Realty funds` rollout soon

Business Standard

Rajesh Abraham / Mumbai February 2, 2007
Retail investors have never had it so good in terms of diverse products from mutual funds.

Schemes that are linked to gold prices (Gold ETFs) to capital protection schemes to products that invest in overseas stock markets are now the flavour of the season.

Yet another product, which until now was beyond the reach of a small investor, will soon become affordable for him. It is the proposed real estate mutual funds (REMFs) which will enable investors to buy and sell real estate properties.

Market regulator Securities and Exchange Board of India (Sebi) has already made its stand known – that it is in favour of REMFs. But there are some issues that need to be addressed before allowing the launch of such schemes in the country.

“Once allowed, REMFs will allow Indian investors to buy a product that is pegging its investments in the booming real estate sector,” said Ashwin Ramesh, promoter and director of Primary Real Estate Advisors, an affiliate of Quantum Mutual Fund, which is eyeing an entry into the sector. While tax issues will likely be addressed in the forthcoming Budget, there are other bottlenecks that also need to be looked at by the authorities concerned. These include unifying the stamp duty and registration fees for property transactions, which now varies from state to state.

Ajoy Veer Kapoor, managing director of Saffron Advisors, said: “If you want to have apples to apples comparison, you need to address these issues. I’m sure that the authorities concerned will address these issues sooner than later.”

REMFs, once allowed in India, would give domestic investors a new and interesting tradable product in a sector that is on an upward trajectory, he added.

REMFs are expected to mobilise funds from the public to invest in real estate projects in areas such as office spaces, residential apartments, shopping malls and IT parks, and will earn their revenues through rentals and even selling the completed projects.

“The ownership model is more popular in mature markets such as the US,” said Ramesh of Primary Real Estate Advisors.

The US is considered the most mature of all markets with a market cap of over $350 billion in realty projects. There are over 200 listed entities in the US investing in real estate projects through Real Estate Investment Trusts of Reits.

Pranay Vakil, chairman of Knight Frank, said the recent clarification by the finance ministry that the Sebi would regulate REMFs has set the ball rolling on the rollout of norms for REMFs.

“This clarification has set the ball rolling and now the issue of taxability needs to be addressed. This is the finance ministry’s call and since the Budget is near, the issue is expected to be addressed in the Budget,” he said.

Several players including ING Vysya and Kotak Mahindra are expected to go the REMFs route, once the market is opened up, said industry officials.

Blame builders, homes will cost you more

TIMES NEWS NETWORK[ THURSDAY, FEBRUARY 01, 2007 02:07:41 AM]

Buying a new home may turn out to be more expensive. This is not because of any hike in home loan rates. It is just the fact that builders, who face the prospect of being charged a higher interest rate on their loans, may well pass on the burden to home buyers.

With the Reserve Bank of India (RBI) forcing banks to set aside more capital for lending to property developers, loans to such developers and builders will be priced higher. Loans also may be hard to come by for some of these builders, with several banks already going slow on sanctioning funds to the realty segment.

While RBI’s move is aimed at discouraging banks to lend less to the real estate in the backdrop of inflationary concerns, in practice, the higher borrowing costs for the developer is bound to translate into higher rates for home buyers, said bankers.

India’s realty sector has attracted a huge amount of interest from both local and global investors fuelling a rise in property prices in even Tier II towns. Monetary policy authorities have consistently voiced their concern over spiralling property prices and the growing exposure of banks to the realty segment. Since 2005, RBI had forced banks to provide more capital while lending to the real estate sector, in an effort to discourage excess flows.

On Wednesday, RBI raised the standard provision for loans to property developers from 1% to 2%. This will mean that for each loan of Rs 100 crore that a bank disburses to a property developer, Rs 2 crore needs to be set aside from its profits as a provision.

To offset this impact of setting aside more capital in their own books for such a lending, banks will charge higher interest rates on loans to property developers, who in turn, may pass on the higher rates to customers. “By raising the provisions requirement to these segments, RBI is signalling that banks should slow down in giving loans to them, but focus on productive sector where the provisions remain unchanged,” KC Chakrabarty, chairman and managing director of Indian Bank said.

