Monday, December 31, 2007
Small cities at global crossroads
A global city is able to use its open spaces, heritage structures and ethnic enclaves to tumble wash different subcultures and create a new experience. This is a luxury smaller cities do not have.
Dwarka, Rohini, Virar, Hebbal and Tambaram have little in common, except for one thing. They are all outliers of that phenomenon: the global city. Yet each time the metro, bus or the local train pulls out of these remote places and makes its way to the city centre—be it New Delhi, Mumbai, Bangalore or Chennai—the aspirations of people inside the belly of those steel monsters become no different from people staying in more posh places of these cities.
Trains and roads of a global city serve as the neurons of a city but to create the urban experience they need to carry the ebb and flow of a city's culture. Actually, make that cultures. Global cities are able to take a million sub-cultures, each insufficient in itself, and create a whole that is more than the sum of its parts.
Rome perhaps, was the first global city. It had the pull that could draw in an Israeli charioteer or a Spanish slave seeking their fortunes. That is perhaps the one identifying mark of a global city—it is a magnet to fortune seekers from all over. Will a Vietnamese doctor come to work in Mumbai, or will an Iraqi shipping magnate want to set his base here?
Most likely, no. Then, no Indian city really qualifies for the label then. Not that the concept is new to India. Bombay and Calcutta were magnets a few centuries ago- certified by the variety of names borne by heritage buildings. David Sassoon, a Baghdadi Jew built up a business empire in India. Though after several decades of navel gazing, things had come to a pass where Indians seeking their fortune would end up in places like Dubai and Singapore. Now though, our metros are trying to make up for lost time.
Many smaller cities in India dream of becoming another Mumbai, Delhi or Bangalore. They may indeed be able to create better physical infrastructure – roads, rails – but can they create a global city culture?
"I don't think smaller cities in India can and will become large metros and certainly won't be global," says Mr Abhay Pethe, professor of urban studies, Mumbai University.
To understand where Pethe is coming from, it is essential to realize that all global cities resemble the last few overs of a one-day match. They carry an air of the unexpected about them. Walk into any of these cities and it is easy to believe that anything is possible. This comes from attracting a huge variety of people different cultures (world-view) and who possess differing skills: banking, musical or even culinary.
In a smaller city, the worlds of these different skills would have never come together. A global city is able to use its open spaces, heritage structures and ethnic enclaves to tumble wash different subcultures and create a new experience.
This is a luxury smaller cities do not have because even while they try and attract different ethnic groups, difficult as it is, they also need to appear culture neutral as well. Hyderabad is one city that has seen a huge rise in migrant population because of IT boom. “I think Hyderabad needs more time to absorb them while they need more time to Hyderabad,” says Dr Balaji Utla, CEO, Satyam Foundation, a Hyderabad-based NGO that works in urban areas.
"Becoming partly denationalized is one feature that makes a city truly global. This does not mean that national culture has to go. On the contrary: there may well be an accentuating of national culture, as it becomes inserted in global tourism. But the national coexists with a growing number of other cultures," says Saskia Sassen, professor of Sociology, Columbia university who also coined the term "Global City" in a book having the same title. Sassen's research shows that all global cities have been driven by a major increase in the population of high income professionals, male as well as female.
Such a profile of people does not wear its cultural affinity on its sleeve. This is a departure from the past. Take, for instance, Mumbai. "Its ethnic areas of Kalbadevi, Girgaum, Mohammed Ali Road, Parsee Colony allowed a psychological comfort to the new arrivals to the city," says Sharda Dwivedi, historian and the co-author of a book on Mumbai. The ancient city of Delhi too has such a layered existence.
"Delhi is a premier example of a city where the new energy or order, represented by the structured bazaars in the various malls and the old energy of circularity, represented by open bazaars of Sarojini Nagar Market and Old Delhi both flow together,” says Navina Jafa, secretary general of Foundation for Arts, an NGO. In the earlier times, the global city's two-tier structure of a culture-neutral surface and the sub-cutaneous world of multiple ethnicities was easy to develop and easy to navigate. You knew where to go to. No longer.
Global city of today is so uniform looking that it might be difficult to tell Singapore from Shanghai. “People living in the city seem to like to make their success visible in lifestyle, clothing, going to luxury restaurants, driving fancy cars—this is quite different from the old rich who preferred a more discrete public presence. Because of this predilection of make their status highly visible though consumption and lifestyle, they create a demand for new types of urban spaces. Architects and real estate developers seem to be happy to build the corresponding environments,” says Sassen. That's why the mall, the lounges and the glass buildings.
So what do global Indians think are the zeitgeist that makes for a global city? Liquor baron Vijay Mallya reportedly has 42 homes all around the world. He says his favorite city in the world is Paris- this for obvious reasons like Fashion, culture, wine, food, history, romance and ambience. But also, he says because of the attitude of the people- the C'est la vie (that's life) thing.
Commenting on what's the intangible that makes a city special, he says it is the energy levels of the people, the ability to go out eat/drink and party. This is very important. Mumbai, for instance, he says, has a lot of energy. Bangalore he says is losing its buzz. It has great people, but how can you have life in a place where everything shuts down at 11 pm? By that measure, can Ahmedabad or any other city in Gujarat ever be a great city in the global sense. Well, expats say the hardship allowance for their tenure in the state is more than what they make for a stint in Vladivostok!
Money can you buy you a bridge, a road a flyover, a train or even an airport for a plane, but the city's air of anticipation is a priceless commodity and it will be a while before smaller Indian cities manage to breathe it.
Bangalore leads in commercial space
Bangalore continues to lead in commercial real estate space absorption with demand of over 13 million square feet followed by National Capital Region (NCR) with 10.6 million square feet and Chennai with 8.7 million square feet.
According to Cushman & Wakefield’s annual year-end report, country witnessed absorption of approximately 34 million square feet in the Tier 1 cities alone, with another 16.65 million square feet of pre-lease commitments in 2007, reflecting an increase of 22 per cent in demand for commercial real estate.
The year 2006 witnessed a cumulative demand of 41.46 million square feet across the seven cities of NCR, Mumbai, Bangalore, Chennai, Hyderabad, Pune and Kolkata. Prime Grade-A properties continue to be in short-supply and the demand for these has resulted in such large pre-commitments along with steady or appreciating rentals, the report added.
According to Sanjay Dutt, Deputy Managing Director, Cushman & Wakefield, “IT/ITeS has been the focus of the Indian real estate sector for the last four years and though the demand for commercial space remains consistent as compared to the previous year, the supply has increased significantly in anticipation of stronger growth and demand.”
“Moreover, the Tier-2 and Tier-3 cities like Mysore, Mangalore, Coimbatore, Ahmedabad, Kochi, Indore and Nagpur also provide lower operational costs with the Indian IT majors already venturing into them. While the impact of this is yet to be witnessed in the Tier 1 cities due to the bludgeoning demand, the future may have a different story. The retail and residential developments in the smaller cities have further added to their advantage,” he added.
Small realty firms to benefit from REITs
As real estate investment trusts (REITs) are set to become a reality in the country, small and medium property developers, who constitute 80 per cent of the total realty industry, can now breathe easy.
These developers, who were hit by the credit squeeze following strict measures of the Reserve Bank of India, can now sell some part of their properties to REITs and liquidate.
“A lot of medium and small developers, who are holding income generating assets, can unlock their value by transferring some of the assets to professionally managed REITs. A large avenue is being opened for these players who cannot go to foreign exchanges to list their projects,” said Jai Mavani, executive director, KPMG India.
The second-rung developers were badly hit on funding due to anti-inflationary measures such as a ban on external commercial borrowings in townships, restrictions on lending to buy land, increase in interest rates and Sebi’s clampdown on realty IPOs.
“REITs will create a healthy secondary market for these firms, which are hit by credit squeeze and restriction on foreign capital infusion,” said Mavani.
Ganesh Raj, partner, Ernst & Young, adds, ‘’Earlier when the smaller developers were building properties in tier-II or -III towns, they could not sell for high returns since there were not many takers, but now they can sell their properties to REITs, if they are strategically placed.”
Meanwhile, big real estate companies may go ahead with their listing of REIT-type structures on the international exchanges since they have opted for listing their own trusts, while the proposed Indian REIT norms do not allow them to fully invest their funds in their own assets.
Companies such as DLF, Unitech and the Embassy Group have already announced their plans to raise nearly $5 billion from the Singapore Stock Exchange through REITs next year.
“Sebi’s guidelines stipulate that a trust cannot have exposure to more than 25 per cent of realty projects by a group of companies. This limits a big property company from listing its own trust in the country. Hence, exchanges such as the Singapore Stock Exchange are always preferred, despite less rate of returns of 4 to 6 per cent compared with 10 to 12 per cent in India,” said an executive of DLF, which is listing a $1.2 billion REIT on the Singapore Stock Exchange in January 2008.
