Developers Worried Over Higher Construction Costs and Low Margins

While higher land prices and raw material costs could put profitability of companies under pressure, a steep rise in borrowing costs is likely to hurt demand. The BSE Realty index fell 11 per cent over the last month and eight per cent over the week as real estate companies reported margin pressures in the September quarter. To add to the problems, the Reserve Bank of India (RBI) toughened stance on rising asset prices. Also, doubts are being expressed about a pick-up in volume due to high prices. “A drop in volumes due to high prices could lead to working capital issues for some players”, said an analyst. The RBI’s measures – lowering the loan to value ratio and higher provisioning for luxury home and teaser loans –are likely to have a minor impact, say analysts. The sector also faces spiraling costs, which have dented the profitability of India’s largest listed players.

High land prices, construction costs and muted sentiment could hurt plans of companies such as Emaar MGF which are looking to come out with initial public offers (IPOs). Though the credit policy was negative for the sector, some realty experts, such as Sanjay Dutt, CEO, Business, Jones Lang Lasalle Meghraj, believe it will have a moderate impact. According to them, most conservative financial institutions and banks have already become cautious on home loans. Analysts say key urban markets such as Mumbai and Delhi will be impacted by higher provisioning for home loans of Rs 75 lakh and above. Given the price increase and higher construction costs (due to labour shortage and rising cement and steel prices) and lower sales in markets such as Mumbai, the norms will be an additional burden for the builders.

With developers withdrawing the 10:90 (10 per cent upfront and the rest on possession) schemes, analysts believe they are likely to bring down the size of the houses or look at lowering prices. While banks have not yet raised rates, analysts believe home loan rates may rise 50 basis points, increasing the borrowing cost. Overall, higher prices and rising costs could hurt demand. According to analysts, Mumbai-based developers (Orbit etc) and others such as DLF, Unitech and Sobha will be impacted given their exposure to premium housing.

High raw material costs and paucity of labour have led to spiralling of expenditure for leading developers. Unitech and DLF, India’s top realty players, saw raw material costs double year-on-year in the September quarter, while consolidated revenues rose 26.5 per cent and 39 per cent, respectively, for the duo. Construction costs were up 38 per cent for DLF on a sequential basis. DLF, which saw earnings before interest, depreciation, tax and amortisation margins drop 900-basis points on a sequential basis to 42 per cent in the quarter, says the drop on account of variation in the product mix is temporary and the company is likely to end the year with margins in the 45-50 per cent range.

Developers say cost pressures are likely to stabilise, but higher land prices and subsequent pricing are the key concerns. Analysts say developers that have outsourced projects with fixed contracts or whose projects are nearing completion will be less impacted as compared to those which are yet to start their projects. They say developers are no longer chanting the affordable housing mantra and are focusing on premium or luxury projects which, given high land prices and construction costs, make more sense. However, volume holds the key and needs to be monitored.

The stock prices of realty companies could see more downward pressure if volumes don’t take off. In addition to higher sales volumes, successful listing of some big-ticket IPOs would reflect interest in the sector, said analysts. While Oberoi Realty and Prestige Estates managed to raise Rs 2,200 crore recently, Emaar MGF’s IPO would be closely watched, given that this would be the company’s fourth attempt to list. While most analysts are bearish on the sector per se, they advice a selective approach. In terms of picks, analysts are putting their faith on DLF, Sobha (26 per cent upside each) and Anant Raj Industries (39 per cent).

Urban India Relying Less on Bank Finance for Housing Needs

Only 25% of urban Indians have used bank finance to invest in a house, government data released on Monday showed. Instead, over 61% of the cost of houses built by families across urban India was financed by themselves. This means India is quite removed from the build-up of sub-prime lending bubble as of now. The figures from the National Sample Survey Organisation’s report on Housing Conditions and Amenities in India for the 2008-09 are startling. They confirm the anecdotal evidence of the boom in construction of residential properties in Indian towns unaffected by the changes in the rates of interest for housing loans from banks and housing finance companies.