“Real estate developers are already feeling the pinch of the policy after RBI hiked the risk weightage to 150 basis points. Most banks have already slowed down on giving loans to them,” said TS Bhattacharya, managing director of State Bank of India.
Although RBI has not raised the risk weightage or standard provisioning for home loans, bankers feel that if their cost of funds rises in the near term, they may be forced to hike the overall lending rates, including home loan rates. Banks now charge about 9.25-10% for loans based on floating rates and close to 11% for home loans disbursed on a fixed rate terms.

The recent efforts by RBI to rein in credit to the realty segment do not seem to have quite worked. The RBI data shows that loans to commercial real estate continues to grow.

It rose by 84% on a year-on-year basis and accounted for 2.5% of non-food credit. The RBI data showed that as of October 2006, banks’ exposure to real estate was Rs 37,838 crore. A provisioning of 2% would mean banks would need to set aside Rs 756.76 crore.

Indian rates near four-year high

BBC reports

India has raised its short-term interest rate to its highest level since March 2003.

The central bank raised the cost of borrowing by a quarter of a point to 7.5%, but left other rates unchanged.

Policymakers said they had raised rates in a bid to curb inflation, which is significantly above targets at 6.1%.

The bank added it hoped the move would not hit growth, as it raised forecasts for economic expansion in the current financial year for a second time.

The central bank now expects growth for 2006/2007 of between 8.5% and 9% - compared with previous forecasts of 8%.

The economy grew 9.1% in the first half of the year to September driven by surging output from the agricultural sector, the Central Statistics Organisation said.

Warning

"Demand pressures appear to have intensified, reflected in rising inflation, high money and credit growth, and elevated asset prices," the central bank said.

It also warned about rising house prices and the surge in credit growth, which it wants to see reined in.

As a result, the central bank's move was a warning shot to the financial sector that it must "must moderate credit growth", finance minister Palaniappan Chidambaram said.

"Monetary policy takes some time to work...it would have a favourable impact on bringing down inflation," Mr Chidambaram added.

The government has also taken measures to try to combat inflation by cutting import duty on edible oils, steel and cement.

Navi Mumbai international airport project drives up land prices

Mumbai, January 30, 2007 - The proposed international airport project in Navi Mumbai is driving up land prices in areas such as New Panvel, Kalamboli and Kharghar. The City and Industrial Development Corporation of Maharashtra (CIDCO) has recently sold plots in the area for significantly higher amounts than recent market prices.

The Navi Mumbai International Airport would be one of the world's few ''greenfield'' international state-of-art airports offering world-class facilities for passengers, cargo, aircrafts and airlines. The airport will support the rapidly growing air travel needs of the Mumbai Metropolitan Region. It is expected to absorb annually 4.5 million passengers in its first operational year, doubling to 8.2 million by 2010 to 13.7 million by 2020 and 30 million by 2030 according to developer CIDCO.

The site of the airport in Panvel, to be developed through a public-partnership model, is located in an area of 950 hectares. CIDCO plans to sell 470 hectares in the periphery of the airport for development of hotels, malls, multiplexes and other aviation related facilities.

This real estate bonanza is sure to attract large developers to the area and drive up property prices. CIDCO recently sold 12 plots in the area for residential and commercial use at a significant premium to prevailing prices. For example, a 1535 sq.m plot was auctioned in New Panvel at Rs.47,200 per sq.m almost double recent prices. In Kharghar CIDCO has realised Rs.3,715 per sq.ft from a land sale.

Indiabulls raises Rs 1,200 cr

from Economic times
MUMBAI: Dev Property Development, an overseas arm of Indiabulls Real Estate, raised Rs 1,200 crore through an offer of its shares to qualified institutional investors at the London Stock Exchange on the alternative investment market (AIM) segment.

The company's shares will start trading on the exchange from Monday. Sources said LN Mittal, Fidelity, Capital Research and the government of Singapore have picked up large stakes in the IPO.

Dev Property Development will acquire minority stake in the projects of Indiabulls through a secondary sale of shares by the latter and by investing fresh equity capital in Indiabulls' projects for a total consideration of Rs 1,055 crore.