“Even a big developer without a business plan of listing the REIT abroad can sell a portion of his developed properties to a trust,” the executive said.
Analysts also believe that the component of black money in smaller companies could come down significantly since institutional money is expected to flow into REITs and these structures demand a high level of disclosure and transparency.
“Normally, buyers invest in properties in unaccounted money due to arbitrary demands of developers and their own needs. Since institutional money is expected to flow in REITs, it will curtail the black money element. However, REIT structures always stipulate a high level of disclosure and transparency,” said a property consultant.
Though the real estate industry welcomed Sebi’s move, many are wary of tax treatment to REITs in the country.
“If the structure was that of a mutual fund, there would not have been a need for a separate tax treatment. But because they are trust structures, they have to pay stamp duty and registration charges when they invest in properties, resulting in their costs going up. Stamp duty being a state subject, there should be uniformity in the matter,” said a tax expert.
The Securities and Exchange Board of India on Friday proposed the setting up of REITs, paving the way for a wider participation by retail investors in the booming real estate sector.
Under the draft guidelines issued by Sebi, scheduled banks, public financial institutions, insurance companies and corporates will be eligible to set up an REIT, with an initial networth of Rs 5 crore.
REITs are listed entities, similar to mutual funds, that use collective funds for owning and managing investments in real estate projects.
Houses for middle class remains a dream
Property developers turned billionaires this year as they mopped up money from the bourses, but the middle class failed to find a decent place to live in cities after interest rates hardened amid firm real estate prices, causing a slowdown in housing market.
However, the office and shopping mall rentals continued their upward trend. The pace was more vigorous in Delhi and Mumbai, which got reflected in a consultant's report that put India's financial capital at second place in the list of most expensive office markets in the world with Delhi at eighth.
The real estate industry, pegged at $16 billion and estimated to reach $60 billion by 2010 with a growth rate of 30 per cent, entered the Dalal Street in a big way and floated 12 public issues in the year which helped it to emerge as a leading sector in terms of fund raising.
Leading the pack was India's biggest realty developer DLF, which launched the country's largest IPO of over Rs 9,000crore, followed by HDIL's Rs 1,700 crore and Puravankara Projects' Rs 850 crore. Bombay Stock Exchange launched "Realty Index" to recognise the growing importance of the sector.
The sector's strength is evident from the fact that there are seven real estate barons in a Forbes list of 54 Indian billionaires. DLF's K P Singh, Unitech chairman Ramesh Chandra and Omaxe's Rohtas Goel were among the richest Indians.
"Kushal Pal Singh is fourth on the 2007 Indian rich list with a net worth of $35 billion, making him the world's richest real estate developer," Forbes said in November.
Industry was able to attract significant interest from domestic and foreign investors keen to be a part of the real estate growth story that started from 2005 when the foreign direct investment norms was liberalised for the sector.
Investors participation was not restricted to only public offers as many private equity deals were struck. For instance, DLF sold 49 per cent stake in its seven townships to Merrill Lynch and Brahma Investments to raise Rs 1,675 crore.
The private equity deals also happened at entity level. Wachovia Corp, one of the largest financial institutions in the US, picked up 15 per cent stake in Vipul for Rs 234 crore.
Raising funds from the public and private equity markets became more attractive for developers in the wake of several regulatory decisions that restricted debt options to industry.
The Reserve Bank of India increased the risk weightage to discourage credit to realty sector. The government curtailed access to overseas borrowings for integrated township.
Despite monetary steps, realty demand did not dampen to the desired extent as the growth in income provided the cushion, Crisil Principal Economist D K Joshi said.
Echoing similar views, global realty consultant Jones Lang LaSalle Meghraj Chairman Anuj Puri said: "There was slackness in the housing demand. However, the overall demand still continue to outstrip supply as a result of which prices either remained firm or in select location went up."
Puri noted that despite expectation of property prices cooling off in retail and office segments during 2007, rentals rose by average 20 per cent because of delay in supply.
Demand-supply mismatch coupled with increased confidence from investors, notwithstanding the concerns expressed by the government and its various agencies over realty sector being overheated, was more than enough to enthuse developers to go for expansions and also gear up for future by acquiring land.
Among the big-ticket land deals, DLF acquired 38 acre at Rs 1,675 crore in the national capital. Mumbai Metropolitan Region Development Authority attracted bids over Rs 2,700 crore for three plots in Bandra Kurla Complex.
The year also saw real estate industry announcing an investment of more than Rs 1,00,000 crore across the country. DLF bagged a township project spread over 9,000 acres in Karnataka, which it would develop in partnership with Dubai-based Limitless at an investment of Rs 60,000 crore.
With organised retail taking shape in the country despite some resistance in few states, industry increased its focus on developing shopping malls.
DLF and Unitech, which concentrated more on residential segment, announced big investment plans for creating retail space. Unitech is developing 48 malls at a cost of Rs 20,000 crore while DLF plans to invest Rs 16,000 crore over four years to develop 20 large shopping malls across the country.
Proliferating Special Economic Zones emerged as another opportunity for the industry that already has its hands full with huge shortage of realty space across major segments. C&W pegged the realty demand at 1,900 million sq ft by 2011.
In order to bridge the huge demand-supply mismatch and also to meet the increased demand from end-users for quality products, the industry partnered global realty developers to execute various projects on time. DLF tied up with US-based Hines to build a 15-acre project in Gurgaon. It also partnered Dubai-based Nakheel to construct two big townships.
Various other global developers evinced interest to foray into the Indian market. US-based Trump Organisation announced it was scouting for partners to enter India, while Dubai-based DAMAC Properties and Rakeen, the state-owned real estate firm of the United Arab Emirates, said it would invest up to $5 billion each to develop properties.
Diversification was also the buzz word in 2007 as major developers announced plans to venture into other sectors like telecom, retail, infrastructure, commodity and power. Hot telecom sector caught the fancy of all the major players like DLF, Unitech, Omaxe, Parsvnath and Indiabulls who queued up for licenses to launch mobile services.
While Indiabulls announced plans to set up commodity exchange in tie up with public sector trading firm MMTC, Omaxe and Ansal entered into power and Parsvnath in retail. DLF also announced foray into insurance and asset management ventures.
Repealing of Urban Land Ceiling and Regulation Act by the Maharashtra government in November was another major highlight of the year as it will open new opportunities for developers because of an expected increase in land supply in the state.
"Repealing of the act would unlock 74,000 hectares of land," Puri said while hailing the decision.
With market regulator SEBI all set to allow Real Estate Mutual Funds and Real Estate Investment Trusts in 2008, paving the way for small investors to ride on the success of sector, there is no doubt that another good year is in the offing.
"Huge growth of investment is taking place in the sector. Like last year, 2008 looks equally bright. FIIs and PEs will bring a lot of money into the area and there will be a lot of activities. Like the agricultural revolution, I believe India needs one housing revolution and it is hopefully to start in 2008," Hiranandani Group's MD Niranjan Hiranandani said.
With Rs 6,000 crore-IPO of Emaar MGF lined up for the next year, it seems that real estate sector will have another good year in the capital market. The new year might also bring a real estate regulator for the national capital.
In terms of property prices, consultants feel industry might witness a correction in office and retail rentals owing to increased supply but housing segment is expected to remain bullish due to demand-supply mismatch.
Realty to widen investment options
Early launch of real estate investments products would ensure wider participation of individuals in the booming realty sector. SEBI must move quickly to facilitate early launch of real estate mutual funds (REMF), now that the Institute of Chartered Accountants of India (ICAI) and Association of Mutual Funds of India (AMFI) have firmed up valuation norms.
For any REMF, valuation of property it owns would hold the key to attracting investor interest. And therein lies the complication. In the case of an equity mutual fund, the market price of the underlying securities determine the net asset value (NAV) of a unit.
However, a real estate mutual fund would have substantial direct ownership of land and built-up property, and that would see little fluctuation in its market price on a daily basis. A pertinent question is how will the value of property be determined. We hope the ICAI and AMFI have comprehensively addressed this in the valuation norms.
The structure of the REMFs, as approved by SEBI board in June 2006, would be close ended, at least in the initial stage. That would help the fund manager, as he would not be required to hold high cash balance to deal with redemption pressure when a fund under performs in the short term.
Introduction of REMF would also benefit developers of properties because it would provide a long-term alternative to bank finance or overseas borrowing. Rasing equity through the capital markets has been another source of finance for real estate companies, but that is an option available only to a limited number of entities with a proven track record.
Participation of REMFs in property development projects can serve to improve corporate governance of such companies. It can also ensure that property valuations are better aligned with demand and supply rather than speculation. SEBI must also issue guidelines for formation of real estate investment trusts (REITs) and the finance ministry must spell out tax treatment for such entities in the budget.
