India Real Estate Insight

Tide turning? Indian consumer confidence creeps up in July

2012-08-08T04:27:00.001-07:00

There’s a little bit of positive news trickling in on the job front. Indian consumer confidence level rose in July on expectations of improved job security, a study by financial services provider BluFin shows.

The BluFin’s Consumer Confidence Index (CCI) rose to 41.1 in July from 40.3 in June. The index is a key ‘aggregate’ indicator that assesses the pulse of urban Indian consumers with regard to the economy, spending behaviour and employment. The index reflects pessimism at below 50 score and optimism above that and is based on nation-wide monthly surveys of 4,000 respondents across 18 cities.

The consumer confidence index has been continuously rising since December 2011 except for a dip in June this year. Last month, it had declined due to a fall in employment sentiment and subdued spending behaviour. Rashid Bilimoria, CEO, BluFin, said that while the urban Indian consumer is still very concerned about price levels, there has been an improvement in consumer sentiment towards spending across four key categories: durables, two-wheelers, fourwheelers and homes.

In terms of geography, Mangalore and Hyderabad lead the consumer sentiment score at 53.4 and 50.1, respectively, as the most upbeat cities while Kochi, Nagpur and Ludhiana are the most pessimistic cities with scores of 31.9, 31.2 and 31.1, respectively

Fitch says outlook on realty sector negative in H2

2012-08-06T22:31:00.000-07:00

The real estate sector faces a negative outlook in the second half of the year mainly due to sluggish demand, high construction costs and liquidity pressures, a report by Fitch Ratings said today.

"The domestic real estate sector continues to be negative for H2 of 2012, due to persistent sluggish demand, high construction costs and liquidity pressures," Fitch Ratings said in its report.

The agency observed that RBI's caution on interest rate cuts and high EMIs will continue to be a deterrent for potential home buyers.

"This, together with high property prices and elevated inflation, will keep demand sluggish," it said, adding however, the y-o-y growth of home loans by banks, which had been slowing since the past 12 months till April, picked up markedly in May and June 2012 and if continued, may help spur the sector.

It further opined that the general slowdown and subdued job growth in the IT sector, which

was at its lowest quarterly level so far, will hold back demand for commercial and retail properties.

Fitch also said real estate companies will continue to face margin compression from high construction costs for both building materials and labour.

"From last December to this April, the price of steel rose 13 per cent while cement by 12 per cent. Notwithstanding the trend of deleveraging since the third quarter of 2011, slowing demand, high costs and thus declining profits will keep leverage high for most realty companies," it said.

Reliance of real estate companies on operating cash flow will assume significance in the near-term as available funding options remain limited, the rating agency said.

Growth of bank lending to the commercial real estate sector was low at 1.5 per cent y-o-y in the June quarter, it pointed out and said, "Except for some pick-up in private equity, other funding options are restricted. As a result,companies that derive significant revenue from lease rentals will have a more stable credit profile compared to their counterparts, whose business model is based on outright sale."

Do vacation homes make for a good investment?

2012-08-06T22:23:00.000-07:00

You’ve just arrived at your favourite holiday hotspot, only to spend harrowing hours looking for a hotel room because you couldn’t book one in advance. What do you do? Perhaps think of buying your own house. It’s a tempting idea, especially if you visit the tourist destination at least twice a year. Does it make sense to buy a property if you end up staying there for just two weeks in a year?

Is it a good investment option or just a lifestyle choice? Should it be solely for your use or do you plan to glean income from it by renting it out for a few months? Here are some things you should consider before buying a house in a popular tourist destination.

Earning returns

Since you will not live in the house round the year, you could give it out on rent. However, the rental income from such a house is not consistent compared with regular properties since the peak tourist season lasts only 12-15 weeks in a year. So, if you are investing purely to generate rental income from your holiday house, you may end up struggling to find tenants in the non-tourist season. While the rental income during tourist season can be quite high, you will have to evaluate if it’s sufficient to cover the cost for the entire year.

Shveta Jain, director, residential services, Cushman & Wakefield India, says, “The average rental return does not exceed 2-7% annually for most holiday destinations. Most cities usually yield higher returns.”