A fortnight ago, Morgan Stanley had invested big amount in city-based real estate company Oberoi Construction. The rush for Indian real estate projects is a reflection of the higher returns from properties vis-a-vis the stock market.

The stock market offers a return of 20%, while returns from real estate projects are as high as 25%. With higher disposable incomes, Indians are buying homes, splurging on entertainment and buying from retail chains.

Hence, there is a rush to build homes, entertainment and retail malls. Indiabulls had received Rs 437 crore by partial sale of its stake in Jupiter Mills and Elphinstone Mills development projects.

Dev Property has also invested Rs 618 crore in subsidiary companies of Indiabulls undertaking real estate projects. It would also have the right to co-invest along with Indiabulls in its future real estate projects.

Earlier, Knight Frank had valued Indiabulls' real estate projects at Rs 21,569 crore and Indiabulls' stake in its projects at Rs 15,125 crore.

Indiabulls' real estate business has been demerged to Indiabulls Real Estate and its shares are expected to start trading in February.

All shareholders of Indiabulls Financial Services received one share of Indiabulls Real Estate for every share they held in Indiabulls Financial Services.

In December, Indiabulls Infrastructure, a subsidiary of Indiabulls Real Estate, had sold 13.3% stake to LN Mittal and Farallon for a consideration of Rs 447 crore.

The Dev Property IPO was managed by Deutsche Bank, Citigroup and UBS. The lead marketing agent of the issue was CLSA and KPMG is the statutory auditor of Dev Property Development.

RBI may push up housing loan rates

from Rediff.com

The housing sector is likely to face rise in interest rate and other restrictions as the Reserve Bank of India announces the quarterly review of its credit policy on January 31.

The bankers say that with the clear directions of the government to bring down inflation through monetary measures, the RBI has limited options apart from raising repo and reverse repo rates.

ABN Amro Bank's chief economist Abeek Barua said, "We are expecting increase in repo and reverse repo rate by 25 basis points, besides increase in capital requirement and risk provisions especially for the housing sector."

He said although the interest rates for the housing sector have gone up by as much 2.5 per cent in recent past, but it may further go up by 0.5 per cent over the next quarter as the banking regulator is likely to raise risk measures for housing sector.

"We feel the property market has overheated in select cities, where we have become stringent in sanctioning loans," K V Kamath, CEO and managing director, ICICI Bank told PTI.

He said heating of the property market has made the bank cautious in mortgage lending, forcing it to adopt stringent sanctioning norms. The floating interest rate for the housing sector is hovering around 10 per cent while fixed interest rate is around 11 per cent.

Finance Minister P Chidambaram has also hinted that RBI will take effective monetary measures to bring down inflation, while ensuring that productive sectors do not face any credit crunch.

Bankers said that heating of the property market especially in the metros like Delhi and Mumbai, where realty prices have more than doubled over the past two years mostly due to easy lending by the banks, can force the central bank to put sectoral restrictions on housing and other sensitive sectors.

Chidambaram had cautioned that growth in non-food credit by over 30 per cent as against around 20 per cent growth in bank deposits is not sustainable. Expecting hike in housing interest rates, builders in the nation capital are asking the clients to book flats immediately.

Ansal API vice president Kunal Banerjee said, "If interest rate on housing loans rises further, it will adversely affect the middle class and thereby hamper the demand for real estate."

Bankers said though the restrictions put on the housing sector by the RBI during its last credit review has slowed down the housing loan market, but it could still take additional steps to safeguard the banks from the overheating sector.

Commenting on the expectations from the credit policy, Oriental Bank's CMD K N Prithviraj said RBI could consider increasing risk weightages for sensitive sectors.

Barua added that the RBI could also announce cut in statutory liquid ratio by 50 basis point or a time frame for that cut coupled with increase in repo and reverse repo rates to meet its objectives.

Bangalore's Boomtown Blues

from the BBC story on globalization.

Nitesh Shetty may be Bangalore's youngest property billionaire.

Aged 30, he has 4,000 apartments under construction in the city, with plans to expand his operations into Calcutta, Mumbai and New Delhi.