Realty market may see major growth till April '08
Circa 2007 may have been an extended joyride for investors, but the stars spell a word of caution during 2008. And the general feeling among the cross-section of astrologers that SundayET spoke to was that while the first half of the year would be good for investors, the next half could be a bit choppy in parts due to unfavourable changes in planetary positions.
The idea behind the interaction with the astrologers was to get a sense of the investment outlook for stocks, real estate and commodities. On the brighter side, the year 2008 would symbolise leadership, dominance and position of authority for the economy. Aura reader S Bhattacharya foresees a positive outlook for the real estate sector. But he doesn’t rule out a few hitches either.
“The sector will continue to be strong till August 17 in Delhi and surrounding areas. But there will be a 18-20% decline post that. Prices are expected to be weak in all other areas, except for Mumbai and Goa, which will continue to remain strong. The bubble burst may happen in February 2009 but there is still room for optimism for real estate in 2008.”
Unlike last year, when the stockmarket threw up surprises with the Sensex touching the magical figure of 20,000, leading numerologist Sanjay B Jumaani predicts that the bourses will take a beating after June next year. “Gold is yellow just like the sun and can have a field year.
Real estate will continue to march upwards though the pace could reduce. In stocks, after August 15, India will enter its 62nd year and 62 adds up to 8 of Saturn. This does not favour stocks but it does favour real estate, farming and steel. One should also be careful about treading in commodities after August 15.”
His logic is that the year 2008 adds up to the number 1, which represents the sun and creative forces that give light and life. It symbolises leadership, dominance and position of authority.
Agrees astrologer Anurag Tripathi, “with the planetary position changing subsequent to June 2008, the financial markets will be hit. The market will end up in the range of 24,000 to 25,000 points in 2008.” According to him, the major astrological implications on the markets will be seen in December 2009 when the position of Saturn will change.
He expects a huge fall in December 2009 onwards and sees the market ending up from where it started its bull run. Leading US-based astrologer Ashok Motiani, however, feels that Sensex will touch the 21,000 mark before April-end 2008.
He anticipates a decline from May onwards, a trend likely to continue for several months. “There will be a major correction during this period. This correction is likely to be caused by liquidity squeeze, not only in India but all over the world.”
Mega IPOs and FIIs may have left the real estate sector smiling in the spotlight during 2007, but Motiani sees possibility of a mild correction next year. “Saturn has been transiting in Leo since July 16, 2007 and will continue to transit till September 10, 2009. During this period, real estate in India is likely to slow down. Prices will stop rising that’s for sure,” he says.
According to yet another astrologer Kewal Anand Joshi, the real estate market will see substantial gains till April 2008. He forecasts a downfall from April 15-July as there will be decline in foreign buying interest. “The market will be normal from September-December but ups and downs will exist,” he feels. For the yellow metal, the upward journey may continue as Joshi foresees it reaching Rs 12,000 in the New Year.
Gold scaled new highs with the price for 10 gms zooming to Rs 10,000 in 2007. Bhattacharya also cautions against a rise in petrol prices in 2008. “Prices will continue to rise in the commodities market. Agricultural items will also be expensive,” he says.
So while punters are dreaming of stronger positions on Dalal Street, it could be the gold-diggers who will have the last laugh on their way to the bank. After all, that’s what the stars have to say.
View realty boom with caution and search for opportunities in downturns
Predicting the commencement of a new phase in the real estate market cycle may be a difficult task, but there are some pointers to the pace of real-estate activity, says Mr Ramesh Nair , Managing Director, Jones Lang LaSalle Meghraj. In an interview with Business Line, he discusses the reasons for decline in real-estate prices in some pockets, private equity funds’ evolving approach to the sector and the entry of foreign developers.
Excerpts from the interview:
What are the indicators of real-estate market peaking?
A real-estate bubble occurs when housing prices take an unhealthy climb instead of rising gradually with the rate of inflation or the rise in median income. Correction also occurs in pockets where property prices have risen without the support of fundamentals such as infrastructure.
If employment rates were to fall due to overall economic slowdown leading to decrease in purchasing power, one would find housing prices immediately softening and eventually dropping. Fortunately this is not the case in most parts of India.
Cycles are common in every industry, not just in real estate. If one looks at volume of sales and performance of the housing finance sector, there has definitely been a slowdown across the country. The number of apartments being sold in the fourth quarter of 2007 is definitely lower than in the corresponding quarter of 2006.
Also, the home loan market, which was growing at over 30 per cent in 2005 and 2006, has logged only 10-15 per cent growth this year. Volume of sales and housing loans are, therefore, two key indicators.
Buyers need to exercise caution and good financial judgment before investing in real estate today. Although the India real-estate story is real, large in size and will pay in the long run, developers need to realise that volumes are inversely related to price; lower the price higher the opportunity.
What are the key reasons for the slowdown in some pockets?
Higher prices and interest rates have been impacting affordability; to a lesser extent, excess supply in a few micro markets, rather than slowdown of economy, are the key reasons. Developers who were selling their entire projects in a few days are now taking months to sell their unsold stock. However, no major drop in prices is expected immediately as the vacancy rate of unsold completed residential real-estate stock is still low.
What are the factors that would enable developers to carry through various market phases?
Understanding what drives the ups and downs of the real-estate cycle can prove valuable to developers. Phases of a real-estate cycle are not consistent in length, making it difficult to predict when a new phase will begin.
Projecting current trends indefinitely into the future is therefore risky. One should view market booms with caution and search for opportunities in downturns. Developers should also resist excess optimism at the top of cycles and instead focus on understanding why the market conditions are changing.
Successful developer strategies that achieve above-market returns over the long run are dependent on understanding the macro and micro market cycles, differentiating end-users from investors, good market timing and a degree of contrarianism.
Overseas funds have been pouring money into the realty market. Have you seen any change in their approach towards investing in the sector?
The sector opened up in February 2005, after the announcement of Press Note 2 by the Cabinet Committee of the Central Government. The last two-and-a-half years have seen nearly 70 PE funds establish operations in India. Most of the funds that have come in are opportunistic in nature. On a lighter note, 2005 was the year of the REITs — Real Estate Investment Tourists — coming to India from all over the world to get a feel of the opportunities!
The year 2006 was one of searching for partners who have access to land. And 2007 has been the year for searching for partners who have good execution skills. Most funds have gone through a learning curve. The initial preference was to look at opportunities wherever it emerged in the country.
Most funds today are focused on specific locations and asset classes. For instance, a number of them are focused on west and south India, investing in technology parks and residential townships. In the future, I think middle class budget housing and warehousing are two segments that may attract interest.
While funding was a welcome move, there are overseas construction players and developers entering the market through joint ventures. What is the impact?
The impact has definitely been positive. With international developers and PE funds entering the market, the local players are getting more organised, professional and corporatised. This would help in increasing quality and timelines will be met. Thanks to the deep pockets of the international players, the scale of projects will also increase. This will not only help create pan- India developers but will also bring about innovative financing and exit strategies. Most importantly, the supply will go up, benefiting end-users — as increased supply can bring down the prices.
From a stock market perspective, players with a pan-India presence appear to be enjoying high premium vis-À-vis the regional players? Do you think the regional players are at a disadvantage?
I would not think so. Being a regional player in a niche market is a positive. Real estate is still predominantly a local game. A local player would know the land pockets, tenants, consumers, brokers and local authorities and rules better.
Moreover, when the market conditions get tough it may not always be prudent to diversify into little known markets. During such phases, it makes sense to focus on one’s core competencies either in terms of specific asset classes (such as residential, commercial or IT parks) or well-acclimatised markets.
But regional developers need to build a strong management team, a high-quality asset base and a long-term differentiation strategy. Many of them just take up deals that are relatively opportunistic.
In future, there would be two critical dimensions of success for such developers. The first is finding good deals… finding those projects, tenants and locations that are going to be economically attractive. The second critical dimension of the business is executing those deals well. These would provide them with a sound competitive strategy against large developers.
Developers here have been comfortable with the ‘sell model’ for long? There is now an increasing change towards projects through lease model as well? What has brought about this change?
Leasing of space by a number of developers is a welcome move. The change has been driven by the needs of the end-users and the increased availability of debt and equity capital. Most developers realised that selling strata title was not the right strategy. Property management and renewals are a nightmare when properties are sold in parts to multiple investors.
The developers also lose control over the tenancy mix. Especially in a mall, one needs to have control over who the tenants are going to be to make it a successful destination. Faster and easier access to debt and equity has brought about this change. Large financial institutions are willing to invest in a whole building, instead of in parts, and securitisation options have helped bring about this change.
Saturday, December 29, 2007
Friday, December 28, 2007
Srinivasa Shipping-Getting Real
Chennai based Real Estate Developer Srinivasa Shipping is spreading its reach across the four contiguous Southern States of TN, Andhra, Karnataka and Kerala.
