India Needs Land Price Balance

By Dhruva Jyoti Chowdhury

Kolkata, India: While the unchecked speculation in North India has resulted in a price correction, other parts of the country have not witnessed a change in prices as yet.

Increasing the supply of land – which constitutes about 50 percent of the total project cost at present and is largely responsible for high prices – holds the key to affordable housing. This was the consensus that emerged at the Real Estate Conference organized by Confederation of Indian Industry (CII ) recently.

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Parag Munot, Executive Director, Kalpataru Properties Pvt Ltd., pointed out that while demand has gone up real estate supply and infrastructure have not improved. Ashish Raheja, Managing Director, K Raheja Universal Pvt Ltd., said that while the current pricing will not come down, affordability is an issue.

Sunil Rohokale, General Manager - Head Mortgages and Real Estate, ICICI Bank Ltd., explained that demand is always outstripping supply in the mortgage industry with too many people chasing the same asset.

Sunil Mantri, Chairman, Mantri Group, opined that the current slackness in the market would disappear after September with the Dussera-Diwali period commencing whereas Harshavardhan Neotia, Director, Bengal Ambuja Housing Development Ltd., pointed out that very few developers find low income and middle income housing viable in the present scenario. The government needs to let developer’s access land at cheaper prices, he said.

Dharmesh Jain, Chairman & Managing Director, Nirmal Group of Companies emphasized that until supply increases, the concept of reducing prices will remain just a mirage. Until one flat is chased by ten buyers this problem will remain, he said. Similarly Ramesh Jogani, Chief Executive Officer & MD, Indiareit Fund Advisors Pvt Ltd., stressed that affordability and banks introducing liquidity in the system were the major issues at present. The government needs to promote large format schemes with a specified time period. Anuj Puri Conference Chairman & Chairman and Country Head, Jones Lang LaSalle Meghraj, said that while the unchecked speculation in North India has resulted in a price correction, other parts of the country have not witnessed a change in prices as yet.

Advocate Anil Harish, D M Harish & Co felt that the emphasis should be on creation of new areas with infrastructure and facilities rather than further developing existing urban areas while K Srinivas, Managing Director, Gujarat Urban Development Co. Ltd., highlighted the fact that close to 50% of ‘close to urban’ areas can be urbanized but are not put to urban use.

Ness Wadia, Jt Managing Director, The Bombay Dyeing & Mfg Co Ltd, highlighted the soaring land prices in metros like Mumbai. He stressed that there is a huge issue of speculation and customers need to feel that they have a good deal. Pawan Malhotra, Managing Director & CEO, Mahindra Gesco Developers, pointed out that building office spaces for small industries offers a great opportunity to developers.

Lalit Kumar K Jain, Chairman, Kumar Builders opined that speculative development in commercial spaces is very low, primarily for incubation spaces so there is no risk on the supply side. Satish Magar, Chairman & MD, Magarpatta Township Development & Construction pointed out that no developer is going to build offices and wait for customers to come.

R N Bhaskar, Chairman & Managing Director, e-convergence Technologies Ltd, underlined the need to build for the future whereas R K Agarwal, GM-Corporate Real Estate, Hindustan Lever Limited, emphasized that infrastructure has to be in place before corporates take up office space. Capt K Srinivas, Vice President Procurement & RESO, Mphasis, said that it was useful for corporates to have information about the demand and supply for real estate as they needed to consider issues like scalability in future.

Providing an Indian perspective on easing norms for FDI in Real Estate, Niranjan Hiranandani, Managing Director, Hiranandani Group of Companies, said that the secret of reducing prices is to create surpluses and that is only possible if restraints on FDI are removed, while Shobhit Agarwal, President Capital Markets & Investment Sales, Jones Lang LaSalle Meghraj, explained the original objectives behind easing FDI.

Manish Chokhani, Director & CEO, Enam Securities Pvt. Ltd., pointed out that the issue is really about liquidity and access to capital, followed by regulation. Alex Hayim, Director, REIT Property Management Pvt Ltd. stressed that clarity on FDI – what can be done and what not – is the need of the hour.