“The NSSO figures reflect under-penetration of Indian banks and show that Indian households are typically under-leveraged so far as bank financing is concerned,” said Crisil director and principal economist DK Joshi. He added that the data was also consistent with earlier findings that only few Indians hold bank accounts and very few took bank loans. The data also show that on top of the 61%, another 15% of the cost of construction is sourced from “non-institutional agencies”, a description for local lenders, including chit funds.

In the latest quarterly monetary policy, the Reserve Bank of India raised the provisioning cost for real estate loans. It has prescribed an upper cap of 80% for loan-to-value ratio for all housing loans. But as the NSSO data show, the impact of such direct measures by RBI might have only muted impact on the pace of construction in domestic real estate.

The data also show that migration of households to urban from rural areas does not seem to increase their access to institutional finance. In rural areas, for instance, access to bank credit is 18% of the total cost of completed constructions. In both urban and rural areas, therefore, almost two-thirds of the cost of housing has to be financed by the households themselves.

Parsvnath Developer to Develop Office Complex worth Rs 225cr at Delhi

Realty firm Parsvnath Developers will invest Rs 225 crore in partnership with private equity firm Red Fort Capital to develop a high-end official complex in the heart of the national capital. The company started the construction of the project ‘Red Fort Parsvnath Tower’, having a built up area of three lakh square feet, located on Bhai Veer Singh Marg near Gole Market.
Last month, Parsvnath had sold 24.5 per cent stake in the project, which it bagged from Delhi Metro Rail Corporation, on a BOT (build-operate-transfer) basis, to Red Fort Capital for Rs 120 crore.

“The project cost of this official complex will be Rs 225 crore and it would be completed in the next 18 months. The construction would be done by L&T and the project will be high-end, catering to the needs of the future generation,” Parsvnath chairman Pradeep Jain, said.
The company expects Rs 100-120 crore per annum as rental from this project starting from 2012-13 fiscal. “We expect rental at over Rs 300 per sq ft per month,” Jain added.

The total project cost includes Rs 99.5 crore upfront payment made to DMRC.
Parsvnath has a land bank of 194 million sq ft, of which it is undertaking construction of 80 million sq ft on fast track basis.
To cut debt running into Rs 1,100 crore and meet construction cost, the company has been raising funds through private placement of shares to institutional investors and private equity at project level.
Also last month, Parsvnath Developers had announced that it has raised Rs 270 crore through private placement of shares with institutional investors to fund ongoing projects.
In 2009, the company had raised Rs 168 crore through the QIP route and Rs 190 crore through stake sale at project level.

Realty Firm Ansal to Raise 400cr via PE Deals

Realty firm Ansal Properties & Infrastructure plans to raise up to Rs 400 crore from private equity players this fiscal to partly repay its high cost debt and fund construction activities of various projects. The company is in talks with private equity firms to raise Rs 300-400 crore by diluting stakes in some of its townships, being developed in North India. Last month, the company had raised Rs 231 crore through private placement of shares to institutional investors for reducing its debt and execute ongoing projects.

“Ansal API is in advanced stages of negotiations to close a deal for Sushant Golf City in Lucknow. It is tying up with a PE fund for a special purpose vehicle, comprising some of the projects within the township,” a source told PTI.
In Lucknow, the company is developing a 3,530-acre hi-tech township. Besides this, the company is also exploring possibilities to raise money from one of its townships in Gurgaon and Greater Noida, sources added.
When contacted, a senior company official said: “We are targeting to retire about Rs 300 crore of high cost debt within this fiscal. For that, we are looking at raising money through various options.”

The company’s current debt stands at about Rs 1,450 crore and its average cost of interest is 14.5 per cent.
“We are planning to bring interest costs down to 12.5- 13.5 per cent by the end of this fiscal,” the official added.
The National-Capital based firm has repaid Rs 140 crore high cost debt in the last 10 days, utilising the money that it had received from qualified institutional placements.
In this fiscal, the company has repaid another Rs 100 crore of debt, mainly high-cost.

The company has reported a 23 per cent decline in its consolidated net profit to Rs 22.76 crore for the quarter ended September 30 compared to the year-ago period. It had posted a net profit of Rs 29.68 crore in the corresponding quarter of the previous year.
Ansal API’s revenues rose by 71 per cent to Rs 330.05 crore in the second quarter of this fiscal against Rs 192.46 crore in the year-ago period.

