Realty Sector Looking Up

After witnessing an acute slowdown during the third and fourth quarter of 2008, the real estate sector has shown some recovery in the first quarter of 2009 ending March 31. If trends ofabsorption for the period January-March 2009 are any indication, a report prepared by PropEquity Research suggested there has been a surge in absorption in majority of the cities.

A recent study conducted by PropEquity across Mumbai, Bangalore, Chennai, Hyderabad, and Gurgaon in NCR reveals that absorption has been high among the residential new launches in the first quarter of 2009 in Mumbai, Chennai and Gurgaon. The study attributes the success rate in absorption to the price correction and reduction in unit sizes introduced by developers in these cities. However, Bangalore and Hyderabad, which witnessed fewer new launches during the period, experienced a low absorption.

The real estate sector experienced one of the worst kinds of slowdown in demand because of rise in the interest rates in the January-March 2008, by almost 2 percentage points, to 12%. At the same time, the prevailing prices of residential apartments in most of the cities made them unaffordable for most buyers. The situation further worsened after global financial markets got affected due to the failure of banks and b ro ke r i n g houses in the US and Europe. This also affected Indian real estate market very badly and demand plummeted.

According to the report, While October-December 2008 saw the nadir with absorption of only 1,113 units in Mumbai, the first quarter of 2009 witnessed the launch of over 14,478 residential apartment units and a corresponding absorption of 5,746 units. As against this, during October-December 2008, 3,096 units were launched, the report said. Similarly, in Gurgaon, during January-March 2009, 815 units were sold while 4,490 units were launched. As against this, in October-December 2008 quarter, only 587 units were sold from 3,708 units launched. Hence, both the absorption and launch figure showed sign of recovery.

The report says the main reason for increase in absorption of the new launched products is drop in the per sq ft rate and the reduction in the size of the units, which brought their prices within the affordable range of buyers. The report says most of these units were launched at a price almost 40% lower than the average pricing of apartments that were available in the first quarter of 2008. The average unit size of these apartments was also lower by almost 35%.

According to Samir Jasuja, founder & CEO of PropEquity, "The increase in this high absorption trend can be attributed to price correction and reduction in unit sizes adopted by developers. This encouraging trend is indicative that the markets are poised for a recovery if proactive measures are adopted by the real estate community to offer the right product at the right price to the consumers."

This trend continued in Gurgaon and Chennai where the new launches have witnessed high absorption after the unit sizes were reduced and average prices corrected by almost 15% to 25%. As anticipated, 61% of the total absorption in Gurgaon and 58% of the total absorption in Chennai in the first quarter of 2009 was constituted by the newly launched residential apartment units.