In all about 2 mn square feet of Residential and Commercial Property is being developed under Srinivasa Shipping and its Associate Sri Sathya Sai Constructions. These projects amount to Rs 1800 crore in value and will get concluded over the next three years, with the first two projects the Capital Towers and the Challa Mall, Chennai having been completed.
Srinivasa’s 200,000 sq feet “Matrix Towers” being built on the IT Express Hi-Way will be completed by the first quarter of FY09, and Alpha City, Chennai’s Tidal IT Park by Q4 FY08.
Meanwhile work continues on the Chennai Central Mall, being built for Kishore Biyani’s Pantaloon, and “The Retreat” complex of villas, apartments and plots being offered in Hyderabad, Bangalore and Munnar, Kerala.
That apart the following three projects are being taken up under joint-development:
1. Joint development of serviced residential plots in 23 acres of Land at Mamidipally Village, Ranga Reddy District, near Shamsabad International Airport at Hyderabad. Srinivasa Shipping’s share in the project is Rs 13 crore.
2. Srinivasa will also set up a residential township on a 90 acre piece of land in Hyderabad alongwith Spire Realty Hyderabad Retreat. The township will bring in FDI under the new norms from US based investors.
3. A JV has been signed with Malaysian Developer Glomac Berhad for a HADA approved township in Hyderabad.
In all probability FY09, should turn out to be a Big year for Srinivasa Shipping, and the patient investor should get well rewarded for his forbearance.
Real estate firms bypass Land Reforms Act
Many real estate companies bypass the Land Reforms Act and hold large tracts of agricultural land in order to develop them as real estate projects at a later date. The provision of Land Reforms Act states that a family with five members can maximum own 15 standard acres of agricultural land. Additional five acres is allowed for every member of the family, but all put together the maximum a family can own cannot exceed 30 standard acres. This ceiling is applicable for companies as well. If the provisions of the Act are strictly applied then many real estate companies have to give up the land they have hoarded in the name of land banks or land reserves. The State Government in 1999 repealed the Tamil Nadu Urban Land (Ceiling and Regulation) Act and with it the ceiling on how much an individual can hold urban land has been abolished. However, the provisions of Tamil Nadu Land Reforms Act are still in force and it imposes ceiling on agricultural land holding.
Many real estate companies have declared that they have large land banks ranging from 500 to 10,000 acres.
The company or the individual has three kinds of arrangements for holding lands. Some are owned by the subsidiary companies and in some cases the company owns only development rights to the land. In addition to these two arrangements, the companies also entirely own the lands.
The land entirely owned by them is substantially large to attract the provisions of Land Reforms Act. For example, three large public limited real estate companies in their offer documents have declared that they own 67 acres, 500 cares and 46.63 acres respectively.
There are also many more real estate companies, big and small, which hold large tracts of agricultural land for future development. Officials of the Registration department told The Hindu that a few months ago, in one of the Chennai suburbs, a land-parcel measuring 100 acres was registered in the name of a single owner. But within a few days the deal was cancelled fearing land reforms action.
Unitech plans a realty check in south India
Unitech, one of India’s largest real estate developer, is making an aggressive entry into the booming realty market in south. It is on the verge of announcing two joint development deals, involving over 1,400 acres of prime land in Hyderabad and Chennai.
Unitech is set to shortly unveil its 50:50 joint venture deal with serial entrepreneur Prasad V Potluri’s PVP Enterprises which owns around 1,300 acres in Hyderabad’s Shamshadabad region, the most happening part of the city in terms of property development.
Unitech will also unveil, over the next few days, a 55:45 joint venture deal for developing 8.8 million sq ft of residential property on the 70-acre Binny land near Perambur in north Chennai, owned by SSI, sources privy to the development told ET.
In February this year, PVP Enterprises picked up a controlling stake in SSI. It now owns 62% equity stake in SSI, which include acquisition of 42% equity stake held by the Kalpathi brothers - Aghoram, Ganesh and Suresh, as well as 20% acquired from the public through an open offer in October.
PVP Enterprises pumped in Rs 750-800 crore for the stake. Kalpathis still hold 29% stake in SSI, the rest 9% with QIBs and others. Besides the 70 acre Binny property, SSI also owns prime property, including an IT Park, developed over 100 grounds (one ground = 2,400 sq ft), at Vadapalani in West Chennai, as well as the Dasaprakash Hotel property in Ooty.
Also, SSI and PVP Enterprise are expected to merge. A formal announcement is likely to take place over the next couple of days, even as the merger ratio between the two companies too has been tentatively finalised. “For every three shares of SSI, one share of PVP Enterprise will be allotted. While the process for merger has been set in motion, it is still not clear whether SSI will undergo a name change,” sources privy to the deal said.
Despite repeated attempts, Shyam Chandra, joint managing director, Unitech, Kalpathis of SSI and its new promoter, Prasad V Potluri could be reached for their comments. According to sources, all existing loans of PVP Enterprise are being converted into equity. This will make it a debt-free company, after the merger. The move will result in a huge scaleable opportunity on the infrastructure front for the merged entity that will also be cash rich.
The development on the Binny land alone involves construction of over 5,000 residential flats, besides retail and commercial space. Even at a reasonably price level of Rs 5,000 per sq ft, the sale proceeds of developing 8.8 million sq ft comes to around Rs 4,400 crore.
“The environment clearance has been obtained for the project, while the CMDA clearance for the first phase involving development of one million sq ft has also been received by SSI,” the sources said.
On Thursday, the shares of Unitech closed at Rs 464.40, marginally down by 0.06% on BSE and at Rs 465.25, marginally up by 0,05% on NSE.
On the other, SSI share closed at Rs 183.05, marginally down by 0.95% on BSE, and at Rs 184.40, down by 0.03% on NSE.
Big cities` high realty costs hit apparel firms hard
Soaring real estate prices and hike in the interest rates earlier this year seem to have played a spoilsport for the Indian apparel sector. The high property costs are making it difficult for companies to undertake rapid retail expansion.
“It will be cheaper to open a store probably in Milan than to book a property in Mumbai or Gurgaon,” feels Raymond Apparel President Shreyas Joshi.
Apparel retailer Giordano International had to defer the launch of its new stores in India by a couple of months. Peter Lau, chairman, Giordano International says, he would like to open at least 20 to 25 stores in the country over the next three years, but given constraints on the real estate prices, it is facing difficulties.
The branded apparel sector is growing at 20 per cent on the back of the upwardly mobile young population, increasing disposable income and the rising brand consciousness. However, the high rental costs have put pressure on the profitability of the companies.
Sanjeev Mohanty, managing director, Benetton India, comments, “The hike in the real estate rates became a critical hindrance for the growth, per store rental costs have doubled in percentage terms from 15 per cent to 30 per cent since last 12 months.”
The industry is also reeling from the poor offtake in the first part of the year due to the spike in interest rates. “ The per store revenues has declined as the consumer spending, drifted more towards automobiles and consumer durables,” said Mohanty.
This Diwali, the consumer durable companies have registered a record sales, while traditional categories such as jewellery and clothing witnessed a marginal demand.
Entering smaller markets, thrust on exclusive outlets seems to be the way out for the industry. H Sidhu, executive vice-president, Koutons, said, “ High rentals have huge impact on margins. The exclusive stores skips a layer of middlemen.”
Indeed, companies have started preferring exclusive outlets to multi brand stores as they give greater control over merchandise and also avoid delayed payments, which they simply cannot afford.
Prashant Agarwal, associate vice-president, Technopak Advisors points out that retail growth will happen in the bigger 40 cities given the infrastructure support.
Companies may also adopt the franchisee route and curtail their aggressive rollout plans to combat high real estate costs.
Rural property prices firm as market softens
Rural properties, particularly those with dairying prospects, appear poised to withstand a softening real estate market in 2008.
According to a Massey University survey of professionals who work in rural real estate, most are predicting moderate to large increase in sales in the three months ending February 2008.
Bob Hargreaves, director of the Massey University Real Estate Analysis Unit (MUREAU), said strong prices for dairy products were bolstering property values.
"Anything that's flat land with either dairy or potential dairy is looking good," he said.
Of the 35 professionals surveyed -- which included realtors, valuers and real estate lawyers -- 28 per cent said they expected to see a large increase in sales and 36% predicted a moderate increase. Their projections were based on work done in their respective offices.
The findings were comparable when professionals were asked to forecast sales volumes based on their own knowledge of rural markets.
Respondents were also upbeat about prices for dairying properties.
Based on work done in the office, 56% predicted moderate increases in sales prices and 11% predicted large increases.
Hargreaves said the same optimism was not reflected in hill country properties which have been affected by drought.
"The outlook for hill country is not so good because the prices farmers are getting have been down. In some parts of the country, they've had prolonged dry weather, so the cash isn't there at the moment."
Hargreaves said the situation could change because of geo-political circumstances and increasing international food prices.