You should also conduct a study on the prospective growth of the destination. Capital growth is typically the highest in towns that have a year-round tourist appeal and a well-established economic base. Also, if the place has the potential to attract people for reasons other than tourism, such as being a MICE (meetings, incentives, conventions and exhibitions) destination, there will always be demand for your property. It may also be easier to sell the house if it’s in a popular area.

Capital appreciation should not be the only criterion for buying property. You must also consider other factors, such as the market dynamics of the location, construction of other property, and accessibility to the area. So, make sure that the house you buy is close to a business centre, a beach or major tourist attractions.

Anand Narayanan, national director, residential agency, Knight Frank India, advises that one should buy a vacation home for the right reasons. “Vacation homes are usually lifestyle choices, not financial investments. If you want to invest in real estate, consider buying a property in a city rather than in an out-of-the-way destination,” he adds.

Maintaining the property

Keeping a holiday home in pristine condition is usually more expensive than for a regular house, whether you keep it locked for the duration you don’t live there or give it out on rent to different people. You will also need to furnish the house with furniture and appliances, which may need to be replaced regularly if too many people visit the place and are not too careful.

You will also have to hire a caretaker to ensure the security and upkeep of the property, as well as visit it regularly. After all, you don’t want to visit your home for a relaxing weekend only to find yourself cleaning it or being embroiled in a brawl with encroachers. All this work, including leasing the property to tenants, will also require you to devote ample time to it. So, invest in the property only if you can visit it frequently.

Due diligence

Whether you are buying a house to live in or visit occasionally, you need to conduct due diligence before signing the sale agreement. Check that the property has all the requisite permissions and that the current as well as future infrastructure development in the vicinity is sound. Om Ahuja, CEO, residential services, Jones Lang LaSalle India, says that unless the second house has essential facilities, such as water, electricity, sewage and road accessibility, it will not serve much purpose. “To avoid problems, it is best to buy a second home from a reputed developer who is known for building high quality projects,” he adds.

If you are buying land, you will have to consider the necessary land and title clearances, and ensure that it isn’t considered agricultural land. If the property is close to a wildlife reserve, you may have to obtain clearances from the environment department too.

Before you buy the house, visit the area a couple of times to judge whether it will sustain your interest for the long run.

Tax benefits on your investment

You can avail of all the tax benefits on your vacation home as on a regular house. If you have purchased the holiday home by taking a bank loan, the interest paid on the mortgage is allowed as deduction for tax purpose. If you take a loan to buy a house that is still being constructed, you can deduct 20% of the total interest paid during the construction period. This can be availed of till five years after the construction is complete and you take possession of the house.

You can also deduct the expenses incurred on the house, such as the municipal and property taxes that you have paid, from the rental income. Other than this, 30% of the net annual value (difference between rental income and municipal taxes) is also allowed as deduction. This amount is considered as expense incurred by you to maintain the property.

Expressways becoming realty hotspots

2012-08-02T23:36:00.002-07:00

Any layman would have the latest facts and figures about real estate and where all the realty action is centred in the NCR, if one were to go purely by the number of SMSs he or she receives about real estate every day.

Be it Dwarka Expressway, Noida Extension , Noida Expressway, Raj Nagar Extension, action in real estate is all concentrated in certain pockets of the Delhi NCR region

Sharad Jhingan, the chief operating officer (Pvt Equity Fund) at Lanco Infratech Limited, says: "In India, most of the development takes place around existing urban agglomerations, akin to clusters or pockets of projects. These projects may be promoted by different developers but are typically located in close proximity to each other with very little to differentiate. As a result , in normal times, developers chase customers and only in good times do we find the reverse trend, barring for some exceptionally good projects."

So where is the realty action concentrated at the moment? "The expressways and national highways is where all the property development is taking place," says Sushant Muttreja of Earth Infrastructure. The company recently launched two residential projects , one on the Dwarka Expressway and the other on the Yamuna Expressway . "People look for affordable housing and these can only be provided at these high-speed transport corridors that offer good connectivity and affordable options," Muttreja says.

People from different parts of India are continuously migrating into the Delhi NCR to study, explore new businesses , land a job, or for career advancement . Thus, the population here is increasing exponentially and there is a huge requirement for residential and commercial space, as well as social infrastructure, to cater to these burgeoning numbers.

