Residential property prices to fall 8-10% more in 2009

Despite popular belief, residential property prices are expected to fall by another 8-10% in 2009 till they stabilise in 2010. Residential property rates declined by 18-20 per cent in March this year, from the highs in the first half of 2008. Despite this drop, home buyers adopted a 'wait and watch' policy, and this trend is likely to continue through 2009, as per the latest report by CRISIL Research.

Owing to improved affordability, steady economic growth and greater liquidity, the residential segment will witness a speedier recovery compared to the retail and commercial segments. Lease rentals are not expected to stabilise till another two years. Mr. Sudhir Nair, Head, CRISIL Research says, “Demand in the commercial and retail segment is likely to remain under stress for the next two years owing to excess supply and weak off take.”

Amongst the 10 cities covered by CRISIL Research, Pune, Bengaluru and Mumbai have witnessed the steepest correction in capital values compared to the highs seen in the first half of 2008. Capital values in NCR had already started stabilising during the first half of 2008 even as the upward trend continued in other cities. Hence, capital values in NCR declined by only 18 per cent, which is relatively low compared to other cities. The report covers more than 400 areas across 88 micro markets in 10 cities--Ahmedabad, Bengaluru, Chandigarh, Chennai, Hyderabad, Kochi, Kolkata, Mumbai-MMR, NCR and Pune.

It is believed that lower home loan interest rates as well as better job security would help to revive demand in the residential segment. Hence, capital values are likely to stabilise in the first half of 2010, and increase during the second half of the year.

Indian HNIs prefer realty investment in India than abroad

The Indian HNI (high net worth individual) is being aggressively wooed by foreign developers. With the balance of economic power shifting towards Asia, and with India projected to be the world’s third largest economy by 2050, and a subsequent increase in the number of wealthy individuals , property consultants from across the globe are making a sales pitch, and also getting the HNI segment interested enough to buy.

HNIs are people with net financial assets (liquid assets) of at least $1 million, excluding primary residence and consumables. Data from consultants like Cap-Gemini and Merrill Lynch suggests that India has the youngest HNI population in the Asia-Pacific region, with the club having even 28-year-olds on their rolls.

Strong GDP growth, robust figures in industrial and service sectors, high market capitalization , and steady FII inflows are some factors contributing to the rise in HNI wealth. In 2006, India’s HNI population crossed the 1 lakh figure, which made it the second-fastest growing HNI segment in the world, after Singapore, where the growth was 21%.
If one were to analyze the asset allocation of Indian HNIs, data suggests that while equities make up the greatest portion of India’s HNIs’ portfolio at 31%, 17% of their investibles are in real estate.

“If you were to look at the total pie of investment by Indian HNI, only 2% of the investment from Indian HNIs is going in overseas real estate ,” says Samantha Jerath, a director at Jerath Properties, Delhi-based real estate consultant having a portfolio of many HNIs. He adds, “Barring Dubai and London, I do reckon (investment taking place in) any other place due to cultural differences, unfamiliarity with local laws, language issues.”

Also accessing and monitoring one’s investment becomes so much more difficult when it is an overseas investment, as there is paperwork involved, making payments from time to time, and with many real estate investment options available back home with even better appreciation profiles, Indians any day prefer their home country.

Vikram Baidyanath, a HNI, says out of all global property destinations, London is most attractive to him. “I’ve spent more than six years in London and it is more of a second home. Besides , it gives a comfort level to be in London and see our products displayed in famous stores. The Asian community has a strong presence and English is understood and spoken by all, so even language is not a barrier.”

Though well travelled, he feels he would not be exactly tempted to invest elsewhere - “To invest in a foreign real estate, either one has to have business interest in a place that makes you travel frequently to that country or be really attached to that place. Also, the appreciation in property is not all that phenomenal to attract anyone to casually invest in any and every global locale.”

