announce 50-100 acre township project but they tie up only for 10-15 acres of land by giving advance money. Recently, a leading Delhi-based real estate developer, which has a number of group companies engaged in pre-launch bookings, was exposed by the town planning authorities in Sonepat.

Developer-investor-broker nexus

The entire business of pre-launch sale of property revolves around the chain formed by developer, big investors and brokers. The investor comes first in the chain of command who is approached by the developer. He invests in the project, normally on the promise of about 40 per cent appreciation in property price at the time of the launch. Some big- time brokers are also involved in underwriting the project. Keeping in view the dimension of the entire business, some big-time investors have even formed joint ventures with developers on revenue-sharing basis for pre-launch projects.

The broker or estate agent is the most important link in the pre-launch business. “Since pre-launch is not a legally accepted practice, the developer does not come directly into the picture. Moreover, most of the investors cannot approach secondary market to find buyer for their booked property. Therefore, the real estate agent plays a key role while interacting on behalf of the developer with investor and on behalf of the investor to sell the property again in the market,” says real estate expert Rakesh Purohit. And the broker gets good rewards as well since he gets as much as 4-8 per cent commission (double the normal) for high risk pre-launch projects. It is this lure of big money which has drawn shopkeepers, business men and retired people into property brokering business. With such fat incentives, brokers have become bolder and pro-active in the attempt to hook common people to invest in such properties. “It is not just gullible, ill-informed retail investor but even well-educated and well-informed senior corporate executives with heavy pay packets and ESOPs who are involved in this gamble of striking it rich in short time. These people have lot of surplus funds to invest. An entry-level executive couple in an MNC takes home about Rs 16 lakh annually. So besides investing in their first home, they are putting in lot of money in pre-launch properties,” informs a leading broker of Delhi.

Most of these corporate executives do not mind putting their money at risk. Says Ramesh Menon, working for a leading real estate consultancy in Gurgaon, “We deal with lot of corporate executives and 15 per cent of my clients are women. These Gen X executives are investing in pre-launch business with due diligence and with proper risk spread. There’s this financial analyst lady working for a Fortune 500 company who has invested Rs 80 lakh in three different (residential, retail and office) projects. And her target is to grow her money to Rs 2 crore in two years’ time.”

Real estate in India is overpriced: Deepak Parekh interview with HDFC Chairman Deepak Parekh

While foreign investors seem to be making a beeline for property in India, HDFC
Chairman Deepak Parekh believes real estate is overpriced. He speaks to Shobhana Subramanian on the dangers of having unreasonably high property prices, saying affordability is now being stretched. Excerpts:

You haven't been bullish on real estate. What do you think you've missed?

I'm still not bullish. Real estate in India has to do with affordability whether it's for residences, offices or even malls, and affordability is the key to viability.

The boom in the commercial space is due to the demand from the IT and ITES sectors where most companies don't buy space. Almost 90 per cent of it is rented. Companies cannot afford to pay rents of Rs 30-35 per sq foot because the wage structure is increasing. If you don't want to lose business to China or Vietnam, rents have to stay in check.

How many malls can afford to pay Rs 100-150 or Rs 200 per sq foot? Look what happened to Crossroads. Only restaurants are left because food sells and the Piramals have sold out. The same thing is going to happen to other malls. There are many international brands, but they too cannot afford to be present in every mall.

How do you view property prices today?

I was in Bangalore recently. Developers tell me they see a slowdown in sales and a dip in commercial and residential property prices varying between 10-30 per cent in Whitefield, which is a growing suburb. I would say this is the beginning, it's not a bubble.

A correction is necessary and further increases are unlikely to happen. Even if your cost of construction goes up, you will not be able to pass it on because you have inflated land prices.

Home loan rates have risen 200-250 basis points from their lows 30 months back and asset prices are also up. Is affordability deteriorating?

Affordability is certainly at a stretch. But the shortage of housing is enormous, so we feel that a 200 basis point increase in home loan rates will not impact demand for housing.

Normally, we either extend the term of the loan, or increase the EMI or ask people to make balloon payments. Sure, we don't want the loan period to extend. Some of the banks have started disbursing loans at 25-year periods at origination. These loans will easily stretch to 40-45 years. Can we afford this? We have to lend on cash flows of the family, not on the asset value.

Interest rates are up 150 basis points year-to-date, though the 10-year benchmark yield has gone down 100 basis points in the last six months. What is your take on interest rates?

Liquidity is certainly getting tight, but then CRR has just been increased and advance taxes have just been paid. Corporate tax collections are 64 per cent higher this December compared with last year. So, the rise in short term rates is temporary and should ease, I would say, by the end of January.

As for long-term rates, I don't think that with the 10 per cent growth that we are aiming at, we can contain inflation below 5-6 per cent. In which case interest rates have to go up and I would imagine a rise of between 1-1.5 per cent.

For the hundredth time, why aren't you merging HDFC Bank and HDFC? Is the Rs 15,000 crore SLR tab the only issue?

The tab is now Rs 20,000 crore (Rs 200 billion).

What about the holding company structure, which you have been talking about?

There is an issue with the double taxation on dividends, which some groups have said, should go. Also, the withholding tax is no longer small, it's very high.

So the operating company pays dividends, the holding company pays withholding tax and even if it's a pass-through, the same amount is paid. There's been a request that if it's a pass-through, to the extent that the holding company pays more, charge it for withholding the tax on dividends.