And he has just sealed a $100m deal with Citigroup to build Bangalore's latest luxury hotel, the Ritz Carlton.

Having dropped out of university pursue a career as a tennis pro he started supplementing his earnings by selling billboard space in Bangalore after getting a 10,000 rupee ($226, £115) loan from his mother.

At 23, he borrowed 500,000 rupees to turn a house in central Bangalore into an office block.

The home was owned by an old widow, and he gave her a 50% stake in the venture.

He then persuaded the bank to rent the ground floor - which covered his interest payments - and he never looked back.

Mr Shetty told the BBC there was no shortage of foreign investors eager to take a stake in India's real estate boom.

He has named all his luxury apartment complexes after famous US locations, such as Times Square, Key Biscayne, and Forest Hills (the US Wimbledon), and has hired the Australian cricketing legend Shane Warne to promote his properties.

But in true Indian fashion, Mr Shetty, a bachelor, still lives with his mum.

In the 1990s, when the Indian government decided to liberalise the economy and encourage the IT services industry, Bangalore established special zones such as Electronic City - a hub of hi-tech firms.

But its highly educated, literate workforce prompted the government to locate its defence and space research here in the 1960s.

Today the Bangalore boom is based on its attractiveness as the centre of India's IT industry, which is enjoying unprecedented growth as foreign multinationals rush to outsource their back-office functions to India.

The city's population has grown from 1.6m in 1970 to 2.8m in 1990 and 6.5m today, making it India's fastest growing city, and planners expect it to reach 10m by 2015.

India's IT sector employs 1.3 million people directly, and 3 million indirectly - and 40% of the IT sector is concentrated in Bangalore.

Bangalore also has the highest average income in India, and the jobs are plentiful, with Infosys expected to hire thousands this year.

Out on the town

There are six new shopping malls, and luxury car showrooms like BMW are springing up everywhere.

The young, well-paid worker likes to go out on the town, and restaurants and bars are doing a roaring trade, with 500 new bars in the city alone and dozens of cafes.

With a new bar opening every week, owners cannot get enough staff.

That's good news for the head barman at the newly opened Le Rock pub, who has been hired at double his previous salary.

And there has been a boom for taxi firms as the IT companies all pay them to transport their workers to and from their offices, given the hopeless inadequacy of the public transport system.

growth of Bangalore's population

Not that the new-found wealth always filters through.

Raj Singh came from Tamil Nadu 15 years ago to work as a taxi driver.

He still sends half his salary to his mother back home, and visits her two weekends a month, travelling for 15 hours on three buses.

But if his wages are higher, so is his rent. He cannot afford to live in Bangalore, and it costs half his salary even to rent a room in a village 30 miles away.

And many of the thousands of construction workers who have to build the new apartments and offices live in squalor in makeshift roadside tents that sit uneasily among the city's glamour.

Weekend breaks

The hi-tech industry has also introduced a new phenomenon in Indian life for those who are on-the-up - the weekend break.

Previously, everyone spent six days a week in the office, but the high-paid IT workers only do five.

With their high-stress jobs, they are increasingly interested in getting away from it all.

And into the breach has stepped Santosh, a trekking guide.

His web-based travel agency, Getoffurass.com, specialises in finding weekend hideaways in the jungle, and is doing a roaring trade.

Santosh told the BBC that the biggest change was that now he was leading Indians, not Westerners, in treks across the Himalayas.

Infrastructure woes

Bangalore's public infrastructure has lagged woefully behind the pace of private sector investment.

Every Bangalore IT company has to have a private generator and uninterruptible power supply to cope with the daily power failures of the grid.

Despite 15 years of lobbying, the 5km stretch of road linking Electronic City to the city centre is still crammed with bullock carts, trucks, cars and two-wheelers despite a private-public partnership to fund a new expressway.

And its international airport has an antiquated terminal far too small for the hordes of international businessmen flooding into the city - and the frenzied search for luggage as people gather five-deep around the single luggage carousel sometimes prompts emotional - and occasionally physical - outbursts.