MSME Proposes 18% FDI in Multi-Brand Retail

The MSME ministry has proposed allowing only up to 18 per cent FDI in multi-brand retail, while cautioning that entry of global retailers could harm interests of kirana stores, small farmers and consumers.
In its reply to the comments sought by the Department of Industrial Policy and Promotion (DIPP), the Micro, Small and Medium Enterprises (MSME) ministry has said even if FDI in multi-brand retail has to be allowed, it should be less than 18 per cent, official sources said. “India should tread cautiously by opening the sector, if at all, gradual and analysing the impact before opening it more.

In the beginning FDI less than 18 per cent may be thought of,” the ministry’’s reply to comments sought by DIPP said. In July DIPP had sought comments from various stakeholders on opening of FDI in multi-brand retail. Currently FDI in multi-brand retail is prohibited in India, while in 51 per cent is allowed in mono-brand retail and 100 per cent in cash and carry.
“It may harm the interest of small farmers as well as consumers , who would be at the mercy these global retailers, who will be able to influence prices,” it said. MSME’’s reply further said: “Once multi-brand retail FDI is allowed, close competition of kirana stores among each other will go. The multi-brand retailer will take over the market as per its will because there cannot be as many retail outlets in each locality as the present kirana stores.” “Thus in practical terms competition will go and monopoly will be established.” The ministry suggested that even if FDI is allowed, conditions should be put that “50 per cent of the investment should be in fixed capital, including facilities for supply chain infrastructure, processing and storage.”

It also said that malls housing multi-brand retail stores should be “at least two kilometers outside the precincts of the town or city area” to minimise competition to small retailers. FDI-backed multi-brand retailers should be allowed to open stores initially only in six metros — Delhi, Mumbai, Kolkata, Chennai, Bangalore and Hyderabad, it added. “If allowed in cities or town having lesser population, the impact of these multi-brand retail stores will be felt faster and deeper because of lesser number of local retail stores,” it said.

Office Space Rentals Firming Up

Rentals for office space in top Indian cities are firming up due to increased demand, as per an industry study that suggests revival in one of the few real estate segments yet to come out of a slowdown.

There has been moderate quarterly rise in office rentals across Grade A projects in the central business districts of Delhi (4%), Mumbai (3%), Bangalore (3%) and Pune (4%) with Kolkata clocking the highest increase (10%), according to a report by commercial real estate services firm CB Richard Ellis India .

The study for the three months ended September that covered top office space rentals across Delhi NCR , Mumbai, Bangalore, Chennai, Hyderabad, Pune and Kolkata found rentals in Chennai and Hyderabad remained static compared with the quarter ended June.

“A large number of companies are reviving their expansion plans, while demand is also increasing for SEZ office space. This is indicative enough of a revival of demand and substantial improvement in the market activity across the country,” stated the report.

There has been considerable increase in the transaction volume in almost most metros, including Pune and Kolkata. Hyderabad is expected to witness higher rentals because of increased demand for commercial office space by year end, added the report. Anshuman Magazine, managing director at CB Richards Ellis said, “Rental increase will remain in check in the medium term due to the ongoing supply.”

In the top cities, occupiers and companies look to shift to secondary markets and alternate locations for several reasons such as location advantage, metro connectivity, quality construction and infrastructure, more efficient buildings and competitive rentals. “It is imperative for developers to take a cautious approach towards rental expectations during this rising yet fragile market,” the report added.

Diploma in Real Estate Marketing launched by NIREM

If you want to position yourself for great opportunities in Real Estate in India and beyond, This course is for you….

National Institute of Real Estate Management (IDS NIREM), www.nirem.org, has launched a Diploma program in Real Estate Marketing. The course offers a step by step learning curve to understand the real estate business with particular emphasis on property sales, marketing and transactions.

Course objective is to provide comprehensive knowledge and develop practical property business skills that traditionally take years to acquire. With this knowledge and practical business skills, participants would be able to manage complex property transactions with confidence and success.