"Increased wealth in India and China, George Bush's ethanol policy and some of the bad things in Australia with drought are all putting pressure on food prices," he said, adding New Zealand will fare well.
"The great advantage we have in New Zealand is we can produce protein products cheaply because it rains a lot and that is true of both hill country and flat country, so for those reasons although the short term outlook for the hill country is not so good now, I believe that will turn around at some point in 2008."
As for rural residential properties and lifestyle blocks, specialists who work in the sector said the outlook was also favourable.
Bob Gillard, of Harcourt City, said demand was strong and he did not expect that to change.
"There has been significant interest from new immigrants especially from the U. K; the desire for finding something with close proximity to the city and a few acres. Also, locals looking to buy existing properties and lifestyle blocks to build on. So there's still a good strong interest across the board," he said. Gillard added the rural real estate market appeared to have returned to a more traditional cycle.
"It's back to that cycle where things tend to pick up around the end of September, run through till the second week of December, picking up again around the third week of January and running through till the end of May."
Lifestyle blocks in particular were proving to be quite popular. "Regardless of what people think, I still think there's a fair bit of money around for people to buy those types of property and just with the natural growth of our population, I think a lot of people are looking for a bit of peace and security and tranquillity and that comes with lifestyle blocks and rural townships in close proximity to major metropolitan areas."
Average rural properties were priced in the high $400,000 to mid $600,000 for a one to two hectare block.
Analysts bet big on Reits, FDI for 2008
Among the trends that real estate developers and analysts are forecasting for 2008 are a threefold jump in foreign direct investment (FDI) inflows into the sector, the introduction of Reits, or real estate investment trusts, the emergence of new sectors such as logistics and warehousing, and a stronger strategy for investment in the smaller, cheaper cities by information technology (IT) companies that have been hit by a rising rupee.
In the residential sector, industry analysts are predicting a divergence between thebig developers and the mid-level ones.
“The residential sector will see the emergence of two kinds of developers—the big ones will move towards the premium segment and will start branding themselves as premium builders,” says Anuj Puri, chairman of Jones Lang LaSalle Meghraj, a real estate consultant firm. “The small developers who will step into their shoes will dominate low-income and mid-market housing,” Puri adds.
“As income levels have risen people are willing to pay for an assurance of quality that comes with the branded products,” says Vicki Oberoi, managing director of Oberoi Constructions.
But, the biggest event of 2008 could be the introduction of Reits, predicts Pranay Vakil, chairman of Knight Frank India Estates, a real estate consultancy firm. “Sebi (Securities and Exchange Board of India) has finalized the guidelines, and they are likely to be released to coincide with the Budget in the last week of February at the latest,” says Vakil.
Indeed, M. Damodaran, chairman of markets regulator, Sebi, said this week that the guidelines for Reits would be released in early 2008.
A Reit is a corporation or trust that uses the pooled capital of many investors to purchase and manage income-yielding property or mortgage loans. Reits are traded on major exchanges much like stocks. While Reits also get special tax considerations, they are required to distribute 90% of their income, which may be taxable in the hands of the investors.
A Reit structure is designed to provide a similar structure for investment in real estate as mutual funds provide for investment in stocks. The key statistics to look at in a Reit are net asset value, adjusted funds from operations and cash available for distribution.
“One of biggest advantage of the introduction of Reits would be that the sector will become liquid with easily tradeable assets. A lot of retail investors who have stayed away from the real estate market will be able to enter it. As properties are listed, there will also be greater transparency in terms of valuations, so the runaway valuations of 2007 would be corrected,” says Vakil.
With the introduction of Reits, the inflow of FDI into the sector is also expected to increase dramatically.
“We expect to see around $12 billion (Rs47,280 crore) coming into FDI-compliant projects in 2008,” says Vakil. That is a threefold increase from 2007 when $3 billion were committed by global investors for projects in India.
But Ambar Maheshwari director (investments) at DTZ, another real estate consultancy firm, offers a word of caution: “FDI will continue to come, but there may be some caveats—if prices, especially land prices, don’t correct,” said Maheshwari.
Investors who raise funds abroad may not be able to get the 20-25% returns they have come to expect from India, though returns in the early to mid-teens would still be assured.”
Another major trend in 2008 will be the emergence of a much stronger strategy for investments in tier II and tier III cities by IT companies that are already feeling the pinch from a rising rupee, says Puri of Jones Lang.
According to data provided by the National Association of Software and Services Companies (Nasscom), an industry lobby, small towns such as Dehradun, Visakhapatnam, Guwahati and Indore are now beginning to see an influx of such companies.
A recent report by Jones Lang LaSalle Meghraj also names cities such as Guwahati, Chandigarh, Indore, Visakhapatnam, Dehradun and Vadodra as the likeliest IT destinations for 2008. Data from Nasscom, IT industry’s lobbying body, suggests that already more than two dozen business process outsourcing (BPO) companies, apart from the state-owned Software Technology Park of India, have set up campuses in these cities.
Guwahati has two BPOs, Chandigarh has seven, Nashik, Visakhapatnam and Indore have four each, and Dehradun has three. A Nasscom spokesperson said most of these cities are attractive to IT industry given their high level of literacy—around 77%—which promises a continuous pool of talent.
“Land prices in these cities have not risen that much in these cities, so it makes sense for IT firms that are looking at cost cutting will benefit in two ways—their real estate costs will be significantly lower, at same time they will also gain from the far lower employee attrition rates, bringing down their recruitment and training costs,” says Puri.
Among the underserved sectors in real estate, logistics and warehousing are expected to emerge as a key growth areas for investors, says Maheshwari of DTZ. “With the growth in retail and the need for warehousing, this sector will emerge as a key growth area this year,” he says.
Though the biggest players in the warehousing business have been the state and Central Warehousing Corp., private companies are also showing interest. Reliance Industries Ltd, the Adani Group and Future Group, for instance, are among the companies that have announced plans to enter the business.
A recent Ernst and Young report says that logistics and warehousing business in India is set to touch $125 billion by 2010, driven mainly by the growth in retail, which is growing at 30% year on year.
This is expected to generate a demand for 5 million sq. ft every year. “It is this opportunity that is attracting the big players,” says Maheshwari. Around 40 million sq. ft of warehousing space is available in India.
Among the formats that are expected to take off in the sector are port and airport-based warehouses, inland container depots and freight stations, custom bonded warehouses and specialized warehouses and cold storages.
DLF plans several listed subsidiaries
India’s largest listed developer, DLF Ltd, which raised some Rs9,000 crore in its first share sale in July, is looking at the possibility of selling stakes in various businesses that will become separate companies.
Listing gains: Ramesh Sanka, chief financial officer, DLF Ltd.
“Each entity of DLF is phenomenally big. We are quite sure we want to go for a listing of each of the entities at a right time,” says Ramesh Sanka, DLF’s chief financial officer. “We will nurture them (entities) and then we will hive off whether it is insurance, telecom, hotels or even the residential business.”
“In the next eight-nine months to three years, lots of listings will happen,” predicts Sanka. The offices’ arm of DLF is already getting indirectly listed through DLF Assets Pvt. Ltd, a unit.
The company is looking at selling 10-20% stakes in the subsidiaries.
DLF’s July offer was the largest initial public share offer in India and the shares have risen 92.4%, to Rs1,010.05 a share, since its listing. Since August, the company has more than doubled its market capitalization while the benchmark Sensex index has risen 25%. DLF became part of the Bombay Stock Exchange Sensex index in November.
Despite this, “today, valuing DLF is a very difficult task,” claims Sanka. “But, tomorrow, if I have six-seven subsidiaries, a single business matrix is easy to value. Even for analysts, it is quite difficult to put a value on DLF.”
DLF now has many business lines that go beyond building homes, shopping malls and offices. It has announced partnerships to set up hotels with Hilton Hotels Corp.; it is bidding for telecom licences to offer mobile phone services in one of the fastest growing cellphone markets in the world; it plans to offer insurance services and wants to build airports, roads and ports.
DLF will initially expand the entities in terms of employees and basic assets before hiving them into separate companies. The company might even look at listing the entities as real estate investment trusts in India once the market regulator, Securities and Exchange Board of India, lays down rules on real estate investment trusts, which is expected early in 2008.
“We think real estate investment trusts will open up in India, so then there will be lots of opportunities for listing,” Sanka said.
DLF has some 224 million sq. ft of existing development and 738 million sq. ft of planned projects.
DLF Assets plans to go in for an initial public offering on the Singapore Stock Exchange through DLF Offices Trust, the real estate investment trust of DLF Assets. DLF Offices Trust holds some of the office properties of DLF. The company declined to say how many properties are held through this, nor did it give the amount it plans to raise as the Singapore Exchange rules do not allow the company to disclose these details at a preliminary stage.
