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.