Divided into three stages, this three-month program is offered through a combination of class room teaching and practical training with real estate companies. The biggest advantage of this course is that there’s no need to leave job, as the flexible class-timings allow participants to study as well as work.

The program is targeted at real estate professionals as well as those who want to start their career in real estate. This course is also ideal for people planning to start their own real estate ventures. Candidates must have passed class twelfth in order to take admission in this course. Admission shall be offered on first-come-first-serve basis, starting from 25^th November, 2010. Course is scheduled to start from 20^th January, 2011. Details can be obtained from www.nirem.org or nirem.india@yahoo.com

Realty firm Parsvnath Raises Rs 120 cr via Stake Sale

Realty firm Parsvnath Developers has raised Rs 120 crore by selling 24.5 per cent stake in its office complex project at Connaught Place, in the national capital, to private equity firm Red Fort Capital. In a filing to the Bombay Stock Exchange, Parsvnath said it has partnered with Red Fort Capital to jointly develop the office complex, spread over five acres.

The project ‘Red Fort Parsvnath Towers’, with a leasable area of three lakh sq ft, would be developed by its subsidiary Farhat Developers Pvt Ltd (FDPL). “The entities controlled by Red Fort Capital have acquired 24.5 equity stake in FDPL by inducting Rs 120 crore as foreign direct investment,” the filing said. When contacted, Parsvnath chairman Pradeep Jain said the total project cost of the office complex is Rs 200 crore that includes Rs 99.5 crore upfront payment to the Delhi Metro Rail Corporation (DMRC).

Parsvnath has executed a concession agreement with DMRC to deliver the project on a BOT (build-operate-transfer) basis. The construction will be done by L&T. Earlier this month, Parsvnath Developers had announced that it has raised Rs 270 crore through private placement of shares with institutional investors to fund ongoing projects. Last year too, the company had raised Rs 168 crore through the QIP route and Rs 190 crore through stake sale at project level.

Parsvnath had raised Rs 115 crore by divesting a 22 per cent stake in a housing project in Delhi to Red Fort Capital. In another PE deal, the company had raised Rs 75 crore by selling a stake in a Gurgaon housing project to Sun Apollo. The company has a land bank of 194 million sq ft, of which it is undertaking construction of 80 million sq ft on fast track basis.

Tata Housing Ventures into Chennai Affordable Housing Segment

Tata Housing – the well known real estate developers for all target segments has now ventured in to Chennai’s residential real estate market. The investment is in the tune of Rs.2,000 crores and the group will be developing about three to four million square feet land in few years. The company is in talks with various state government bodies to promote affordable housing projects with Public Private Partnership (PPP) model.

Addressing a Press Meet Tuesday Mr Brotin Banerjee – Managing Director and Chief Executive Officer of Tata Housing Development Company Limited said that the proposal includes the companies flagship project Crescent Lake – an integral Township Project, disseminated over an area of 25 acres of land at Oragadam which is considered as the industrial hub of Tamil Nadu. The cost range of each flat would be around Rs. 14 lakhs – 35 lakhs with the whole project estimated at Rs. 650 – Rs. 750 Crores. The phase I, which would comprise of 960 apartments with six high rise towers offering 1, 2 and 3BHK with a minimum of 570 sq ft to the maximum of 1,406 sq ft. The cost would range from Rs.2, 500 per sq ft. Phase ll would have rows of houses and 3 and 4 BHK.

THDCL is also planning to take up two more home township projects in Chennai with 40 – 50 acres, where the space would be priced around Rs.6.5.lakh – Rs.35 lakh, viewed as a premium project in Chennai city. The company is also planning to tie up with local land owners in developing few projects in Chennai. Apart from Chennai, the company is also planning to develop a residential project at Hyderabad in 30 acres of land. THDCL would also set joint ventures with land owners for few up coming projects.

THDCL has already signed two MoU with the Assam Government to create commercial development in the state. The first MoU is with the Department of Industries and Commerce of Assam for creating commercial space which including business parks and IT buildings. The second MoU is with Guwahati Metropolitan Development Authority (GMDA) for developing a township and other infrastructure projects under the PPP model.

