As developers increase their footprint and expand their business five-fold, execution capabilities and finance have emerged as big challenges. Project related SPV have, in this scenario, emerged as viable options that are investment-related only to the project.
In an SPV, the developer ties up with a private equity fund who provides capital, or alternately, ties up with foreign developers who not only have capital but also bring in technical and execution capabilities. Several developers in Mumbai, Delhi, Pune, Chennai are looking at tying up with foreign developers. SPVs have picked up as every developer needs financial backing and the overall capability to manage, says Sanjay Dutt, Deputy Managing Director, Cushman &Wakefield. It is much easier to establish the forecasted profits in an SPV as opposed to when it is pooled into the entity.
Many developers are diluting a minority stake in their entity organization, or going in for specific FDI compliant SPVs for different projects. Dutt explains that there are developers developing SEZs/ retail/ hospitality / mixed townships who will accordingly choose partners who can bring in the requisite expertise in the different real estate segments. Then there are developers who have taken too much land but do not have the financial backing or expertise and are hence looking for partners in an SPV.
SPVs are the only way out in FDI projects, where you have a clear shareholder agreement and control in the project and exits becomes easier. According to Gautam Hora, Senior Manager, India Capital Market, Jones Lang LaSalle Meghraj, the foreign investor or fund wants to join hands with the local developer and an SPV is formed, so that any unsettled claims, litigations with respect to the existing entity are not carried forward.
Most large builders today have either tied up with funds or are scouting for joint venture partners overseas. Prominent real estate companies like DLF and Ansal API, have recently tied up with Dubai-based firm Nakheel and Deyaar, and are looking at more such deals. Through its joint venture with Nakheel, India's largest real estate developer DLF is planning to invest $10 billion in two integrated townships spread across 40,000 acres.
One of the earliest SPVs was the Emaar-MGF, joint venture company formed by Emaar Properties PJSC Dubai, the world's largest listed real estate company, and Delhi based MGF Developments Limited for an FDI project amounting to over half a billion dollars for projects with a capital outlay of US$4 billion (Rs 18,000 crore). Today there are SPVs galore, and some examples include the Runwal CapitalLand venture in Mumbai, Oberoi Constructions tie-up with Morgan Stanley, Keystone Group and Trikona Capital SPV for a Thane project of 127 acres.
The popularity of SPV in future will depend on lot of factors such global funding and domestic demand. However, both of these things appear to be not so encouraging.
Monday, July 21, 2008
Thursday, July 17, 2008
Different Interest Rates in Indian monetary system
Repo (Repurchase) Rate
Repo rate is the rate at which banks borrow funds from the RBI to meet the gap between the demands they are facing for money (loans) and how much they have on hand to lend. If the RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate.
Reverse Repo Rate
This is the exact opposite of repo rate. The rate at which RBI borrows money from the banks (or banks lend money to the RBI) is termed the reverse repo rate. The RBI uses this tool when it feels there is too much money floating in the banking system.
If the reverse repo rate is increased, it means the RBI will borrow money from the bank and offer them a lucrative rate of interest. As a result, banks would prefer to keep their money with the RBI (which is absolutely risk free) instead of lending it out (this option comes with a certain amount of risk). Consequently, banks would have lesser funds to lend to their customers. This helps stem the flow of excess money into the economy. Reverse repo rate signifies the rate at which the central bank absorbs liquidity from the banks, while repo signifies the rate at which liquidity is injected.
Bank Rate
This is the rate at which RBI lends money to other banks (or financial institutions. The bank rate signals the central bank’s long-term outlook on interest rates. If the bank rate moves up, long-term interest rates also tend to move up, and vice-versa.
Banks make a profit by borrowing at a lower rate and lending the same funds at a higher rate of interest. If the RBI hikes the bank rate (this is currently 6 per cent), the interest that a bank pays for borrowing money (banks borrow money either from each other or from the RBI) increases. It, in turn, hikes its own lending rates to ensure it continues to make a profit.
Call Rate
Call rate is the interest rate paid by the banks for lending and borrowing for daily fund requirement. Since banks need funds on a daily basis, they lend to and borrow from other banks according to their daily or short-term requirements on a regular basis.
CRR
Also called the cash reserve ratio, refers to a portion of deposits (as cash) which banks have to keep/maintain with the RBI. This serves two purposes. It ensures that a portion of bank deposits is totally risk-free and secondly it enables that RBI control liquidity in the system, and thereby, inflation by tying their hands in lending money
SLR
Besides the CRR, banks are required to invest a portion of their deposits in government securities as a part of their statutory liquidity ratio (SLR) requirements. What SLR does is again restrict the bank’s leverage in pumping more money into the economy.