B S Nagesh, Managing Director, Shoppers’ Stop pointed out that when money comes in, it has to bring in quality. Unfortunately we haven’t seen that happen yet, he said. Ajoy Veer Kapoor, Managing Director, Saffron Advisors, explained that economics, financial inputs and politics cannot be segregated, we have to be realistic. Tarun Joshi, Chief Executive Officer, Brand House Retails Ltd and Shailesh Chaturvedi, Chief Executive Officer, Tommy Hilfiger Apparel India also addressed the conference.

A whole host of financial institutions are looking seriously at entering the reverse mortgage segment. A new concept in India, the reverse mortgage product is essentially a loan provided to senior citizens by mortgaging their homes. Heirs can either repay the loan or forfeit the property. Social and economic conditions have created an opportunity for this segment, particularly with an increasing number of senior citizens living by themselves due to migration of their children to other cities or countries.

Punjab National Bank (PNB) and Dewan Housing Finance Corporation Ltd (DHFC) have already launched reverse mortgage products. GIC Housing Finance Ltd plans to enter this segment in the next 3-4 months. LIC Housing Finance also plans to offer a reverse mortgage product within a month where senior citizens will be given between 40% to 60 percent of the value of their homes as loan with a tenure of 15 years.

According to news reports, other institutions like Allahabad Bank, ICICI Bank and Bank of Baroda amongst others are also evaluating the reverse mortgage segment.

One area that is still unclear is on the tax implications of reverse mortgage. Gruh Finance is one institution that is waiting for clarity over taxation aspects before launching a reverse mortgage product.

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India Real Estate Jitters

By F. Colton

I have recently read about a few laws the India Government has passed to slow the real estate market in India. The false claim that too many foreign real estate funds are driving up real estate values is complete rubbish. First and most importantly, I can count on two hands the number of foreign real estate funds that have actually invested money on a real estate project in India. It's just not happening like the media claims. Foreign Real Estate funds find the India market appealing, but it still lacks the transparency available in other more mature markets.

So how are the real estate prices being driven up? For one, local Indian developers and local speculators are driving the cost of real estate up. Most are ignoring real estate fundamentals and are paying any price to participate. The smart ones are forming Joint Ventures with landowners to reduce their exposure and risk. Most of these joint ventures are win-win scenarios.

Real estate is a cycle of booms and busts. The Indian government may try and smooth the peaks and valleys but inevitably the cycle must continue. Moreover, India is in need of a complete overhaul in infrastructure. Why scare away the very investor you are looking to attract to help build out the infrastructure India sorely needs? There is no so called bubble in the India real estate marketplace. Of course prices are too high in some areas and will come down. However, the fact remains that almost 95% of the buildings in India are Class D or F in other parts of the developed world.

India needs foreign capital to drive its real estate market and to compete with other Asia countries. Foreign investment brings jobs and skill development not currently found in domestic India. The India Government should be focused on enticing FDI and not protectionism. India has momentum, but as history has shown, it can change overnight by thoughtless, short-term strategies that may get one reelected but not allow the country to modernize.

In summary, India is at yet another cross roads. This won’t be the last one but it is an important signpost directing foreign investment in or out. Unlike more mature markets, India’s modernization depends on foreign capital. The world is globalizing and is looking for alternative investments outside of the US and Europe. India can either open the door a little wider to foreign capital or discontinue FDI liberalization and risk foreign capital finding other alternative markets. Large foreign investors are a finicky bunch.

The author is the Editor, The India Street.

RBI keeps key rates unchanged

In the annual credit policy for the year 2007-08 announced here today, the Reserve Bank has left the CRR, repo and reverse repo rates unchanged.

Announcing the policy here, RBI Governor Y.V. Reddy said the RBI has kept the bank rate unchanged at 6 per cent, the reverse repo rate at 6 per cent, repo rate at 7.75 per cent and the cash reserve ratio (CRR) at 6.5 per cent.