No wonder then that the expressways and national highways are turning into hubs for realty action. These offer excellent connectivity by road and existing and proposed connectivity by the Metro network and the infrastructure being developed by the respective state governments and civic authorities here has given a boost to their realty profile.

Projects are mushrooming along the Noida-Greater Noida Expressway, the Yamuna Expressway, the KPMG expressway, NH-24 , NH-58 , NH-8 , NH-1 , the Dwarka Expressway, Raj Nagar Extension at a rapid clip and finding favour with end users and investors alike.

Take a look at the Dwarka-Gurgaon Expressway, which is an 18km stretch of 150-metre-wide road, starting from Dwarka Phase 2 and joining NH-8 near Kherki-Dhaula . The average rate is approximately Rs 3,600 per sq feet and sizes here range from 1,200 to 3,000 sq ft. The main developers here include BPTP, Ramprastha, Indiabulls, Uppals, Raheja, Sobha, Chintels, Spire, etc. Apart from the connectivity through the expressway, this area is also close to the IGI Airport and is preferred by pilots and senior staff of most airlines.

A spokesperson of the Raheja group, which has a couple of projects on the Dwarka Expressway, says: "Given the strategic advantage which this location enjoys, it was an ideal location for a number of residential projects . The area is very close to the international airport, Dwarka as well as the new diplomatic enclave, which makes it an attractive location for buyers, considered from every possible angle."

NH-8 , yet another significant hub of realty action, has the presence of several builders like Raheja, Emaar MGF, Vatika, Godrej, Anantraj, etc.

The price range here is Rs 4,200-4 ,500 per sq feet. This area commands a premium as the connectivity is already good and there is excellent social and physical infrastructure on the Dwarka Manesar E-way .

Raj Nagar Extension is another case in point. It is a unique case of not just geographical clustering of projects but one where instead of individually selling projects, a conglomeration of developers have jointly promoted the place over product.

Raj Nagar Extension, located on the National Highway 58 in Ghaziabad, is a unique experiment where 24 developers have come together to market projects in an area that is along a major transport corridor.

Manu Garg, spokesperson of Raj Nagar Extension Developers Associations and the director of Landcraft Developers, says: "This was possible because most projects in the area fitted into the affordablehousing category and attracted end users from the neighbouring regions who had traditionally been kept out of the market because of affordability issues. Today, the locality is extremely popular with middle and lower middle-class buyers as well as first-time young buyers who are looking to purchase a home to stay in."

The branding of Raj Nagar Extension is clear in the mind of the end user as 'quality housing at affordable rates' . There is uniformity in what is on offer: these projects are primarily targeted at the middle class with the 1- to 3BHK being priced between Rs 12 lakh and Rs 40 lakh.

Garg says: "Yes we are targeting the middle class here and all our projects are priced keeping in mind the affordability of this segment . That is the reason that end users bought into this project, which is visible in the way people have started staying here."

Marketing the area jointly has helped in cutting down on marketing cost of individual developers; also, developers coordinate with the authorities for expediting the development in that area.

When you talk of size, the total land area is huge it would take individual developers years to develop it on their own.

When many developers come together at one place, the development takes lesser time provided they work in the interest of people and not end up fighting. This makes the situation good for buyers, who not only get the home but also an area that is more liveable.

Is there any flipside in promoting the (location) place over the product? Manu Garg says that it has only been an upside by projecting the area because "we always maintained that all the developers working here have a common motto of making homes available to the middle-income segment. We have given freedom to people to buy from whichever developer they want and have ensured quality and uniform pricing for all units.

No one will lose if we stick to the principles of real estate - that is quality of construction, timely delivery , and competitive and uniform pricing."

There’s no end to legal hassles for Brand DLF

2012-08-02T23:32:00.001-07:00

Last month, more than a dozen investors dragged DLF to court, accusing it of hurting their investments in an east Delhi mall by converting it into an office complex.

Two months earlier, hundreds of home buyers in DLF’s project in Chennai collectively moved the Competition Commission of India (CCI) accusing the company of extracting additional money under the garb of taxes.

A year after the CCI, in a landmark judgment, slapped DLF with a Rs 630-crore anti-competition fine— which the company is contesting in a higher body—more such cases are piling up against the developer for a wide range of unfair business practices.