Repo rate is the rate at which banks borrow funds from the RBI to meet the gap between the demands they are facing for money (loans) and how much they have on hand to lend. If the RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate.
Reverse Repo Rate
This is the exact opposite of repo rate. The rate at which RBI borrows money from the banks (or banks lend money to the RBI) is termed the reverse repo rate. The RBI uses this tool when it feels there is too much money floating in the banking system.
If the reverse repo rate is increased, it means the RBI will borrow money from the bank and offer them a lucrative rate of interest. As a result, banks would prefer to keep their money with the RBI (which is absolutely risk free) instead of lending it out (this option comes with a certain amount of risk). Consequently, banks would have lesser funds to lend to their customers. This helps stem the flow of excess money into the economy. Reverse repo rate signifies the rate at which the central bank absorbs liquidity from the banks, while repo signifies the rate at which liquidity is injected.
Bank Rate
This is the rate at which RBI lends money to other banks (or financial institutions. The bank rate signals the central bank’s long-term outlook on interest rates. If the bank rate moves up, long-term interest rates also tend to move up, and vice-versa.
Banks make a profit by borrowing at a lower rate and lending the same funds at a higher rate of interest. If the RBI hikes the bank rate (this is currently 6 per cent), the interest that a bank pays for borrowing money (banks borrow money either from each other or from the RBI) increases. It, in turn, hikes its own lending rates to ensure it continues to make a profit.
Call Rate
Call rate is the interest rate paid by the banks for lending and borrowing for daily fund requirement. Since banks need funds on a daily basis, they lend to and borrow from other banks according to their daily or short-term requirements on a regular basis.
CRR
Also called the cash reserve ratio, refers to a portion of deposits (as cash) which banks have to keep/maintain with the RBI. This serves two purposes. It ensures that a portion of bank deposits is totally risk-free and secondly it enables that RBI control liquidity in the system, and thereby, inflation by tying their hands in lending money
SLR
Besides the CRR, banks are required to invest a portion of their deposits in government securities as a part of their statutory liquidity ratio (SLR) requirements. What SLR does is again restrict the bank’s leverage in pumping more money into the economy.
Wednesday, July 16, 2008
Definition Of Market Value
The “market value” is the most probable price that an income property should bring in a competitive and open market under all conditions necessary for a fair sale presuming the buyer and seller each act prudently, knowledgeably, and assuming the price is not affected by undue stimuli. Implicit in this definition the consummation of a sale as of a specified date and the title from seller to buyer under condition by:
1. Buyer and seller are typically motivated.
2. Both parties are well informed or well advised and each of them is acting in what one considers one’s own best interests.
3. A reasonable time is allowed for exposure in the open market
4. Payment is made in terms of cash of the same currency which the income property has adopted as their accounting standard or in terms of financial arrangements comparable thereto.
5. The price represents the normal consideration for the income property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
A fair market transaction must be a “win-win” for all parties concerned. The fair market value of an “active” income property, in its specific market, is that price at which:
1. The investors located within the market, will receive the current market rate of return for similar investments within the property’s market area.
2. The spendable income stream generated from the property will be adequate to pay the structured debt service that the sale of the property would create under the current market rates and terms offered at the current market down payment percentages.
3. The spendable income stream generated from the property will be adequate to pay all of the property’s expenses including a market wage, salary or fee to the property managers.
1. Buyer and seller are typically motivated.
2. Both parties are well informed or well advised and each of them is acting in what one considers one’s own best interests.
3. A reasonable time is allowed for exposure in the open market
4. Payment is made in terms of cash of the same currency which the income property has adopted as their accounting standard or in terms of financial arrangements comparable thereto.
5. The price represents the normal consideration for the income property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
A fair market transaction must be a “win-win” for all parties concerned. The fair market value of an “active” income property, in its specific market, is that price at which:
1. The investors located within the market, will receive the current market rate of return for similar investments within the property’s market area.
2. The spendable income stream generated from the property will be adequate to pay the structured debt service that the sale of the property would create under the current market rates and terms offered at the current market down payment percentages.
3. The spendable income stream generated from the property will be adequate to pay all of the property’s expenses including a market wage, salary or fee to the property managers.