Lack of awareness about foreign projects and foreign laws is another deterrent for HNIs from investing in foreign real estate. According to Sandip Sen of Calcutta Skyline who has a good network of HNI clients in the eastern part of the country, “We have found that Indians are not investing a lot in foreign markets, if at all they are investing, it is restricted to UK and the Middle East. Primary constraints in making overseas property investments include unfamiliarity with local laws of that country, fear of being stuck in litigation in another country, plus lack of awareness in general. Also there are regulatory issues.” As per RBI regulations, the maximum limit allowed in investments outside India is $200,000 per year. For any higher investments , RBI needs to be approached.

Dubai has been a popular choice with Indian HNIs and that is corroborated by Dubai-based real estate consultant Mansoor from Spring Rose Real Estate consultants, “A lot of Indian, especially HNIs from South India are investing in retail, while HNIs from Delhi and Mumbai are purchasing apartments from well established brand names in real estate. As a matter of fact, HNIs from India, Pakistan and Bangladesh like to have a foothold in Dubai due to citizenship , tax rebates etc.”

With recession, property prices have depreciated globally. But this has not translated into attractiveness towards overseas properties. On the contrary, according to Dr Devinder Gupta, CEO & CMD of Century 21 India, “Due to the global meltdown and uncertainty in realty sector, many projects have become unviable. Even bankers are not willing to lend. All this has led to Indian HNI being wary of investing overseas.”

There are enough accounts of developers being faced with credit crunch, globally, who have stalled construction work, delaying most of their projects in the pipeline. Developer’s cash flow problems and credit crunch has in turn impacted delivery deadlines of projects.

Samantha Jerath sums it, “Real estate investment is all about perception, trust, and ease of accessing and monitoring projects.

DLF won't sell core assets as credit begins to flow

India’s largest real estate company DLF has decided against selling core assets — residential, industrial and commercial plots — which it had put on the block.

The company will now sell only the hotel plots, which are non-core to its business. DLF executive director YK Tyagi told ET that the company has pulled back these assets from the market over the past 2-3 weeks, considering that banks lending to the real estate sector has started to ease.

A few prime properties in Gurgaon’s Cybercity and Udyog Vihar areas, which have been on the block for sometime now, have been pulled back. DLF had recently told ET that it planned to raise Rs 10,000 crore by selling land parcels, treasury investments and real estate projects in the next 2-3 years.

There has been a change of heart for DLF. “The decision to pull back these core assets from the market was taken considering the fact that banks have become more liberal in lending to real estate companies,” said Mr Tyagi. He also pointed out that after the recent stake sale by the promoters of the company, the company was in a comfortable position.

DLF promoters had sold a 9.9% stake in the past month to raise Rs 3,980 crore, which has put the company in a comfortable position. Capital Group picked up close to 5% in DLF, while HSBC, GIC and Fidelity bought smaller stakes. Following the open market transaction, the promoter group now holds a 78.6% stake in DLF.

Mr Tyagi pointed out that the company will continue to sell its non-core assets, including hotel plots and its wind power business, which would help them reduce their debt by half. DLF’s debt stands at around Rs 14,000 crore.

“We expect to sell all of the hotel plots by the end of the year,” he said. The company had said earlier that they do not want to exit the entire hotel business. “We expect to sell all of the hotel plots by the end of the year,” he said.

The company had said earlier that they do not want to exit the entire hotel business. While looking at hotel properties and plots just as an investment, DLF would like to retain the Aman brand. DLF has a number of hotel plots located in Mumbai, Kolkata, Bangalore, Gurgaon, Baroda, Lucknow, Kasauli (Himachal Pradesh) and Sikkim among others. According to sources, DLF has managed to sell hotel plots in Sikkim and Baroda.

A number of core assets—commercial, residential, industrial plots—were on sale by the developer, some of which it managed to sell over the last few months. The company recently sold its 66% stake in Hindoostan Spinning and Weaving Mill in central Mumbai for Rs 310 crore.

Sobha Developers plans QIP of 3cr shares:

One sector on which alarm bells are ringing today is real estate. Although stocks are having a rough session, the money raising continues. Sobha Developers is planning a QIP of three crore shares reports CNBC-TV18, quoting sources.