For instance, if it receives Rs 100 and pays Rs 90, then charge it. But if it receives Rs 100 and pays Rs 200, then charge it on the balance amount.

There are other issues too. We already have two listed companies and are planning to list our insurance ventures soon. A holding company must be listed, so it becomes messy in our case because there is no family. Who will hold the shares?

You say size and market cap are very important for financial players, yet you desist from consolidation. Also, compared with ICICI Bank, don't you think HDFC Bank has grown slowly?

Yes, size is very important but we are growing at a minimum of 30 per cent every year. I think in the financial sector, growing at a 50 or 100 per cent rate on a per annum basis, is inviting trouble in the future. You must have a reasonable growth. A finance company cannot double and treble its balance sheet. Thirty per cent is much more than we can handle.

How does one interpret the 12 per cent stake that Citibank holds in HDFC? Isn't Citibank a competitor?

Standard Life needed to sell the stock and I'd say it's a sale from one portfolio investor to another. Citibank is a competitor in only banking, not in insurance or asset management. Besides, we have 500 branches, while they have 50, so where is the competition?

Citibank is one of the largest lenders to our mortgage business. They are also distributors to our AMC. We work closely, so I don't think you can view Citibank as a competitor.

Do you foresee a time when Citibank will take over HDFC Bank, legislation permitting?

We don't know what the future holds. One thing is certain: as an individual, I can't prevent anything because I don't hold any stock that has power.

HDFC will launch a $750 million international real estate fund next month. How big is the opportunity in this space?

We'll close the fund by January or February. We see an opportunity in real estate if one invests wisely. I know that on the one hand, I'm saying real estate prices are too high and on the other, we're raising money for real estate equity investment.

But our case is different. We have been working with developers for 29 years and have supported many of them with construction finance. We have an edge over the others because we can request our old clients for a project in which we can take an equity stake and thereby, hold a better chance at succeeding.

The other advantage we have is that every builder requires debt, and he knows that if we give him equity from our fund, we will provide debt in any case, because we become part owners of that project. Having said that, we have to be careful about land valuation and we will not accept inflated valuations.

Should the government sell UTI Mutual Fund?

It does make sense because there are five shareholders and each of them have their own AMC and are competing. Five owners are too many and LIC has its own portfolio, so there are some conflicts. Maybe one of the five can make a bid for it. It need not go outside the family of shareholders.

Wednesday, January 10, 2007

Pallonji may sell stake in realty

Reeba Zachariah
Times Of India article

MUMBAI: Things are changing at Shapoorji Pallonji Centre, the business headquarters of India's fifth richest billionaire, Pallonji Mistry. The legendarily reclusive septuagenarian, well-known as the single largest shareholder of Tata Sons, promoter of India's largest industrial house — the Tata group — is now constructing a deal at group flagship Shapoorji Pallonji & Company, which could see the Mistry family adding billions more to its swelling coffers. With the Indian real estate sector attracting huge investments from foreigners, can the 140-year-old builder be left behind?

It is learnt that foreign investors are wooing the Mistrys to become a part of their real estate venture. A source familiar with the situation told TOI that the Mistrys are not bringing in any investor in Shapoorji Pallonji & Company but planning to sell a part of their stake in real estate business. SP&Co has two business units: construction and real estate.

The source said SP&Co is the holding company of the group which also holds shares of Tata Sons, and any stake sale in the company is being ruled out. Instead, the group is contemplating whether to rope in a foreign investor for a single real estate development project or form a JV for a pool of projects that it could hive off into a separate entity. The JV would be majority owned by the SP group while the foreign investor would get between 15% and 20%. The group has about 50 million square feet of real estate for development spread across Pune, Chennai, Kolkata, Mysore and Gurgaon among others. SP&Co will soon be launching a 60-storey residential tower in Mumbai, said to be the tallest in India.

A source said that the group preferred government-owned funds such as Dubai Capital, Abu Dhabi Investment Authority (ADIA) and Government of Singapore Investment Corporation (GIC), all of which are in talks with it. The valuation of the deal could not be ascertained as the source said the process has just started.

"Land bank is the most important factor as property is about location. If location is good and the land bank has
been substantially acquired at prices well below current levels, developers will attract a very good response," says Siddhartha Gupta, real estate analyst with Macquarie Research.

The real estate sector has become a hot pick for investors, attracting $2.08 billion — about 26% of the total foreign direct investment of $8 billion in the country in 2006. Buoyed by demand from home buyers, retailers and special economic zones, the property boom is expected to continue.

Tuesday, January 09, 2007

High realty prices hit home loans


ICICI Bank on Tuesday said it has witnessed a slowdown in home loan segment in the current fiscal, following the high realty prices in certain markets.

"Real estate prices in some markets have touched a high and there has been a decrease in growth rate of the industry," Rajiv Sabharwal, senior general manager and head (retail assets) said.

He, however, stressed that high real estate prices were not a pan-India phenomenon but present only in certain pockets of the country. The bank expects the industry growth rate to reduce from the current 30-35 per cent to about 25 per cent in the current fiscal.

"Apart from high real estate prices, the base too has grown and it is difficult to maintain high growth rates on a larger base," Sabharwal said, adding the bank expects its growth to be in line with the industry.

ICICI Bank is a leading home loan lender with about 30 per cent market share. Out of the total loan portfolio, the retail assets comprise 70 per cent, of which the home loan lending is about 50 per cent.