Monday, July 14, 2008
Criteria for FDI in real estate
The government allows 100% FDI under an automatic route for development of townships, housing, built-up infrastructure, and construction-development projects (including commercial premises, hotels, resorts, hospitals, educational institutions, and recreational facilities), subject to the following guidelines:
Project criteria
• Minimum area of 10 hectares in the case of servicing housing plots
• Minimum area of 50,000 sqm in the case of construction development projects
• For combination projects, any one of the above two conditions will suffice
Project development
• 50% of project must be developed within five years, from the date of obtaining all statutory clearances
• Not permitted to sell undeveloped plots Capital requirement
Capital requirement
• Minimum capitalization of US$10m for wholly-owned subsidiaries and US$5m for JVs with Indian partners
• Capital to be brought within six months of the incorporation of JV or subsidiary
• Original investment cannot be repatriated before a period of three years from completion of minimum capitalization
• Repatriation allowed only after prior approval from the government
Project criteria
• Minimum area of 10 hectares in the case of servicing housing plots
• Minimum area of 50,000 sqm in the case of construction development projects
• For combination projects, any one of the above two conditions will suffice
Project development
• 50% of project must be developed within five years, from the date of obtaining all statutory clearances
• Not permitted to sell undeveloped plots Capital requirement
Capital requirement
• Minimum capitalization of US$10m for wholly-owned subsidiaries and US$5m for JVs with Indian partners
• Capital to be brought within six months of the incorporation of JV or subsidiary
• Original investment cannot be repatriated before a period of three years from completion of minimum capitalization
• Repatriation allowed only after prior approval from the government
Friday, July 4, 2008
REITS
Real estate investment trusts (REITs) are companies that own and often actively manage income-generating commercial real estate, such as shopping centers, apartments, offices and warehouses.
A REIT is a company that buys, develops, manages and sells real estate assets and allows participants to invest in a professionally managed portfolio of properties. Some REITs make or invest in loans and other obligations, which are secured by real estate collateral. A REIT operates like a mutual fund, where investments of individual investors are invested in real estate rather than in the equities market. REITs also help raise funds for the real-estate business – i.e. to fund construction of new offices, factories, residential flats, shopping malls, etc. Many private real-estate companies used REITs to access capital through the public marketplace.
A REIT is a company that buys, develops, manages and sells real estate assets and allows participants to invest in a professionally managed portfolio of properties. Some REITs make or invest in loans and other obligations, which are secured by real estate collateral. A REIT operates like a mutual fund, where investments of individual investors are invested in real estate rather than in the equities market. REITs also help raise funds for the real-estate business – i.e. to fund construction of new offices, factories, residential flats, shopping malls, etc. Many private real-estate companies used REITs to access capital through the public marketplace.
Wednesday, July 2, 2008
Indian Real Estate Sector
I published an article on Indian Real Estate couple of months back in a leading magazine. Two days back, I revisited this article and decided to start a blog on Indian real estate sector - What it was, where it is now and where will it go from here. A small piece of the entire article is here:
India Real Estate
The size in terms of total economic value of real estate development activity of the Indian real estate market is currently US$40-45bn (5-6% of GDP) of which residential forms the major chunk with 90-95% of the market, commercial segment is distant second with 4-5% of the market and organized retail with 1% of the market. Over next five years, Indian real estate market is expected to grow at a CAGR of 20%, driven by 18-19% growth in residential real estate, 55-60% in retail real estate, and 20-22% in commercial real estate.
Long-term outlook
Long term industry outlook remains attractive: We believe that long term industry outlook remains attractive, on account of increasing urbanization, growing nuclear families and the increasing number of Indian middle class. Fundamentally, strong GDP growth, increasing tourism traffic and increase in per capita income coupled with lower interest rates shall improve the outlook of the sector in the medium to long term.
Key Drivers of Real Estate
1) Economic Growth
- GDP growth rate of ~8-8.5%
- Double-digit income growth rate for the next 3-4 years
- Income growth should improve affordability, driving demand for residential units
- Lower interest rates
2) Demographics and Urbanization
- Positive demographic trends - middle class or the aspirers to show a CAGR of 10.4% to reach 124m in 2013 compared to 46m in 2003
- Urbanization – UNDP forecasts urban population will constitute about 40% of total population by 2030 from the current about 28%
- Indian household families moving from joint families to nuclear families
3) Favorable Interest Rate and Fiscal Incentive
- Housing loan interest rate, despite the recent rise, continue to remain low compared to 15-16% in the 1990s
- Easy availability of finance
- Fiscal incentives offered on owing a residential house is also a significant demand driver
4) IT/ITES Growth
- Strong IT/ITES growth should drive demand for commercial space – FY07-10 CAGR of 23% as a result of 568 000 employee additions; Indirect contribution to residential demand as well
- They consume about 75% of the commercial space
5) Organized Retail and Hospitality Demand
- Organized retail penetration level at 4.1% is lowest compared to other emerging markets
- Economic growth and changing demographics should increase retail penetration levels
- Strong tourist arrivals should spur demand for hotels across India. Foreign Tourist inflow is forecasted to show a 20%+ CAGR to reach 10m by 2010 compared to 4.4m in 2006
- Room shortages have resulted in a sharp jump in average room rates – Rs7,559 at end-FY07 vs. Rs2,004 in FY03; Approx. 105,000 hotel rooms are available in India
Future outlook of the sector
The real-estate sector offers a US$80bn-100bn opportunity over the next three years. Higher economy growth and rising income level will lead to higher demand for both residential and commercial properties. An easy and huge availability of capital will enable real estate developers to meet the demand.