The book is open for Sobha Developers is what we understand for the QIP (Qualified Institutional Placement). Three core shares are what they are offering in the QIP book and the floor price is going to be Rs 227 which is a two-week average. So given the floor price, the total fund raising plan is Rs 680 crore. Only yesterday in the EGM (Extraordinary General Meeting) the company got an approval to raise up to Rs 1,500 crore via various means including QIP. So in the first tranch as I understand now they have opened the book to investors and they are looking at raising Rs 680 to 700 crore via this QIP issue.

In terms of dilution, it means that the promoters’ holding will come from 83% to close to 62–63%, so there is going to be a good amount of dilution from the promoters through this QIP issue. But I do know from investment banking sources that the QIP book has opened today with three crore shares and the floor price is Rs 227.

States, PEs queue up for Nano homes

Tata Housing Development Company, a subsidiary of Tata Sons, which recently announced low-cost housing project Shubh Griha, is learnt to be in talks with various state governments for developing similar projects. The houses are priced at around Rs 4 lakh.

Managing director & CEO of Tata Housing Brotin Banerjee confirmed the news. “There have been some proposals from state governments offering us partnerships for affordable housing projects, but we have no announcement to make now,” he said. It is believed that the company may adopt the public-private partnership (PPP) route with the state governments by year-end. It was not possible to ascertain which state governments have approached Tata Housing for these projects. The company is also believed to be in talks with private equity players for its forthcoming projects, which could cost anywhere between Rs 1,500-2,000 crores.

Meanwhile, it’s also learnt that the company would soon announce three more projects with an investment of around Rs 300 crore around Mumbai and Pune. A senior official in the company told ET, “We have the option of 16 land parcels in Mumbai where we can start the projects. Some land deals will be an outright purchase while we will go in for a JV with the land owner in the case of the others,” the official added.

Tata Housing’s Shubha Griha project will come up at Boisar, which is about two-and-half hours by train from Mumbai. This project will be ready in two years. “For the new projects, we would give preference to those who did not get their home in Boisar,” the official said. This project is often referred to as the Nano housing project. The company had earlier said that around 16,000 forms were sold for this project with 5,500 people having applied. Eventually, 1000 houses would be allotted through a random selection of forms or a lottery system.

Earlier, Tata Housing had announced that they would build a total of 16,000 houses within the next two years across the country. Referring to the option of bringing in private equity money, the official said, “In the affordable housing project the return is anywhere between 20% to 25% which is lesser than what normally prevails. We are in talks with PE players who would not mind lesser but secure returns,” the official added.

Tata Housing recently tied up with Micro Housing Finance Corporation (MHFC), a microfinance institute, and intends adopting the same model going forward. “Our customers belong to low-income groups who can buy a house but may not have documents required to obtain a housing loan. The MFIs and other financial institutions we have tied up with understand this and provide loans without these documents,” added Mr Banerjee.

Real estate developers homing in on residential projects

While the sudden rise in demand for affordable residential housing in the last couple of months has given the much-needed relief to real estate developers, commercial and retail segments continue to face the heat of oversupply, combined with declining rental rates and lower demand from investors.

As a result, developers have deferred a majority of the ongoing commercial and retail projects, which were scheduled for completion in 2009-10, and are instead focusing on the residential market. In fact, according to real estate consultants Cushman & Wakefield, developers will be forced to defer 41 per cent of the projected office space supply in 2009.

“Out of 76 million sq ft of commercial (office) space projected across eight cities by many developers, only 45 million sq ft is expected to be completed in 2009. In the retail segment, out of the 14.5 million sq ft of projected space, only 3.6 million sq ft is expected to enter the market,” Cushman & Wakefield’s Executive Director Kaustav Roy said.

The supply overhang in commercial and retail segments is expected to continue for another 12-18 months, feel experts. At the same time, a sharp decline in the price of residential units — in terms of per sq ft rate as well as size — has resulted in a sharp increase in demand. As per conservative estimates, 60 million sq ft of residential space has been lined up for launch in 2009.