Rajeev Talwar, group executive director of DLF, says the very premise of the DLF Garden City (Chennai) buyers approaching the CCI is wrong as the issue pertains to a consumer case.

“Please take it to an appropriate forum like a consumer court…,” Talwar says, adding his company ‘honours’ its clients. “I must restore confidence of my customers and it is my duty to satisfy my customers first and not the media,” he says, adding some people are ‘litigant minded’ and are trying to find issues in the project even as the overall value of the apartments in the Garden City township has doubled to Rs 3,600 per sq ft over the years, from its launch price of Rs 1,850 per sq ft.

Many of the home buyers counter Talwar’s claim, saying the rate per sq ft was never below Rs 2,500. In 2005, partly lured by the hype of modern retailing that was touted as the next sunrise sector and party enticed by the rosy picture painted by DLF, Naveen Aggarwal invested Rs 1 crore in buying shops at an upcoming mall in Delhi’s Mayur Vihar.

Finally, after years of delay, when the DLF Galleria mall was ready to be opened, the slowdown hit the retailing business. As a result, DLF could not find appropriate tenants for the building, and it leased the space as office. This is now being objected to by the investors who had bought shops there.

“After five years of wait, there was no anchor tenant, no foodcourt as promised,” says Aggarwal, adding that DLF had promised supermarket Sabka Bazaar as the lead retailer in the mall. “It was nothing more than a concrete structure and we could not find tenants because of that.”

Now, Aggarwal along with 56 other investors, who bought outlets of various sizes, have dragged DLF to court, accusing the country’s largest developer for converting a mall into an office complex.

Talwar of DLF says it is a reality today that many of the retail projects did not take off due to tough economic conditions post the 2008 downturn. For example, DLF’s plans to construct the country’s biggest mall in Gurgaon, The Mall of India, has been postponed several times due to the prevailing slump, he says.

The buyers of DLF Galleria, he says, need to lease their space on their own and stop blaming DLF. “We are trying to find an anchor tenant and other retailers but the market is tough. We are exploring how to maximise footfalls into the mall,” he adds.

In another case, DLF had sold offices at Okhla in Delhi to investors in 2008 on the promise that the land use will be changed from industrial to commercial. The realtor even promised to return the money to investors with interest if it was unable to change land use in 12 months.

Property rally in India not over, Mumbai at risk; house buyers fret

2012-08-02T07:09:00.001-07:00

Not good news for those who want to buy a house,

Indian house prices, which have more than doubled in the past five years, will keep rising this year even as the economy slows although prices in India’s financial capital, Mumbai, look ripe for a fall, a poll showed on Tuesday.

The first such survey of 19 property market analysts, consultants, developers and data firms taken over the past few weeks pointed to a median 7.5 percent rise for house prices this year in Asia’s third largest economy.

This comes despite a slowdown in home sales and a rapid deceleration in economic growth to 5.3 percent at the latest read, its weakest in nearly a decade, from a nearly 10 percent pace before the global financial crisis in 2008.

Yet the expectation for price rises in cities such as Mumbai coincides with some of the strongest conclusions ever in Reuters housing market polls worldwide that a property market is overvalued.

That includes polls taken before the historic U.S. housing market crash sent prices plummeting by more than a third and triggered the financial crisis.

There is no demand, there are no fundamentals to these prices, said Pankaj Kapoor, founder and managing director at Liases Foras, a real estate research firm in Mumbai.

(In Mumbai) sales have continuously been going down. It has 37 to 40 months of inventory lying in the market. No efficient market can maintain more than eight months of inventory.

But there appears to be little hope for prospective homebuyers in a market which analysts rate as too expensive in the urban centres of Delhi and Mumbai but that is still being driven by widespread expectations for hefty capital gains.

Paresh Patnaik, a man in his 40s, says that despite having a good paying job, he cannot really think of buying a house, even though his need is urgent and banks may not give him loans due to the age factor. He has a kid and a wife while his parents are in Orissa, but he sees no hope for himself, with renting the only option till even after retirement. Unless, he says, “A miracle happens and the land sharks and the politicos in Mumbai are disciplined and the price falls.”

He could well be speaking for most of India, where the demand is huge, but the money is too tight to mention.

Developers, who had reaped profits off a booming market, say relatively high borrowing costs and an average 30 percent rise in the cost of cement, steel and labour over the last few years, stops them from lowering prices.