DLF has filed for a listing of DLF Assets and it expects the listing to happen in the first quarter of fiscal 2008. The details of the prospectus will be made public by January. DLF Assets was established to hold completed commercial assets. The developer said DLF Assets bids for buildings along with other companies when DLF sells off assets.
Separately, DLF said it plans to double its investment in the power business. The company has wind energy farms and captive power plants to supply power to its projects. DLF invested Rs1,000 crore this year in its power business and during the next year, it plans to invest at least Rs2,000 crore.
DLF posted revenues of Rs4,053.30 crore and a net profit of Rs1,933.65 crore for the year ended March. That revenue figure includes sales and other income, which the company calls total revenue. Though DLF has not given any comparables for its financial results in the last two quarters, according to Sanka, the profit in the second quarter alone was higher than 2007. In the second quarter of 2007, the company posted a net profit of Rs2,018.55 crore.
“The growth is very, very high. The growth compared to last year is four times more,” Sanka said, without providing numbers.
Should STPI scheme be extended?
Extension of sops will only treat symptoms
Kala S Sridhar,Fellow,NIPFP
The commerce ministry has proposed that the budget for 2008-09 should extend tax concessions to Software and Technology Parks of India (STPI), beyond April 2009, their scheduled sunset, after 15 years of exemption.
There is no doubt that India’s software industry has created more than a million skilled jobs and is the greatest generator of export revenues, accounting for nearly one-fifth of the total. One of the objectives of STPIs is also to promote smaller firms, which assumes relevance in the aftermath of the appreciating rupee, given the dependence of smaller firms on the US market.
However, continuing tax incentives does not make sense because of the following:
Research shows that, for maximising the effects of tax incentives, they should be offered for a limited time period. If they continue for periods longer than this optimum, they likely degenerate into becoming a permanent feature of the tax system.
Second, continued tax exemptions to STPIs, due to their revenue implications, would make difficult meeting of the targets set by the Fiscal Responsibility and Budget Management Act, thwarting prudent fiscal policy. Third, such sops are effectively subsidies to exporters, and are challenged in international fora such as the WTO. Finally, many of the Indian software sector’s problems span beyond tax exemptions.
The sector faces shortages of workforce with required skills and high attrition. It faces rising costs of real estate, with the space requirements slated to be an additional 20 million square feet of space each year, much greater than the commercial real estate space that is developed currently, based on the additional employment to be generated in the sector over the coming years.
Obviously, the solution to all these problems does not lie in tax exemptions. Efforts have to be made by the industry to enlarge the pool of workforce with the required skills, identify alternative low-cost locations to contain the costs of real estate, and facilitate the government’s job in stepping up relevant IT infrastructure and public services to improve their own productivity. To continue tax exemptions is tantamount to treating the symptoms without treating the underlying cause.
(Views are personal)
Ending tax exemption will hurt IT growth
Surjeet Singh, Chief Financial Officer, Patni
The STPI scheme that exempts software companies from paying taxes on their export profits should be continued beyond March 2009, as it has played a vital role in propelling the tremendous growth rate witnessed by the IT industry over the last decade.
IT accounts for 5.4% of India’s GDP, and its export revenues alone are expected to touch $60 billion by 2010. However, doing away with the tax exemption at this crucial juncture would hurt the IT sectors’ long-term growth prospects.
At the moment, the IT industry in India is beset by mounting pressures from various quarters. Issues like rising wage costs and rupee appreciation against the dollar in the past few months have impacted the bottom lines of most IT firms.
While the Indian IT industry is poised to ride the next growth wave, to successfully tap this potential and continue to grow at 30% growth rate, it needs to invest in creating new business models centred around end-to-end capabilities, business solutions, platform BPO, which will require continued investments, strategic M&As, and integration of global workforce in order to move up the IT value chain. Similarly, SMEs also need to carve niches for themselves. However, to truly achieve a level playing field and tackle the above mentioned pressures the industry needs more time to adjust.
The IT industry is a major contributor to India’s economic growth and has mainly progressed because of the support available through the STPI scheme. Moving to a new location or renting space in SEZs is not a viable option, as it will add to the operating costs of companies currently benefiting from the scheme. Additionally, it would be difficult for most companies, and especially the SMEs, to fulfil the various criteria required by the government, including acquiring a minimum mass of land to qualify for setting up an SEZ.
Only the STPI scheme can offer the industry the support it requires and ensure that the IT sector grows at a robust pace. Hence, in order to maintain the sheen of the IT industry the government should extend the scheme by a few more years to reduce the scope for any further polarisation between the players in this sector.
Thursday, December 27, 2007
What luxury home buyers are looking for
Dressed for the occasion, you face a group of equally polished people across the negotiating table. They grill you on your background, your career, your income and your prospects. Satisfied with your replies, they sit back and smile. You are in.
Is this a job interview? A visa application? Perhaps a matrimonial enquiry? Actually, it's "none of the above". This is a potential luxury homeowner being vetted before his purchase is approved.
If you thought the only differences between luxury homes and their middle-class counterparts were the price tags and the frills, think again. Posh houses collectively worth more than Rs 30,000 crore (Rs 300 billion) are coming up across the country and builders and developers are fast realising that if they are to get buyers to willingly part with eight-figure sums, they need selling strategies that are significantly different from what they follow for more affordable housing.
So whether it is brochures that could pass off for coffee-table books or conducting a series of "personal interactions" to determine whether a buyer is worthy of an upscale apartment complex, they're willing to try it all. And then some.
That's because even within the fast-growing luxury segment, property is quite distinct. Unlike other luxury goods, such as fashion, automobiles, jewellery and accessories, the price of top-end real estate differs drastically depending on where you buy it. A crore would fetch you a minuscule, bare four-walls in a Mumbai suburb, where the same amount or a little over could buy you a decent deal in another metro, and a posh flat in smaller towns.
Of course, "luxury" costs extra. Multi-layered security, water and power backup, Wi-Fi, modular kitchens and marble flooring are becoming hygiene factors in most new mid- to high-end residential projects. Which means property developers need to constantly offer their demanding, deep-pocketed customers something more.
Here is how they do it.
Less is more
"It's not about selling a commodity like other homes, but a lifestyle," declares Anuj Puri, chairman of property consulting firm, Jones Lang LaSalle Meghraj. Adds Pranay Vakil, chairman, Knight Frank, "You will almost never find large-scale advertisements for luxury homes. Publicity is done mainly through word-of-mouth or by select property consultancies." The subtle approach helps the developer discourage window shoppers and zero in on the serious buyer.
Typically, new luxury housing projects target top-level professionals and executives. Which means developers need to speak to them in their language. It may be a while before Indian property developers take prospective buyers to site visits in stretch limos but, meanwhile, they aren't holding back in organising the kind of dos that will appeal to their target clientele.
The Lodha group, which builds high-end apartments in Mumbai, uses events as a marketing strategy. Rather than hard sell the group's exclusive projects, select sets of prospective buyers are invited to events like art appreciation or wine and cheese sessions.
The return on investment is intangible, but substantial: even if only 10-20 per cent of the invitees follow through and become customers, the remaining 80-90 per cent become worthwhile word-of-mouth ambassadors.
"Events create a complete experience for prospective customers. It helps them understand our products better," says Abhisheck Lodha, director, Lodha Developers.
The Unitech group also opted for the subtle approach when it launched Grande, a 5,400 luxury apartment project in Noida, near Delhi. Instead of the usual brochures and flyers with covered with floor plans and details of proposed amenities, it created a two-part "book".
While book 1 is all about luxury, lifestyle, safety and the thought behind a township centred on a golf course, the other book provides the specifications of the apartments, the project layout and other details.
"You cannot sell luxury products with simple brochures," says R Nagraju, general manager, corporate planning and strategy, Unitech. He does not divulge details on the number of books in circulation or conversion rates.
As for marketing costs, each flat in the Grande development will sell for over Rs 2 crore (Rs 20 million); realty consultants believe the coffee-table brochures will account for less than 1 per cent of sales.
Not that advertising isn't an option. But many developers believe an exclusive print campaign in niche publications may fit the bill better than broadbased television commercials.
Nitesh Estates vice president, marketing, Ashok Ganguly points out that his company advertises its Bangalore-based Canary Wharf project in select magazines as well as in-flight publications on certain domestic and international airlines.
"This kind of advertising has given quality visibility with quality audience. The ads cater to intellectual mind space of prospective consumers and translating their aspirations into reality," says Ganguly.
Perhaps the most in-your-face marketing initiative was a couple of years ago for Sahara Group's Aamby Valley.
Television commercials, hoardings and full-colour advertisements featured celebrity brand ambassadors like Amitabh Bachchan, Aishwarya Rai, Boris Becker and Anna Kournikova, promoting the township in in Lonavla, Maharashtra.