Source: Economic Times

Liquidity starts seeping back into India Inc

Liquidity starts seeping back into India Inc

Business Standard: May 21, 2009

Mumbai/New Delhi: After a near six-month drought, India Inc is finding some takers for debt and equity issues If trends over the past few weeks are anything to go by, banks are slowly shedding their aversion to financing new projects and foreign investors are heading back to India. Though private and the foreign banks are yet to step up lending in a big way, public sector banks have started financing projects. The result: Funding of over Rs 58,000 crore for large projects has been tied up in the last six weeks. The list includes Indian Oil’s Paradip refinery (Rs 14,900 crore), State Bank of India’s loan to NTPC (Rs 8,500 crore), Krishnapattnam Port (Rs 3,000 crore), BGR Energy’s engineering, procurement and construction work (Rs 4,000 crore), SBI’s loans to Vodafone (Rs 10,000 crore) and the Anil Dhirubhai Ambani group’s three projects (Rs 14,500 crore for the Sasan Ultra Mega Power project, Rs 2,000 crore for Delhi Metro Express and around Rs 1,000 crore for transmission projects in the west). “With interest rates falling, lenders are locking in deals at higher yields on the project finance side,” said Ravi Kapoor, Managing Director of Citigroup Global Markets. Infrastructure developers aren’t the only ones finding it easier to raise resources; companies such as Tata Motors are finding takers, too. A banker associated with the Rs 4,200-crore debenture issue, said the auto major had placed its entire debt in a day. Construction major J P Associates is also in the process of raising nearly Rs 4,000 crore from debentures. Companies that failed to raise equity in the aftermath of the September crisis — when several global investment banks crumbled under the sub-prime loan crisis in the West — had to opt for non-convertible debentures to meet their funding requirements. Although this market remained strong, with companies raising funds at up to 12 per cent, participation was limited to state-owned Life Insurance Corporation. Now, other banks are back in the market, said market participants. In April, companies collectively raised NCD issues worth Rs 25,000 crore. There are signs that the equity market is looking up too. Overall, bankers estimated that over Rs 40,000 crore of rights, QIP and debenture issues are in the pipeline. In the last six weeks, Unitech, DLF and Indiabulls — all real estate players — have together raised Rs 8,000 crore through qualified institutional placements (QIPs). “The private placement by the three realty companies is an example of foreign investors willing to invest in a sector that was perceived to be the most risky,” said Enam Securities Vice-president Yogesh Kapoor. He predicted that other sectors considered less risky will attract investment more easily from overseas investors. “The underlying sentiment has changed dramatically. Indian stocks, which were punished severely in comparison to other emerging markets, provide attractive value propositions for investors,” Kapoor added. Also, the election mandate that returned a less fragmented government at the Centre is expected to facilitate the reform process, so some state-owned companies will enter the capital market, which will increase the supply of good quality papers, Kapoor said. Some constraints, however, remain. “On the equity side, companies with good assets and a good track record on returns to shareholders are able to raise funds now. But the gate is not so widely open that anyone can get through,” said Gagan Banga, director, Indiabulls Real Estate, which raised Rs 2,585 through a QIP issue on Tuesday. Also, he said the cost of debt remains high “We have seen sentiments improve for the short-term but we have not found a solution for the medium to long term,” Banga said. Indiabulls Power Services is looking to raise around Rs 5,200 crore of debt to achieve financial closure for its upcoming thermal power plant. It has already raised its equity contribution of Rs 800 crore. Though Banga did not name any projects, funds for Sasan were tied up at 12.5 per cent, while SBI’s five-year loan to Vodafone will cost 13.25 per cent during the first two years. Going forward, however, things are likely to improve. “Investment in infrastructure projects will pick up substantially shortly. It was expected to start early this year but got caught in the election process. The National Highway Authority of India had stopped the award of new projects owing to the election code of conduct, but it is expected to start soon. This time, the response is going to be overwhelming as most of the projects have been redesigned,” said India Infrastructure Finance Company Chairman and Managing Director, S S Kohli. He added that benign interest rates will also make infrastructure projects more economically viable. “With enough liquidity in the system, there will be no paucity of resources,” he predicted. According to government estimates, infrastructure projects worth nearly Rs 46,000 crore will be awarded in the coming months. “The pipeline of projects, from sectors like power and gas, to raise funds is strong. In the current financial year, we expect to arrange around Rs 100,000 crore for infrastructure projects,” said A P Verma, managing director & CEO of SBI Caps, which was associated with the Tata Motors and Sasan fund-raising. Though companies are still under pressure and demand remains subdued, the sentiment, bankers said, has changed because the worst seems to be over, at least in the domestic market. “The mood was really down in the last quarter of 2008. By mid-January, it had started improving and by March there was clear visibility of the mood changing,” ICICI Bank Chairman K V Kamath told Business Standard in a recent interview. Although overseas fund-raising remains tough, given the high credit spreads, domestically banks are flush with funds, which can be gauged from the fact that for nearly six weeks now, they have been consistently parking around Rs 125,000 crore on a daily basis through the Reserve Bank of India’s reverse repo window.

Infrastructure Projects Starts Again....

Just two days after returning to power, Congress government in Andhra Pradesh has started releasing funds to infrastructure companies implementing ticket irrigation projects in the state, valued at over Rs 1.2 trillion. 