In addition, some analysts say, speculators with deep pockets act as a buffer, preventing prices from falling or even levelling off and also shutting out many buyers who just need a home.

INVENTORY OVERHANG

India has led the list of top-performing housing markets globally with a 284 percent real rise in prices since 2001, which is equivalent to an average annual rise of 14 percent, according to the Lloyds TSB International Global Housing Market Review.

Though trends vary by city, prices in most Indian urban centres have doubled since the property market boom began in 2006-07, driven by growing numbers of middle class Indians looking to invest in real estate as well as speculators.

But prospective home buyers are being held back by a slowing domestic economy and great uncertainty across the globe.

Although in nominal terms house prices are expected to rise, once you adjust for inflation, which is more than 7 percent, prices in real terms are stagnant, said Samantak Das, director of research and advisory at consultant Knight Frank.

The economic situation in India and abroad is not giving enough confidence to homebuyers, who feel it is better to wait and watch.

The Reserve Bank of India left its key repo rate steady at 8 percent on Tuesday. But it cut its growth outlook and raised inflation expectations, suggesting it will move cautiously on rates in the near term.

Interest rates on home loans, which range from 10 to 14 percent, will probably not fall any time soon either.

With prices rising and buyers required to pay around 25 percent of the total cost of the house as a down payment, it has become increasingly difficult to buy a house.

In Delhi and its surrounding National Capital Region (NCR) that includes Gurgaon and Noida, average house prices are expected to rise by at least 7 percent this year, even though demand for homes has fallen significantly over the last year.

Sales in Delhi and NCR are down 20 percent in 2011 from a year earlier, according to consultant Jones Lang LaSalle India’s Real Estate Intelligence Services.

Older stock is not selling and there is a huge inventory overhang, said Sachin Sandhir, managing director for the Royal Institute of Chartered Surveyors in South Asia.

Unavailability of land, delays in project approvals and low floor space index (FSI) norms are constraining supply in certain markets, thereby affecting the ability of prices to settle at a more rational level.

Unlike China, which has adopted a slew of measures to cool its once red-hot property markets India still lacks regulation to stem price rise and tackle the shortage of affordable housing for its burgeoning urban population.

PROHIBITIVELY EXPENSIVE

Respondents overwhelmingly said Mumbai property prices were highly overvalued. They gave Mumbai property an overall rating of ’8.5′ on a 10-point scale where ’1′ is very undervalued, and ’10′ extremely overvalued.

Half of the respondents rated it a ’9′ or ’10′, compelling evidence of house prices being prohibitively expensive. This is the strongest conclusion seen in any Reuters housing market poll, even those taken before the crash in the U.S.

Mumbai, where a 2,000 square foot flat in the city’s posh southern district can cost more than $3 million, the same as a two-bedroom flat in central London, has seen home sales slide by 45 percent from a year earlier.

Eight of 18 analysts in the poll see average Mumbai prices rising, eight see them falling and two expected no change. One respondent said Mumbai house prices will plummet more than 20 percent this year.

Mumbai was top choice for city most likely to experience the steepest price fall, with a median 12.5 percent drop expected this year.

As the city is grappling with drastic fall in the transactions with reduced funding options, the price correction is the only option left with the developers, said Sanjay Kumar Agarwal, general manager at CARE Ratings in Mumbai.

However, it will be some time before this will make housing affordable for the majority of working class citizens. More than half of Mumbai and its suburbs’ population of more than 15 million resides in slums. Respondents rated Delhi a 7.5 and NCR a 7.0 on a similar scale of relative expense. Residents in these industrial towns on the outskirts of Delhi struggle with eight hour power cuts and water shortage in the scorching summer as the existing infrastructure proves inadequate.

New launches of residential properties across major cities fall by 44% in second quarter

2012-08-02T07:07:00.001-07:00

Residential property launches across major cities fell by nearly 44% to 17,500 units in the second quarter of 2012, due to delay in approvals, significant inventory in certain locations as well as postponement of project to coincide new launches with the festival season, says Cushman & Wakefield (C&W), a global real estate consultancy, Cushman & Wakefield (C&W).