Tata Housing to Develop Integrated Residential Township Projects Across India and Abroad

Tata Housing Development Company, a subsidiary of Tata & Sons, is keen to adopt public private partnership (PPP) route to develop integrated residential township projects across the country. While an MoU has already been signed with the Assam government for affordable homes through the PPP route, the company is in talks with a few other state governments. Tata Housing is also planning to adopt this concept for its overseas foray.

“We are very close to signing an agreement, through a third party, with another country. However, we can’t disclose the name of that country at this point,” Brotin Banerjee, managing director and CEO, Tata Housing told reporters. While speculations are that the project might come up in Sri Lanka, company officials remain tightlipped.

“We are in talks with a few state governments in the country. While the governments will be able to bring in the land and ensure associated resources required for the township, we will use our expertise to plan and implement an integrated project with all basic amenities and facilities,” said Banerjee.

According to Banerjee, private developers usually run into issues such as acquisition, conversion and approval leading to project delays. Government comes into the project, it cannot only ensure availability of land with clear title, but also open the opportunity to develop affordable homes for the needy. The state housing boards that were formed for such initiatives have off-late lost their focus, he added.

(Un)affordable Housing

October 25 2010, 14:18:07 IST | RITESH VOHRA, SAFFRON ASSET ADVISORS I Source: VCCircle

Come signs of a market recovery and most of the talk about affordable housing remained just talk!

Affordable housing must certainly hold the distinction of being amongst the most misused words within the Indian real estate sector. During the property market downturn in 2008 and 2009, almost every developer (especially those listed and aspiring-to-get-listed) came out gushing how affordable housing was the new growth mantra and how they would develop ten-twenty-thirty thousand affordable homes over the next few years.

Market watchers felt this was the great transformation of the Indian property market that they had been waiting for years. From catering almost exclusively to the mid income and premium segments, finally the established developers were taking note of the bottom of the pyramid as well. The FMCG strategy of selling shampoo in one rupee sachets was about to be implemented in the real estate sector as well.

As events of the last 12-18 months have demonstrated, all these hopes were short-lived. Come signs of a market recovery and most of the talk about affordable housing remained just talk! Developers quietly went back to the business of building apartments for the rich and the aspiring.

Most of us involved with the property sector know that as per government statistics there is a shortage of about 25m homes in India. Some 70% of these are needed in the rural areas and over 80% are in the below INR 750,000 category. For the purpose of this article, I will focus on the urban markets and on housing priced at INR 750,000 or below.

Despite all the noise, in reality there are only a miniscule number of established real estate developers operating in this segment. However, in recent times a few new developers have focusing on this segment exclusively, notably Jerry Rao’s Value Budget Housing and the NYSE listed Homex. Some of the existing developers involved in affordable housing projects include Tata Housing, Puravankara and Shriram Land.

The reason why this trickle of projects is not turning into a stampede is because the established developers don’t find such projects profitable enough on a per sq ft basis. Why work for hundred bucks per sq ft profit when you can make a thousand or indeed ten thousand? Also, leaving aside slum rehabilitation schemes, there are no real opportunities for such projects within city limits because of the land costs involved.

Which is why it is heartening to see niche affordable housing developers emerge and one hopes there will be many more of them coming up and establishing robust business models. This is a segment which anyways requires a different way of thinking compared to conventional real estate development – the mind set has to be assembly line manufacturing to ensure cost efficiencies, process management and quicker turnarounds. The sales team has to be able to handle customers who are used to being regularly fleeced by fly-by-night operators.The architects and designers have to think on completely unconventional lines when developing master plans and layouts.

Typically such projects are located on the out-skirts of the larger cities, unit sizes are between 300 to 600 sq ft and prices range from INR 300,000 to INR 750,000. Configurations vary from studio apartments to compact 2 BHKs.

It is interesting that most such projects are profitable on a stand-alone basis without any government subsidies or support. Also, despite being in the outskirts or far flung locations, most of these projects have witnessed phenomenal sales velocities, thereby proving the hypothesis that there is a market which is ready and in fact desperate to get a house within their budget.