Bangalore's city commissioner, K Jairaj, told the BBC that untrammelled growth could not go on indefinitely, with five million vehicles already clogging the roads and property prices going through the roof.

The government's policy is to decentralise development - building new towns on green field sites surrounding the city.

K. Jairaj, commissioner, city of Bangalore
The boss of Bangalore is critical of many of his workforce

Mr Jairaj also said that, in order to generate more jobs, the government wanted to encourage more labour-intensive sectors like car manufacturing to locate in Bangalore, and would not resist plans to disperse IT jobs to more cities in India.

But he said his greatest problem was the weakness of his own civil servants, who were not good at managing big projects "on time and on budget."

Cultural dislocation

For those Bangalore natives who do not have jobs in the IT industry, there are signs of increasing unease about the direction the city is going.

Some object on religious grounds to the wild nightlife, which was recently highlighted when the police started enforcing a curfew law that forbids disco dancing in bars after 11pm.

Others want the IT firms to give them a share of the good jobs.

They are calling for a reservation system, similar to that in the Indian civil service, which allocates a percentage of all jobs to the so-called "backward castes".

And many are disturbed by the fact that Kannada, the native language of Karnataka, has become a minority tongue in Bangalore, with English, Hindi, and Tamil all more widely spoken.

The state government has now insisted that Kannada, not Hindi, should be the language of instruction at school.

It plans to change Bangalore's name to Bengalooru in an effort to appease locals disturbed by the tremendous influx of outsiders into the city in the past few years.

The change still has to approved by the Federal government.

Tensions reached boiling point in April last year when crowds rioted outside Microsoft's global research centre in Bangalore after hi-tech companies failed to observe an unofficial day of mourning following the death of Karnataka's most famous film star, Rajkumar, the "John Wayne of India."

So despite its prosperity, the cultural dislocation brought about by Bangalore's rampant success in the global economy has, at least for now, increased rather than decreased political tensions.

Indian market ‘correction’ looms - Deepak Parekh

India’s real estate and stock markets are heading for a correction, with a liquidity crunch in the banking sector likely to accelerate the trend, according to one of the country’s most influential bankers.

Indian stock valuations are inflated and property prices in many areas are beginning to exceed what people can afford to pay, said Deepak Parekh, chairman of Housing Development Finance Corporation, which controls India’s second largest private-sector bank.

“I’m concerned about overheating real estate prices, I’m concerned about overheating of stock markets, that some of the valuations are not justifiable,” Mr Parekh said in an interview. “The kind of returns people got in the last two to three years, they would be foolish to expect this year. The Indian story is fully priced.”

Foreign investors eager to tap into India’s rapid economic growth of above 8 per cent have been pouring funds into stocks and specialist private equity funds investing in property and other sectors.

India commanded nearly half of foreign fund flows into emerging markets tracked by Morgan Stanley last year, with the average market capitalisation last year nearly 50 per cent higher than a year earlier.

In cities such as Mumbai, housing prices have risen threefold since 2004, with residents reporting increases in rent of up to 2.5 times in two years.

“Real estate has to do with affordability. There is no point building houses of a crore [Rs10m, $227,000] and two crores when people don’t have the resources to pay for them,” said Mr Parekh, whose bank specialises in loans for first homebuyers. Banks such as HDFC and its rival, ICICI, the country’s largest private sector bank, have been reporting credit growth of more than 30 per cent as Indians borrow to buy homes, cars and appliances.

But Mr Parekh warned that across the banking sector there was an emerging credit crunch with loan growth outpacing deposit growth by about 10 percentage points.

“This is a cause of concern because this creates higher interest rates and this creates a slowdown of the economy,” he said.

“The government keeps talking of a benign interest rate policy but with demand for funds in excess of the liquidity available, something has to break somewhere.”

He said he expected a correction rather than a crash, with the stock market likely to settle 10-20 per cent below its current levels and real estate price rises to stall rather than collapse.

Chetan Ahya, economist at Morgan Stanley in Mumbai, said indicators such as inflation and property prices showed the current economic growth rate was unsustainable in the short term.

“In our view, it’s not a risk, it’s pretty much very largely prevalent. The economy is overheating,” Mr Ahya said.