Of the 17,500 units launched 70% catered to the mid segment as it continues to see maximum demand from end users and investors. The financial capital of India saw the sharpest fall of 73% in new residential property launches, followed by Bangalore and Chennai at 67% and 47% respectively.

Other cities including Kolkata and NCR-New Delhi saw new residential property launches fall by 29% and 24%. However, Pune and Hyderabad saw increase in new launches in the second quarter.

“Going forward, we anticipate an improvement in the economic scenario will provide the much needed impetus to boost the demand. Values are expected to remain stable in the short term and the developers may also offer attractive options and incentives to attract buyers during the festive season,” Shveta Jain, Director, Residential Services Cushman & Wakefield India said.

As per C&W, the residential sector witnessed steady demand across almost all the major cities with capital values in majority of the micro markets remaining stable across high end and mid end segment properties during the quarter.

Meanwhile, the luxury housing segment continued to witness demand with a few high value transactions being concluded in cities like Mumbai and NCR. Some of the prominent micro markets that recorded appreciation include Gurgaon – NCR, in which the luxury segment witnessed a rise of 10% in capital values.

Capital values of mid segment properties in areas like North and South-west Bangalore recorded an increase of 13% and 10% respectively; Powai in Mumbai saw an appreciation of 12% in 2Q 2012.

The Plight Of Satellite Towns In India

2012-08-02T07:03:00.001-07:00

A close look at the residential construction activity happening in and around India’s top-tier cities reveals that suburbs and satellite towns bear a herculean load of meeting the housing demand. Time and again, I have noticed that these outgrowths of cities like Mumbai, Delhi, Chennai, Bangalore and Kolkata, etc., provide three to five times the number of houses as compared to their parent cities.

Every year, when the Mumbai Metropolitan Region constructs about 24,000 houses, Mumbai City builds 1,000 houses, her suburbs build about 5,000 and the remaining 18,000 are constructed in her satellite towns of Thane and Navi Mumbai. Chennai constructs about 18,000 houses annually, of which only 3,000 are in the city limits, while a whopping 15,000 are in the suburbs and satellite towns.

Housing construction on the outskirts of India’s metros begins well before the necessary infrastructure has been constructed. This happens because demand for houses in big cities is high enough to make even hastily established projects financially feasible for developers.

The main reason for this is affordability. The absorption of affordably priced projects is literally guaranteed, no matter what the drawbacks of the location are, and the land prices are much lower than they are in areas closer to city centres. Often the peri- urban council bodies lack resources as well as vision and willingness to implement such structures.

Many satellite towns are poorly equipped to handle the relentless demand to properly facilitate their jurisdictions. While they realise the problem and may have done much planning, we have seen little implementation on the ground.

Also, city municipal corporations have to work together with the state government, which results in bureaucratic disconnect and the involvement of multiple agencies. Sourcing funds generally means creating public-private partnerships, and local agencies are not always empowered or experienced enough to do so.

Their plight is the same everywhere
Meanwhile, most areas in the far suburbs continue to suffer from a lack of proper roads, water, electricity, sewage systems, public transport, hospitals and schools, etc. Moreover, many of these areas do not have strong economic drivers to encourage the implementation of infrastructure projects. These drivers exist mainly in their parent cities. These areas serve solely as residential bases for those who cannot afford to live closer to their workplaces in the more centralised locations.

Precautions and Remedies
Because the demand is so high, end-users are forced to overlook the lack of infrastructure and move in regardless of the inconveniences they will face afterwards. However, residential property buyers whose circumstances require them to seek properties in these less-enabled locations can still ensure that the necessary infrastructure exists, at least at the project level.

The city agencies should be innovative and use market dynamics to raise and deploy funds for infrastructure. Much can be learned from the Ahmedabad Urban Development Authority (AUDA). The AUDA model is built around acquiring a large tract of land, enabling infrastructure on it and returning this part of the property to the owners as developed land that has immediate market value. In return, they retain the remaining portion for further development of their own projects.

As the conventional revenue sources for satellite city agencies are drying up, they must wake up and act proactively to stop the haphazard growth propelled by the market forces and offer an enhanced standard of living and quality of life to the vast majority of the people who create wealth in parent cities for its fewer and more privileged citizens.

32 million sq ft of office space expected to be absorbed in 2012: JLL

2012-07-30T22:03:00.000-07:00

The global economic slowdown is pushing corporates to postpone their expansion plans, which is bad news for the office space leasing segment in India.