Having said that, it is the need of the hour to deliver at least a million such homes a year across India’s cities. Some facilitation from the government can go a long way in generating that level of through put. For starters, if only we had adequate transportation infrastructure to allow people to live 30 km away from the city centre and still reach their workplace within an hour of travel time.

That would allow thousands of acres of relatively inexpensive land to become available for affordable housing that would be convenient enough for the prospective residents. Till this happens, developers would have to substitute government infrastructure with private options – bus services to the nearest transportation hub is a common feature of such projects.

I feel there is no real need for any land or FSI based subsidies for affordable housing projects as that will vary from state to state as well as be cumbersome to implement. Further, it would be a long time before this becomes a national movement (JNNURM is a case in point).

Instead, if the central government can announce a tax break (aka 80-IB (10)) for affordable housing projects meeting certain criteria (size of units, selling prices, number of units, buyers profile etc), that would be enough for mass scale development activities in this segment to take off. A similar mechanism can also be enacted for development of rental units in the affordable housing category. State housing boards could also participate actively by becoming facilitators or developers of such projects.

As the under construction affordable housing stock grows, we will see rapid growth of micro housing finance companies as well. Both of these (developers and HFCs) working hand in hand can do wonders for this segment.

(Ritesh Vohra is the Managing Director, Real Estate, Saffron Asset Advisors Private Limited.)

Basics Of First Time Fund Raising

Menka Sajnani, Vice President, Auda Alternative Investments, October 25, 2010; Source:VCCircle

Raising a first time fund can be extremely challenging. What are some things to think about when contemplating a new setup?

Having screened more than a hundred GPs in the Indian market over the past three years, it would be safe to say that our private equity practitioners are a highly dynamic group - and quick to evolve. We have seen a number of industry veterans going independent this year. I believe this spells good news for the development of the private equity ecosystem.  Having said that, raising a first time fund can be extremely challenging.  What are some things to think about when contemplating a new setup?

Let Your Team Shine – Personality driven first time funds seem to be the flavor of the market. Very often there is a highly accomplished and charismatic individual leading or even dominating the fundraising efforts and marketing meetings.  What I have found, that works quite well, is shifting some of that responsibility to other members of the team. I have to say that my conversations with the “second-in-command” or the Principals/Directors have always been the most enlightening.  Ultimately, we want to be backing an organization, not just one specific individual.

Maintain High Reporting Standards - One of the biggest concerns when investing in a first time fund is the quality of reporting standards, vis-a-vis a more established fund. This point is often undermined in preliminary marketing meetings, but is one of the key ingredients in a successful GP setup. Given our exposure to the Indian market, we have seen the good, bad and the ugly when it comes to quarterly reporting. And it really does reflect a lot about the GP. There is no such thing as a ‘perfect’ standard, but it is definitely worthwhile spending time and energy understanding what your LPs want to see and how to get it right.

Share Co-Invest Opportunities – With a number of sophisticated institutional investors with large AUMs, co-investment opportunities are clearly an attractive way to maximize upside. It also provides LPs and GPs an avenue to establish closer ties and share expertise. For the first time fund, it may entice investors, and rest assured, the effects are long lasting. Carry sharing with LPs or reduced management fees are other initiatives that we have come across, and it seems to have worked quite well for some first time funds. 

Have a Clear Vision – There a number of instances where we met with first time funds, and surprised to learn how such little thought has been put into the long term vision for the organization.  Is there a succession plan in place? Do you want to be the next Warburg Pincus? Or expand into real state?  These are things to think about. And the answer can be very telling.

Set Realistic Goals – We are seeing first time funds are raise anywhere between $100-$400million. Given the tougher fundraising environment and increased level of competition, setting realistic expectations would be wise.  It may be good idea to put serious thought into how large the first fund really needs to be, and how much time can you afford to spend on fundraising. Patience is definitely not overrated in this industry.

Keep it Simple – It can be overwhelming to receive a presentation, a private placement memorandum, an executive summary, a reference list and a long note soon after the first meeting. Marketing and due diligence ‘ammunition’ should be used in a selective manner, so that LPs have time to digest the information bit by bit.