One of the key reasons for this poor demand in commercial and retail segments is the non–availability of Real Estate Investment Trusts (REITs), which could not take off because of complex legal hurdles and the sudden crash in the stock market in 2008.

While many of the real estate companies — such as DLF Asset Ltd, Unitech, Indiabulls Real Estate and Purvankara, among others — were planning to raise resources through REITs’ listing, only Indiabulls successfully raised $286 million by listing its REITs on the Singapore Stock Exchange. The failure of REITs to take off has affected the financial position of developers and, in turn, further delayed the completion of ongoing retail and commercial projects.

“In the past one year, everything has been against the commercial real estate. Private equity vanished from the markets, while the government increased risk rating on the real estate sector. The failure of REITs to pick up added to the financial crunch of the developers,” commercial real estate services company CB Richard Ellis’ Chairman and Managing Director Anshuman Magazine said.

“Developers are not in a position to complete their commercial projects due to a lack of funds, a demand-supply mismatch and falling rentals,” he added.

The country’s largest developer, DLF, has already received an approval to denotify four of its SEZs. In addition, it has also temporarily stopped construction work on nearly 16 million sq ft of office and retail mall space out of the 62 million sq ft of planned construction.

Mumbai SEZ in danger of being scrapped

The country’s largest special economic zone (SEZ), promoted jointly by Reliance Industries Chairman Mukesh Ambani and his confidant Anand Jain, is in danger of being scrapped. The zone was being set up by a company called Mumbai SEZ Ltd in the Raigad district of Maharashtra.

The threat to the SEZ follows the Supreme Court’s refusal to stay the land acquisition process that otherwise has to conclude by Monday, June 8. A Bench headed by Justice B Sudarshan Reddy dismissed Mumbai SEZ’s plea challenging a Bombay High Court interim order that refused to stay the land acquisition process. A stay by the Supreme Court would have made the deadline redundant.

The company has spent Rs 600 crore on land acquisition but the process had stalled following protests in 22 villages. The state government then held a referendum on the project among villagers last year but has not yet released the results.

Mumbai SEZ had filed a writ petition last month before the high court, seeking a direction to the Raigad district administration to speed up the land acquisition initiated under the provisions of the Land Acquisition Act, 1984.

Land acquisition for SEZs has to be completed within two years from the date of approval.

The Mumbai SEZ project, which was to come up over 10,000 hectares at an investment of Rs 40,000 crore, was approved in June 2005 and the deadline has been extended twice.

A Mumbai SEZ spokesperson declined to comment when asked about the company’s course of action.

Senior Maharashtra government officials, however, said the project’s future appeared bleak, given that the state was headed for Assembly elections in October. Land acquisition for industrial projects is a highly emotive issue and no government wanted to do anything that was perceived as being harmful to the villagers' interests.

Sources familiar with the developments, however, said there was hope for Mumbai SEZ. One, the Supreme Court simultaneously issued a notice to the Maharashtra government on another plea by the Mumbai SEZ, seeking to transfer its petition pending before the Bombay High Court.

Last year, the apex court had transferred a number of SEZ cases to itself from various high courts. All the writ petitions, some by land owners and some in public interest, challenge the validity and procedure of land acquisition in various states for building SEZs. The Supreme Court is yet to hear those cases.

J P Dange, the state’s additional chief secretary (revenue & forests), said the government would take a decision on granting an extension to the land acquisition process only after receiving a specific request from the company to that effect.

Convener of the People Against Globalisation, Ulka Mahajan, who headed the anti-SEZ agitation, welcomed the apex court’s decision and said, “The decision has strengthened our belief that even mighty corporations can be forced to eat humble pie using peaceful and democratic means of agitation.”

The state government will need to carry out detailed consultations and study the legal provisions before deciding what to do with the land the company has already acquired from farmers, Dange said. If the project is scrapped, one option available to the state government is to return the land after taking it over from the company. However, the state government can also use it for other public purposes. A Supreme Court judgement in the case involving the Kerala government allowed such a change of purpose, an official said.