Even though construction activity is expected to continue at a fast pace which would mean 19% higher completions in 2012 compared to the year before, take up of space is expected to remain subdued during the year, says a new Jones Land LaSalle report called Indian Realty - Through the Looking Glass.

"We expect 32 million sq ft of office space to be absorbed in 2012, registering a decline of 12.5% over 2011," says the report.

The year 2011 saw record completion of office space projects as well as take up of space. About 37 million sq ft of space was absorbed in 2011, higher than the previous peak of 33 million sq ft achieved in 2008.

Major Indian cities saw strong preleasing of office space in under construction buildings. Many corporates decided to consolidate their office space by vacating more than one smaller spaces in central business districts of cities and instead taking up one or more larger spaces in cheaper secondary and suburban districts.

A decline in absorption is expected in 2012 because of corporates postponing their expansion plans. "Demand from domestic occupiers, although robust so far, is also under question due to concerns over domestic economic growth, delays in policy reforms, a projected slowdown in corporate earnings and moderately high core inflation. However, large IT occupiers seeking to consolidate or relocate are expected to generate significant demand for IT SEZ and IT buildings in peripheral districts," says JLL in its report.

DLF to sell its 17.5-acre land in Mumbai's Lower Parel to Lodha Group and a PE player for Rs 2,800 crore

2012-07-30T22:02:00.002-07:00

DLF, the country's largest developer, will sell its 17.5-acre land in Mumbai's Lower Parel to Lodha Group and a private equity player for about Rs 2,800 crore, ending its long-drawn bid to break ground in India's financial capital.

The deal will help the Delhi-based builder pare part of its burgeoning debt that had reached Rs 22,725 crore by March 31, a top company official said. "The legal documentation will be completed in the next one week," he said.

The buyers have paid an advance, and the final terms of the deal are currently being worked out, the person said. DLF will get the entire Rs 2,700-2,800 crore in one go within two months.

The cash-rich Lodha Group, which is building the world's tallest residential tower in Mumbai, will bring in Rs 1,000 crore, while the balance will be paid by the PE fund, the person said without naming the private equity fund.

Lodha Group MD Abhisheck Lodha confirmed he is part of the transaction, but refused to share details of the deal. "We aren't in a position to give any comments on the transaction," he said through a mobile text message. A spokesperson for DLF said the company does not comment on speculation.

DLF bought the land for Rs 702 crore in an auction in 2005 from state-owned National Textile Corporation. It had changed its developmental plans for the plot thrice—from building a retail mall to commercial office buildings to finally a residential project—before it decided to sell it a year ago.

DLF and many other builders piled up huge debt when demand for residential and commercial property fell during the 2008-09 slump after years of boom when the sector grew rapidly.

DLF Selling Non-Core Assets to Cut Debt

The company is in the process of selling several non-core assets including land parcels, SEZs and some office buildings, to reduce its debt.

DLF had been trying to sell the Lower Parel land for about a year, but was finding it difficult to get the right value. Potential buyers renewed interest in the asset after new development control rules in Mumbai were notified in January, which cleared the air about how much space can be built on the land parcel and the amount of extra FSI that can be bought.

Lodha and DLF have been in talks for three months. Other builders such as Vallabh Sheth, Piramal, Runwal and the Wadhwa Group, and sovereign funds like GIC and Macquarie too had shown interest in the land. Lodha—which has several landmark projects in the Lower Parel area including the 117-storey World One residential tower—plans to build a highend residential project at the new location, an official said.

Besides luxury homes, the company may also construct houses for the mid-income group because of a glut of top-end apartments in central Mumbai, the person said. A recent ET report showed that close to 60% of Mumbai's luxury apartments, under-construction and fullybuilt, remain unsold because of rising prices and oversupply. There are currently 3,300 luxury apartments being developed in Mumbai.

Lodha-DLF deal will be the largest land deal where the seller gets the entire payment in one go. BPTP's Rs 5,006-crore buy of a land parcel on the Noida Expressway, which is the largest deal so far in the country, involved staggered payments over several months and years. DLF is also working on two other-high value transactions, including the sale of the luxury hotel chain Aman Resorts (barring the Delhi property) and its wind power business, to raise over Rs 3,000 crore.