Construction companies, such as IVRCL, Nagarjuna Construction Company and Lanco Infratech, are carrying out these projects under the Jalayagnam Scheme. The three firms have orders worth Rs 8,000 crore on the irrigation project. Congress promised to continue the scheme if voted to power. 

The multi-purpose projects that are at different stages of execution were stalled for a while as the state had delayed payments to the companies carrying out the projects. Money for these schemes came largely from sale of land. But the downturn in the realty market hit the resource-raising ability of the state through this route. 
These projects were launched by the government in 2004, and are scheduled to be completed by 2012. 

“IVRCL is executing irrigation projects worth Rs 5,000 crore under the Jalayagnam Scheme. We received sanctions for the projects last week. While some projects may take about a year, few others may take four years to get completed. The delay in fund allocation was mainly on account of the model code coming into force before the elections. It has not impacted us as such,” said IVRCL chairman and managing director E Sudhir Reddy. The company has bagged about seven state-sponsored irrigation projects. 

Lanco Infratech too is implementing three projects, valued at Rs 30 crore. Nagarjuna Construction Company (NCC) is executing 11 irrigation projects under the scheme, valued at Rs 2,751 crore. “While we hold a 50% stake in these projects, the other 50% is held by Maytas Infra. All our running bills have been paid by the government,” said NCC executive vice-president (finance) Y D Murthy. 

Companies feared that these projects would be cancelled if a non-Congress government comes to power.

Wells Fargo Dumps Maytas Hill County

The world class Maytas Hill County SEZ, a flagship venture of Maytas Properties and the only venture of the company still afloat is now in trouble. US-based Wells Fargo, the first and only firm to have tied up with the SEZ coming up in Bachupally and had even located its office there, pulled down its signboard the day after Raju’s confession and is now planning to pull out of the venture completely, according to sources.

Sources said, the company has been on tenterhooks ever since the Satyam-Maytas merger fiasco unfolded and has been watching the developments closely ever since. Officials say they will “definitely pull out of the SEZ if the situation worsens’’. The banking firm has another office in Raheja Mindspace, Madhapur.

“The plan to set up the office there was made not just because of the SEZ but also the residential township. But now the main concern is the ability of Maytas Properties to raise funds and complete the project and looking at the situation now things are pretty bad,’’ says an official, mentioning that it will be easy for Wells Fargo, which is currently housed in an incubation centre (a temporary structure), to leave Maytas Hill County as “the impact on withdrawing will be low both in terms of money and time as the construction of the permanent structure is still in the initial stages,’’ he says.

It is also learnt that there have been around 50 cancellations in Maytas Hill County ever since Satyam-Maytas merger fiasco. These customers who had only “booked’’ apartments
and villas in the plush residential blocks have now pulled out. Other customers of the Hill County are now giving serious thought about selling their property, only that there wouldn’t be any takers for now.

“During the last two weeks I have been constantly receiving calls from my previous customers who are extremely worried and are asking for my opinion on what they should do with their property and whether they should let it go,’’ confesses an ex-employee of Maytas Properties adding that even if Maytas is able to sustain the township it will be difficult to convince the customers otherwise.

A group of about 100 customers of the township have now formed a clique and are planning to approach Maytas to sort out all their apprehensions regarding the viability of the project. “We are scared as all of us have invested lot of money and despite repeated assurances from the Maytas officials we are still very worried. The management has offered to meet all of us so we will probably have a discussion with them in the next few days,’’ says a member of the group who had bought a villa just seven months ago.

Even though the construction of the apartments and villas, which now cost anything between Rs 1.5 to Rs 4 crores, are now almost complete, investors are concerned about the possibility of Maytas being bought over by another firm. “There is a possibility that some other company might takeover Maytas as there seems to be no source of funds anymore for the Satyam-backed company. I have spent Rs 1.5 crores on my villa and now the only option is to shift into the place as very few people will be willing to buy it now even at the same price,’’ says another customer.

Maytas officials however denied that anyone has backed out of the township or the SEZ in recent times.

SOURCES:
Times Of India

Market getting Better with 20% price Correction

And finally... the Genuine buyers are back.