But that's a one-off case, say experts. You won't find too many multi-media campaigns for top-end housing projects. In fact, you won't find them listed with your neighbourhood broker, either - a portfolio manager is a better bet for promoting these properties. Which is why building a strong network is the prime focus of developers.
"We do a network campaign in three ways; through top end portfolio managers, housing finance companies and through customer reference," says Ramashraya Yadav, head, finance and strategies, Orbit Corporation [Get Quote], the Mumbai-based developers of Villa Orb. That's an 18-storey, eight-apartment building on Mumbai's Nepeansea Road, each of which will sell at upward of Rs 42 crore (Rs 420 million).
Others are developing "dealer" networks. "We have a network of 850 franchisees and dealers. We also participate in exhibitions both domestically and internationally to reach our target audience," says Bipin Agarwal, executive director, Omaxe, a Delhi-based developer.
Space splurge
What is a luxury home buyer looking for? Most property dealers still can't answer that with certainty, but they are taking no chances. They offer apartments and villas and exclusive floors that come fully loaded with every conceivable modcon and round-the-clock security.
But what swings the deal for most high networth individuals is knowing who their neighbours will be and whether their privacy is adequately protected or not.
"If you sell one flat to a managing director, you cannot sell remaining flats to lesser ranked executives," agrees Raminder Grover, managing director, Sandalwood High Street Residential, a subsidiary of Jones Lang LaSalle Meghraj. Which is where the pre-purchase screening interviews come in.
To make doubly sure the privacy angle is covered, builders offer more space. Even in prime, heart of town locations, luxury homebuilders offer fewer flats. On Nepeansea Road, Villa Orb and Lodha's Solitaire offer just eight apartments each. In Bangalore, the Canary Wharf project - located close to the commercial heart of Brigade Road and MG Road - will host only eight exclusive buyers.
"Luxury home buyers need space that's more than utilitarian, like bigger parking space, wider lobbies and so on," says Niranjan Hiranandani, managing director, Hiranandani Constructions, a leading Mumbai developer.
That's in the "town" houses. Space is not so much at a premium in the suburbs, so developers play another trump card - they create "destinations". Taking a second look at the concept of luxury homes, developers are offering concept-based living options, often engaging foreign architects for the purpose.
The result is residences in golf courses (Jaypee in Noida), green areas (Omaxe's The Forest in Noida), and spas (MetroCorp's Nirvana in Bangalore), among others.
While the Omaxe project is located close to 325 acres of reserve forest, the project's expected price of Rs 3 crore (Rs 30 million) a unit is also attributed to the lavish landscaping within the project area.
Casa Estebana, developed by Koncept Ambience on the outskirts of Hyderabad, differentiates itself through Spanish style houses, while two projects in Noida (one by Jaypee and the other by Unitech) offers courses designed by golfing legend Greg Norman.
Developers are also offering upscale homes in smaller towns. There are two very good reasons for that. There's very little competition from other builders and there's significant untapped demand - not just from locals but also "townies" looking for a second, or holiday home.
Which is why DLF is planning a 115-acre ski village near Manali, Himachal Pradesh, which will also offer its villa residents kayaking, paragliding and other sport options. There's a villa project coming up at Rishikesh as well - complete with swimming pool filled with Ganga water, a selling point, apparently.
High "net" worth
Projects like those are particularly appealing to prosperous, non-resident Indians. As most companies are finding, NRI demand accounts for anywhere between 15 and 25 per cent of all luxury home sales. Sales pitches in person to this influential and affluent customer group is difficult, which is why most builders are fine-tuning their online strategies.
That includes CRM programmes, quick follow-through on enquiries and targeted advertising. Virtual, 3-D tours and web walk-throughs are also an increasingly favoured option - Unitech and Orbit both offer the facility. Online interviews aren't being considered, though.
JB Group takes prime spot with ‘diamond’ skyscraper JB Tower in heart of new Dubai
Posted: 27-12-2007 , 07:44 GMT
The JB Group, a globally diversified company with Indian roots, today announced it is developing a 60-storey skyscraper, the JB Tower, in the Downtown Burj Dubai.
The JB Tower, a state-of-the-art commercial block scheduled to break ground in March, is the flagship in a USD1.6 billion property venture in the Middle East by the JB Group. Designed in the shape of the JB Group logo – a converged diamond and lotus, India’s national flower – the tower will carve out a striking silhouette within one of the Gulf region’s most prestigious urban developments, opposite the Dubai Mall and proximate to the Burj Dubai tower, the world’s largest mall at 5 million sq ft and the tallest man-made structure at 805 metres respectively.
“The JB Tower is our debut property project in the Middle East spearheading two other major developments, including a four-star hotel and on Sheikh Zayed Road, the Twin Towers,” said Jatin Chutke, Vice President of JB Group. Mr Chutke explained the reasons for the company’s eye on Dubai: “For the JB Group, Dubai represents a first-class modern hub for increasing international business activities, in line with our own global vision. In just one year since 2006 when we first entered into properties and real estate, the value of our portfolio has grown multifold. The JB Tower and the Dubai project overall cements our vision to develop ultra-modern commercial, residential and hotel opportunities to inspire innovative business, leisure and living environments worldwide.”
From its origins as a diamond trading business in Surat, the so-called ‘diamond city’ in the western Indian state of Gujarat, the JB Group now has an expanding global property portfolio including upscale office and hotel developments in Oman, Indonesia and India. The JB Tower will be built on top of a four-floor podium climbing a total of 240 meters into the Dubai skyline and covering a total of 700,000 sq ft. Branching off the same podium will be the Group’s four-star hotel at 160,000 sq ft. In total the Dubai project encompasses 2,000,000 sq ft and a further 6,000,000 sq ft has been earmarked for warehousing and storage facilities. Residential properties and serviced apartments are also in the pipeline.
“Strategic diversification continues to drive our growth momentum in all areas of business, from property and real estate in Dubai, to alternative energy in Inner Mongolia, and international trade and consultancy both off and onshore,” said Bhupen Surani, Chairman of JB Group who is headquartered in Hong Kong. “Our success rides on furthering our global footprint by targeting opportunities in some of the most promising, vibrant and high-growth economies today, such as Dubai, China and of course India where the JB Group began.”
The construction and property investment in Dubai is part of the Group’s ‘silk-road’ strategy, which has involved planned strategic forays into the world’s three most dynamic economic hubs along the old trading routes of the past centuries - India, China and the Middle East. In India, the Group has acquired 20,000,000 sq ft and earmarked a further 3,000,000 sq ft for property development valued over USD440 million, as well as projects worth USD20 million in Indonesia. The JB Group also recently acquired a vast tract of land in Goa to erect India’s first Sofitel hotel.
Real estate mutual fund keenly awaited
With India’s appetite for commercial, residential and retail space growing stronger, real estate markets could no longer wallow in opacity and other imperfections since these adverse features could easily generate bubbles in the real estate market.
No doubt, the country’s apex bank, the Reserve Bank of India (RBI) has always been on its toes about potential asset-price bubble as it periodically ramps up the risk weightage on real estate loans extended by banks.
National wealth
There can be no two opinions that housing and real estate constitute not only a substantive proportion of national wealth but also a crucial and fast expanding component of the services sector of the economy.
Since both lenders and borrowers may have substantial real estate/housing exposure, financial balance sheets may be hit by any large gyration of prices in this sector.
Delivering a lecture on “India’s financial sector Reforms: Fostering Growth while containing risks,” the RBI Deputy Governor, Dr Rakesh Mohan, told his audience at Yale University early this month that “strong demand for housing and buoyancy in real estate prices in an environment of non-transparency could potentially pose risks to the banking system. In conjunction with interest rate cycles, the banking system as well as the regulator would need to be vigilant to future non-performing assets and the US-like sub-prime woes.”
Banking credit
Considering the reality that clamant demand for housing finance has emerged as a key driver of banking credit in the past few years and making due allowance for the burgeoning rush for commercial and retail market space by industry and corporate across the country, will it not be too much to expect the domestic banking industry to meet the genuine real estate demands of a growing economy?
No doubt, real estate funds set up to invest only in India have already raised a few modest sums, while Merrill Lynch forecasts that the Indian realty sector will grow from $12 billion in 2005 to $90 billion by 2015.
That the market regulator the Securities and Exchange Board of India (SEBI) is alive to the issue of tapping real estate investment for proper development of the financial market is revealed in its Annual Report (2006-07), tabled in Parliament on the last day of the winter session.
It points out that investment in real estate provides outlets for capital gains as well as periodic incomes. Over a longer term, real estate provides returns that are comparable with returns on equities. It further notes that the volatility in prices of real estate is lower than equities leading to a better risk return trade-off for the investment. No wonder, real estate investments made over longer periods of time provide an inflation hedge and yield real returns.
Tedious process
Having said this, SEBI has not refrained from asserting that real estate is distinct from other assets. The real estate investments are lumpy in nature and unaffordable to many.