The RBI has now permitted Indian banks to extend credit and non-credit facilities to step-down subsidiaries within the existing prudential limits and some additional safeguards. Banks and primary dealers have also been permitted to begin transactions in single-entity credit default swaps.

The RBI also introduced measures to make interest rates attractive for housing loans upto Rs 20 lakh. Reddy announced today that risk weight on the residential housing loans to individuals would be reduced to 50 per cent from 75 per cent as a temporary measure, keeping in view the default experience and other relevant factors.

This step would be applicable to loans up to Rs 20 lakh and will be reviewed after one year, the policy said. This measure will leave banks with more money to lend for the housing sector and make interest rates attractive for loans up to Rs 20 lakh.

Meanwhile the apex bank has lowered its growth forecast to 8.5 per cent from 8.5-9 per cent as it expects global GDP to decline in 2007.

Inflation targets have also been revised downward to 5 per cent from last year’s targets of 5-5.5 per cent. The RBI hopes to rein in inflation between 4 and 4.5 per cent over the medium term.

With foreign exchange inflows peaking $200 billion, the RBI has begun to move a bit further towards full capital account convertibility.

Among the measures in this direction include permission for Indian companies to invest in foreign companies upto 300 per cent of their net worth, hedging for individuals and outward remittances up to $ 100,000 as against $50,000 in the past.

Domestic producers and users will also be allowed to hedge their price risk on international commodity exchanges for copper, aluminia, zinc, and even aviation turbine fuel. Indian companies will also be allowed to rebook and cancel their forward contracts.

The RBI has also reduced interest rate ceilings on non-resident deposits. It proposed allowing corporates to repay more external commercial borrowings ahead of schedule, proposed increasing the aggregate ceiling for overseas investment by mutual funds to $4 billion from $3 billion, and increased the foreign portfolio investment limit for listed firms.

Reddy also put out a roadmap for the apex bank to develop the corporate bond market, futures contract, establishment of credit information companies and a number of steps to help distressed farmers and micro-finance.

Reddy announced that a credit guarantee scheme would be introduced for distressed farmers.

Markets party

The financial market gave a thumbs up to the annual credit policy, which pushed up the benchmark Sensex higher by over 225 points and lifted rupee to over a nine-year high.

The RBI’s annual monetary and credit policy, which left all key rates unchanged, boosted trading sentiment in stocks, forex and bond markets at 1230 hrs and triggered all-round buying.

While the BSE Sensex zoomed by over 225 points to 14,153.58, the rupee surged by 51 paisa against the US dollar which traded at Rs 41.17.

The government bonds rose, pushing 10-year yields down to the lowest this month. Bonds rallied and the yield on the benchmark 8.07 per cent bond due for 2017 fell 4 basis points, or 0.04 percentage points, to 8.03 per cent.

On the stock market, the major contribution to the rise in the Sensex came in from Bank index, which shot up by 313.41 points, or 4.55 per cent at 7,195.25 points. Most of banking stocks were up between the range of 3 and 7 per cent across the board.

Bankers gung ho

Bankers were optimistic about the Reserve Bank’s annual credit policy, which left all key rates unchanged, but feared that there could be tightening measures in the near future if it had to contain inflation around 5 per cent.

There is substantial liquidity in the market, evident from the fact that the money supply was dangerously high at 20.8 per cent and any containment will require some drastic belt-tightening.

K.V. Kamath, managing director of ICICI Bank, which accounts for a sizeable percentage of home loans, fears further tightening as the apex bank tries to achieve the medium term inflation target of 4 to 4.5 per cent. J&K Bank chairman and chief executive Haseeb A. Drabu said that between the lines it was a strong monetary policy and there could be further tightening in the next few months."

Public sector banks, however, welcomed the cut in risk provisioning as it would improve their margins with about 80 per cent of their home loans being sub-Rs 10 lakh.

Source: Tribuneindia.com

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