Property Market in Hyderabad has seen a 15- 25% drop in prices in the past six months.

The Genuine Buyer understood this very fact and going ahead in persuing their dream home.

With banks droping their Home loan intrest rates to 8%, people are in a hurry to find their property as per the requirement(Location/Budget/Ammenities etc..).

Reality Firms Stepping in to Educational Sector

At a time when the biggies of real estate are divesting non core businesses, a clutch of mid-level developers are chalking up plans to invest in the ‘recession proof’ education sector. 

In the last one month, four real estate developers have announced plans of setting up business schools across the country with the combined investment exceeding Rs 500 crore. “It’s a natural progression for a real estate developer to foray into the sector which offers such a tremendous growth potential. There is a shortage of supply in the education sector which we feel we can successfully cater to,” says Pranav Ansal, Chairman, Ansal API. 

With diminished demand for housing and a cash constraint, it’s a natural progression for many developers with available land banks. The Chennai based R. R Industries, Ahmedabad based Omega Realty, Delhi based Ansal Plaza and Kolhapur based Sanjay Ghodawat group are betting heavily on the `business of education’ to diversify their businesses; a model that has worked successfully in some countries like US and Canada. 

The Delhi based Ansal API plans to invest Rs 200 crore in next three to five years for setting up private schools, engineering institute across various centre in the country. The group has already tied up with e-learning service provider Educomp and has leased out its three operational schools in Gurgaon to Educomp. The realty major also plans to build school in townships being developed by them. 

Similarly, the Ahmedabad based Omega Realty plans to get into business schools - to be named as United World School of Business - with a proposed investment of Rs 105 crores. The three proposed schools in Mumbai, Delhi and Ahmedabad will commence operations in academic session 2009-10. 

Another builder to jump into the education bandwagon, the Kolhapur based Sanjay Godhwat Group plans to offer courses in engineering, management and also in the pipeline is an international school. The development of the 150 acre Sanjay Godhwat Institute will happen in three phases with an investment of over Rs 250 crore. 

The trend is being seen amongst the builders in south too. Chennai based real estate firm R. R Industries has tied up with National Management School (NMS) which is being set-up by US academics to start 25 business schools across the country with an estimated cost of Rs 9 crore. 

Experts say the reason for the rush into education is the burgeoning demand supply gap and also a logical extension into an adjacent category for builders who have the necessary wherewithal. 

Karan Khemka, principal, of a global strategic advisory boutique explains, “High rate of returns on investment coupled with huge imbalance in demand supply is attracting real estate players towards the sector who will be at ease in setting up the required infrastructure who already have land banks with them”. But the diversification won’t be an easy one, as similar initiatives have flopped in China.

Real Estate Market Outlook. Have Builders been too Sluggish to React? Hyderabad - March 2009

1.0 Coming to Terms with Hard Reality 

Builders are like middle aged women. It takes a woman courageous effort, to come to terms with the harsh reality of aging. You can continue to live in a make believe world for months or even couple of years…but natural aging just can't be stopped.

Those who read the signals and adjust their lifestyle, carry on with minimal impact, on their lives. Those who refuse to read signals and adjust lifestyle, end up in medical care. 

90% of women are smart enough to admirably adjust and are prepared well in advance. (Salutes to women on Women's Day!!). However, more than 90% of the builders react sluggishly to realities of the market which could affect, if not personal but definitely their financial health. 

2.0 Reading Signals Early and Reacting Swiftly 

In a booming market, builders were quick to react by resetting prices upward, every week. The possibility of making larger profits drove them to be extra alert! When market trend shows negativity, it is rightly expected that the same builders would be quick to act, to cut losses. After all, cutting losses is MORE IMPORTANT than making quicker profit. (In boom, whether one reacts quickly or not, there is profit, always. Its only the quantity of profit that varies. But in a sliding market, money gets burned. And that could be deadly)

And this is exactly where builders have gone, dreadfully wrong. Even now, many are in a "make believe world". Comforting themselves, with grandiose vision of early boom! Unfortunately, they are unaware that they are shooting themselves in the leg. And soon, the self inflicted injuries may aggravate.