The specific risk is high and personal diversification is very difficult. While the legal issues and lack of transparency make the probability of a mistake high, the illiquid nature of the markets makes the undoing of a wrong real estate investment a tedious process. Distress sales generate much lower returns than the fair value of the property, so argues the SEBI.
In view of these corking troubles, professional management labours to limit the risks in real estate investment while simultaneously bringing in such benefits as legal expertise, information on prices and regular maintenance and repairs.
Fully convinced that real estate investment schemes provide affordability to small investors enabling their participation in the property market as they help investors to diversify their investment portfolio across various asset classes and cut down the property specific risk, the SEBI has decided to allow the existing mutual funds in the country to float real estate investment schemes. In June 2006, the guidelines for Real Estate Mutual Funds were approved by the SEBI Board.
Investment Objective
A real estate mutual fund (REMF) scheme means a mutual fund which has investment objective to invest directly or indirectly in real estate property and should be governed by the provisions and guidelines under the SEBI (Mutual Funds), Regulations, 1996.
The structure of the REMFs, initially, would be close-ended and the units should be compulsorily listed on the bourses and net asset value (NAV) of the scheme should be declared daily.
As the annual report of SEBI states that “certain residual issues relating to valuation and accounting are being addressed,” market watchers and market participants keep their fingers crossed about the early launch of a real estate mutual fund in the country for the mutual benefit of retail investors and also to the realty industry.
DLF plans to raise $400 mn via PE route
Wednesday, December 26, 2007 (New Delhi):
India's largest real estate firm DLF is now all set to raise another $400 million through private equity route to fund its long-term investment plans.
As per the deal, financial services major Merrill Lynch will get 20 per cent assured return and the debt will later get converted into equity.
Merrill Lynch could pick up 49 per cent in 3-5 townships. The decision on the deal will be taken in mid-January after DLF�s real estate investment trust (REIT) listing is complete.
Though the management continues to remain very tight lipped about the deal they are not denying it either.
"DLF has a large number of residential, integrated townships and commercial projects in the pipeline. While the company is looking to list its commercial properties in a REIT these PE deals in residential projects are not only about raising funds," said Ramesh Sanka, CFO, DLF.
Experts say, a PE infusion at this stage for residential projects under construction give real estate companies a higher return on equity boosting their market cap significantly.
Earlier this year RBI had put a ban on lending for land and most of these companies need huge cash reserves to buy land. In fact, PE funds help in reducing the turnaround time of these projects while bringing in the much desired credibility.
DLF is not the only one which is looking at such deals, Morgan Stanley picked up stake in Oberoi Constructions this year and Shapporji Pallonji too plans to raise funds for its realty arm.
So even as real estate companies lose out on the profits from these projects the long term benefits from such deals are lucrative enough to forego short term small gains.
UK fund buy talk lifts Rajeshwari Foundation
Stock of Rajeshwari Foundations, a Chennai-based real estate company, has risen around 14% over the past one month. According to dealers, buzz is that a UK-based real estate fund is planning to invest around Rs 50-60 crore in the company that constructs bungalows under the brand name of ‘RGL Dream Bungalow’.
The company has chalked out expansion plans worth a total of Rs 25 crore and has already identified 20 acres of land in Chennai, they added. The grapevine further adds that the company proposes to set up a mega township of 450 bungalows in two phases.
Some dealers were also heard talking about a GDR issue in the range of $30-40 million. Meanwhile, an email sent to the company remained unanswered till the time of going to press.
On Wednesday, the stock hit the upper end of its 5% intra-day circuit filter, before closing at Rs 37, up 4.1%. Nearly 46,000 shares changed hands, as against the two-week average of 27,354 shares on the BSE.
Pride Hotels plans IPO
The Pride Hotels today announced its plan for an IPO in the first quarter of 2008 and also the receipt of an investment from Kotak India Real Estate Funds towards its Rs 340 crore expansion-cum-renovation plan.
According to a release here, the group, with hotels in Pune, Nagpur, Ahmedabad and Chennai, would utilise the funds for setting up new hotels in Mumbai, Goa, Bangalore and Alibaug.
Pride Group Chairman SP Jain said in the release, ''with this key investment from the Kotak Realty fund and Mauritius-based primary fund, we are now close to finalising sources of funds for the expansion plans.''
The Pride Hotel now offered a total of 430 rooms in Nagpur, Ahmedabad, Pune and Chennai, he said, adding that the capacity would be increased to 1,126 rooms in the five-star category.
Currently, the Hotel had 11 food outlets, which included restaurants, coffee shop, bars, 19 banquet halls and conference rooms.
Pride hotels had a growth of 77 per cent on total earnings in 2006-2007 compared to the 48 per cent in 2005-06, the release added.
Wednesday, December 26, 2007
Langham Hotels looks for partners in India
Helmut Knipp
Langham Hotels International, the operating and asset management arm of Hong Kong-based Great Eagle Holdings, has identified India as a strong market for development. Helmut Knipp, its senior VP (development) reveals, "Our focus has been on China of late. But India is as large and showing similar growth. The opportunity cannot be missed and we wish to take measured steps to establish the brand in India."
According to the company, there is a strong interest to build the brands in Delhi NCR, Mumbai, Hyderabad, Bangalore, Chennai, Ahmedabad, Kochi and Goa. Knipp adds, "While on a trip to Pondicherry, I realised that the place is an ideal destination for our wish list - an undiscovered gem."
The group is looking at management contract development in India for its two brands - The Langham (super luxury brand) and Langham Place (ideal for cities, mixed-use, or business hotels) - although it has not completely sidelined direct ownership. "In case we go for ownership, the investments will be accrued through debt and equity," Knipp says.
According to him, there will be a focus on selecting the right partners for which he is currently speaking to developers. "We are open to partnerships with real estate developers or even Indian hotel companies for existing or greenfield properties. We will also try to facilitate funding for projects through our international networks," Knipp elaborates.
The group aims to enter into a long-term contract of 25 years that can be renewed. Speaking about the fee structure, Knipp remarks, "We are going to be very competitive and at par with international standards. The group wants to offer value addition for the Indian developers and would expect developers to live up to the brand's standards.
The Langham Hotels and Langham Place would have an average of 50 sq metre and 35 sq metre room sizes, respectively. While the former will be restricted to a maximum of 200 rooms, the latter would range from 100 to 400+ rooms properties depending on the plot. Raju Shahani, executive consultant with LHI, informed, "The estimated cost for the former will be approximately Rs 1.2 to 1.3 crore, while the latter would be from Rs 80 lakh to Rs one crore. These are estimated figures and would come down in case of real estate developers owing to their expertise in the field of construction."
There is a plan to make Chuan Spa - a signature brand of LHI - a regular feature in its Indian properties. The group might add some specifically-designed spa rooms on the same floor. The group has forayed in China with a boutique hotel set to open in 2008 and recently opened a spa resort in Thailand. LHI has a development office in Bangalore at present and is looking to have its first sales office in Bangalore, Mumbai or Delhi that will help focus on India's outbound market.
Olympia to invest Rs 1000 cr in realty
Chennai's skyline is set to become broader as realty developers pull out more avant-garde residential projects from the Pandora box.
Chennai-based real estate developer Olympia plans to invest Rs 1,000 crore in realty projects at Chennai and Kolkata over the next 3 years. Once again, the Old Mahabalipuram Road is at the centre stage in the metro.
Realty prices, which hovered around Rs 4,000 per sqft here just a couple of months ago, after slowing down apartment bookings, have settled at Rs 3,500 per sqft now, stepping up market demand.
Olympia is planning a multi-product project on the OMR to cash in on the IT boom. To be located on 30 acres, 60 per cent of the land will be dedicated to a residential complex, 30 per cent for use of IT and non-IT office space and the balance for retail.
"We will be the first to cater to the non-IT demand on the OMR," Director, Khivraj Tech Park Ltd (the promoter), Chandrakant Kankaria told this website's newspaper. He said Rs 300 crore would be invested in the project with a mix of internal accruals and debt, including loans from banks.
About 1,500 apartments have been planned with the work expected to start in August next year and be completed in 3 years. A manufacturing facility and warehousing infrastructure for hardware and electronic companies, on 60 acres of land, has also been proposed at Sriperumbudur near Chennai.
The project is expected to get the green signal by mid- 2008. Also on the anvil is 'Olympia Opaline', a large residential complex on the OMR. To come up on 18 acres of land, the project's USP would be an air-conditioned club spread over 100,000 sq ft.
Expected to be the largest in South India, it would sport an indoor cricket arena, an outdoor equestrian training school, besides other five star amenities.
"A thousand apartments have been proposed in the first phase with an investment of Rs 275 crore, funded through internal accruals, debt and sale of residential apartments.
We also have additional land which can be later used to increase the area to 40 acres," said Kankaria. The first phase of the project is likely to be completed by March 2010.