Growth in the next decade should come from Tier II/III cities
- Higher real-estate prices in Tier I cities coupled with manpower and infrastructure issues may force companies to look at Tier II and Tier III cities for expanding their operations
Tier I cities- Mumbai, Delhi and Bangalore
Tier II cities- Kolkata, Hyderabad, Pune
Tier III cities- Nagpur, Ahmedabad, Indore, Lucknow, Jaipur
- Within the next three to six years, towns and cities such as Chandigarh, Jaipur, Mysore, Indore, Coimbatore, Vishakhapatnam, etc are likely to see an increase in real-estate demand from the IT/ITES sector
- According to Nasscom’s projections, Tier II and Tier III cities, which account for about 29% and 5% of the total commercial space in FY07, respectively, will increase to 44% and 20% at the end of FY17
India Real Estate
The size in terms of total economic value of real estate development activity of the Indian real estate market is currently US$40-45bn (5-6% of GDP) of which residential forms the major chunk with 90-95% of the market, commercial segment is distant second with 4-5% of the market and organized retail with 1% of the market. Over next five years, Indian real estate market is expected to grow at a CAGR of 20%, driven by 18-19% growth in residential real estate, 55-60% in retail real estate, and 20-22% in commercial real estate.
Long-term outlook
Long term industry outlook remains attractive: We believe that long term industry outlook remains attractive, on account of increasing urbanization, growing nuclear families and the increasing number of Indian middle class. Fundamentally, strong GDP growth, increasing tourism traffic and increase in per capita income coupled with lower interest rates shall improve the outlook of the sector in the medium to long term.
Key Drivers of Real Estate
1) Economic Growth
- GDP growth rate of ~8-8.5%
- Double-digit income growth rate for the next 3-4 years
- Income growth should improve affordability, driving demand for residential units
- Lower interest rates
2) Demographics and Urbanization
- Positive demographic trends - middle class or the aspirers to show a CAGR of 10.4% to reach 124m in 2013 compared to 46m in 2003
- Urbanization – UNDP forecasts urban population will constitute about 40% of total population by 2030 from the current about 28%
- Indian household families moving from joint families to nuclear families
3) Favorable Interest Rate and Fiscal Incentive
- Housing loan interest rate, despite the recent rise, continue to remain low compared to 15-16% in the 1990s
- Easy availability of finance
- Fiscal incentives offered on owing a residential house is also a significant demand driver
4) IT/ITES Growth
- Strong IT/ITES growth should drive demand for commercial space – FY07-10 CAGR of 23% as a result of 568 000 employee additions; Indirect contribution to residential demand as well
- They consume about 75% of the commercial space
5) Organized Retail and Hospitality Demand
- Organized retail penetration level at 4.1% is lowest compared to other emerging markets
- Economic growth and changing demographics should increase retail penetration levels
- Strong tourist arrivals should spur demand for hotels across India. Foreign Tourist inflow is forecasted to show a 20%+ CAGR to reach 10m by 2010 compared to 4.4m in 2006
- Room shortages have resulted in a sharp jump in average room rates – Rs7,559 at end-FY07 vs. Rs2,004 in FY03; Approx. 105,000 hotel rooms are available in India
Future outlook of the sector
The real-estate sector offers a US$80bn-100bn opportunity over the next three years. Higher economy growth and rising income level will lead to higher demand for both residential and commercial properties. An easy and huge availability of capital will enable real estate developers to meet the demand.
Growth in the next decade should come from Tier II/III cities
- Higher real-estate prices in Tier I cities coupled with manpower and infrastructure issues may force companies to look at Tier II and Tier III cities for expanding their operations
Tier I cities- Mumbai, Delhi and Bangalore
Tier II cities- Kolkata, Hyderabad, Pune
Tier III cities- Nagpur, Ahmedabad, Indore, Lucknow, Jaipur
- Within the next three to six years, towns and cities such as Chandigarh, Jaipur, Mysore, Indore, Coimbatore, Vishakhapatnam, etc are likely to see an increase in real-estate demand from the IT/ITES sector
- According to Nasscom’s projections, Tier II and Tier III cities, which account for about 29% and 5% of the total commercial space in FY07, respectively, will increase to 44% and 20% at the end of FY17
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