Cutting losses by aggressive pricing in anticipation of worsening market, should have been the mantra 9 to 12 months ago. But the opportunity was lost due to the blind belief that boom is perpetual and negative trend, a flash in the pan. Builders offered small cuts from August 08 onwards which had absolutely no impact. 

There were opportunities as late as September 08 to offer aggressive pricing and convert leads to Sales. But once the negative trend firmed into solid slide, NOTHING could work. Its only in December 08, after a whole year and a half of negativity, that few builders started to react with larger cuts. But the horses had bolted in September 08 itself. And builders who reacted late, know that the stable is empty. 

For the smarter builders, the market has indeed given an opportunity to prepare itself for the future. Those who have learned the lesson that procrastination will cause misery, may be quick to act during a slide, after the next boom! 

3.0 Truth Hurts 

Developers are not expected to focus on the larger economy or keep track of business and employment trends, world wide. The primary business is to build and sell. And in the melee, they are either unaware or if aware, ignore emerging trends. 

Their outlook is very narrow and is intensively latched to generating sales at rates, that are not clued to trends. Even when there is appreciable fall in month to month sales, they choose not to look at the root cause. 

During last year, we had the opportunity to advise four developers on pricing as well as downsizing. The exercise reached nowhere with developers shooting down proposals which was based on emerging trends and established facts. These developers could have been winners and built projects, instead of losing crores, if they had acted diligently.

Since the market situation changes fast, suggested rate will have to be reworked and tinkered every month. What is saleable in May, could be too high in November of the same year. 

4.0 Case Studies 

Project 10Km from Gachibowli - Suggested pricing was Rs.2800/sft in May 2008. (Off course the rate is no more acceptable, today) Struggled with high rates and even now carries on, with the overheads mounting. 

Project near Guchibowli - Suggested rate for Villas under Rs.150L, a hot rate at that time in January 2008. For large plot with large Villas. But was priced close to 200L. Also we advised to reduce plot sizes to have Rs.100L villas, which was not agreed. Developer remained adamant and the plots too remain adamantly unsold. Meanwhile, money continues to get burned, since land was purchased partly with Blade fund.

Project 2Km from Narsingi - Suggested pricing level was Rs.2200/sft in April 2008. Actual launch by developer Rs.3150/sft. Naturally Struggled to book at the price and has been forced to bring price down drasrically 

Project near Guchibowli- July 2008. This is one project where the developers correctly decided not to launch, after discussions thus avoiding hardship and saving money

5.0 Ungainly Sales & Marketing Set Ups 

In boom time, any Tom, Dick and Harry in marketing/sales could be a hero. What is surprising was the profligacy of some developers to appoint too many people. And in such scenario, inefficiency spread, like wild fire. 

No more than one good guy is required to handle sales of 300 to 400 apartments whether its boom or bust time provided there is management and ground level support. Its absolutely wrong to expect sales to happen, by adding many more staff. If the sales comes down, its due to market situation not because there is insufficient staff! Nor is it because the efficiency of the Manager has come down. Its no use barking up the wrong cabin, while the rate cat is in the Chairman's Chamber. 

6.0 Current Outlook 

With the economy showing no signs of recovery and elections scheduled to be completed by Mid May, we can not expect any change in the trend which remains negative. As we had commented earlier, till there is appreciable upswing in economy, job security and new job creation, it would be foolish to expect Real Estate Sector to recover early. Global indicators currently point to couple of years of hardship, unless certain positive triggers happen, in between. 

The buyers are absolutely uninterested in housing loan rate cuts and freebees. They are interested only in "reasobable" capital cost. The price of properties will eventually settle at position of cost plus reasonable profit. And this is that part of finely wrapped real estate anatomy, which most developers still feel shy to look at. Its time for them to gather courage, lift the veil and take a deep, hard, close look!

The lowest price reachable in each project will depend on the cost structure of the project and risk associated with it. Though 2 projects may be close by, we can not expect price X in both, due to structural, specification, land cost, land ownership, approval and funding differences.