In an analyst call after its fourth quarter results, the company's management said it has increased the overall target for asset divestments by an additional Rs 5,000 crore in the medium term. DLF's net profits dipped 26.8% in 2011-12.

Why property prices rarely crash

2012-07-30T21:57:00.005-07:00

When do you put your home on the block and move to an inexpensive destination? When do you look for a buyer for your second home? Only when you fear losing your job; only when you sense you may take a long time to wriggle out of the mess your business has run into. Luckily, not too many have suffered such dramatic reversal of fortune.

It certainly hasn't reached a staggering number - and possibly will not in the near future - that will soften ready-home prices. The pangs of distress that rattle property markets aren't everywhere. And in pockets where the pain is felt, the sufferers know how not to make it too visible.

Properties aren't stocks: a share selloff by someone battling bankruptcy will pull down the price of the stock, leaving all shareholders poorer; but the sale of an apartment (by someone who has fallen into bad times) - even at a price that's well below the going market rate - is unlikely to impact prices of other flats in the building, let alone cause ripples in the property market.

In residential properties, there are markets within the market; and in that slice of the market - where apartment owners are typically end users - prices are most sticky.

There is another part of the market (particularly in Mumbai) where prices are high and have stayed high, albeit artificially. These are residential properties where the builder has completed construction and multiple approvals are in place. Such apartments command a stiff premium.

This is a sellers' market and no amount of negotiations will fetch you a great deal. With a large numbers of constructions awaiting some clearances, the ones which have all the clearances are in big demand. Indeed, less than 10% of constructions in the country receive all approvals on time.

Of course, there are projects where booking is on and you may walk into the developer's office with your cheque book, displaying a genuine intention to buy with some upfront cash. These are constructions in the launch and pre-launch stages.

There will be some room for bargaining if the developer is convinced that you are a serious buyer, not just someone who is casually snooping around. But there are risks: you don't know by when all clearances will be in, how long the construction may take, and by when you can move in.

While deals are fewer and many builders are feeling the heat, it may be an error to believe that a fire sale is about to begin. Large developers have holding power, and even smaller ones figure out ways to roll over loans and keep off creditors by borrowing from private financiers roped in by wealth management arms of brokerages and non-banking finance companies.

A few have unencumbered land (bought a decade ago) which can be leveraged to raise funds, some may go for fresh borrowings through a subsidiary to service old loans. It's another point that many of these wealthy, private lenders may have wrongly assessed the value of the land and property pledged, and that some of them may end up losing money when a builder goes belly up. But unless money markets run dry, stocks crash and there is widespread joblessness, such defaults will not rattle the overall property market.

Don't always judge the financial health of a builder from analysts' reports on the stock of the company he owns. First, the cash received by developers - which is as much as 20-25% of the property value - is not captured by analysts who largely depend on balance sheets. Second, the land on the books is mostly valued at historical cost.

Also, smarter realtors are unlikely to repeat the mistakes of 2006-07 when all property firms were keen to list their stocks. Advised by investment bankers, they went on a land buying spree.

The arithmetic was simple: a land bank on the offer document coupled with the floor space index with the builder is a tool for fabulous profit projection: the company will sell X number of apartments at Rs 10,000 per sq ft against a construction cost of Rs 3,000.

So purchasing land parcels by paying 20% of the money was one sure shot road to improve valuation of a company that's dressing up for an IPO. In October 2008, when markets froze, many builders were unable to pay the next instalment on the land they 'bought'. Most of them had focused on high-end properties for which there were no takers. Today, many builders have a mix of high-end and mid-income properties to lower the risk.

Ever heard of a builder going to the CDR ( corporate debt restructuring) cell? Chances are not many will. Lenders will take a long time to pull the trigger and acquire properties. At the end of the day, some developers will sell land and a few will fall by the wayside. But many will manage to rope in a few investors to stay afloat and hold on to high prices.

Developers don't mind paying a small penal interest if the properties are not delivered on time; there is no law - and there won't be one in a hurry - where the builder is made to pay a huge penalty for the delay.

And, most importantly, there will always be some buyers even if transactions slow down: the demise of defined-benefit pension and the absence of social security net will compel the salaried to buy properties - the only asset they believe will not let them down.