Chennai Real Estate to Appreciate by 10% over the next 12 months

Chennai is a blend of historic and modern, traditional and advanced urban elements co-mingled in a unique way. The growth of Chennai into one of the major cities in India is attributed to its exceptional geographical location at the seaboard of the palar delta. The main factors, which account for its growth, are the extent of its surrounding area, its easy accessibility from the sea route along with far-reaching railways. Chennai has developed as the largest commercial and industrial center in South India, with an extensive network of transportation facilities including the largest seaport in South India, an international airport (soon to have South Asia’s largest), some well-laid roads and rail facilities.

Let us first discuss The Commercial Office Market in Chennai

According to experts, Chennai is expected to witness a supply of approximately 12 million sq.ft in 2007 - subject to scheduled completion of projects under construction. Of this, nearly 10 million sq.ft. is expected to enter the market in the Chennai suburban and Chennai peripheral locations. 9 million sq ft is expected to be taken up by IT or IT related companies, while the rest is spread amongst the various Chennai industries.

Of the 12 million in supply, the India Street expects 80% of that supply will be claimed before the projects are complete. The remainder will be leased within 6 months of the structures being complete. The India Street sees no let up in Multi National Corporation demand for IT space especially along the OMR IT corridor.

So for our 12 Month Office Market Outlook

The India Street further predicts that all major office related real estate zones around Chennai will increase in value between 5 and 10% but not at the 2006 levels witness last year.

Now let’s turn to the Chennai Residential Market

Let me mention an article I have written on the subject located at our Indiastreet blog that discusses the India bubble hype. Please review that article so that I need not summarize it here.

Unlike some of the other major cities in India, Chennai’s residential market still has legs. Home prices are still increasing in the CBD, while new projects on the OMR are selling out quickly. Moreover, a proposed new Floor Space Index (or FSI) along the OMR from 1.5 to 2.5 will allow even greater density which means more profit for developers.

In the high-end market, residential prices in Chennai are creating new benchmarks. The prices of premium properties have increased over 200% in parts of central and south Chennai during the past 15 - 18 months.

There is still a lot of nervousness for high end residential properties outside of Chennai including the OMR due to a lack of temples, quality schools and transportation. The India Street believes a purchase along the OMR is smart given that most of the foreign corporations are located there and there is a strong need for quality housing in the area. Moreover, once the new airport is built, TIS predicts the residential market appreciation areas will shift out of the CBD to the OMR and new Airport regions.

Finally, let’s discuss the retail market in Chennai

Like everywhere in India, quality retail establishments are hard to find. Yes, there are malls and yes there are singular cases of quality retail, but until the market is opened up to multi-brand foreign retail establishments, retail in India is substandard and weak. Yes, you’ll hear from pundits that the market for retail is strong, but only because the only suppliers are Indian. Given a choice, Indians will opt for foreign retail brands because they are better (due to being in a competitive landscape) and we know that Non-Resident Indians prefer them over similar India brands. Please understand we are generalizing here, but we know from experience that this is true.

Due to the lack of mall space in Chennai, malls under construction are witnessing high pre-leasing activity. It’s likely to be a landlord market through 2008. The High Streets of Chennai continue to be the choice for organized retail as there are only 3 malls operating in the City.

TIS predicts a 10-15% increase in retail lease value growth during the next 12 months. The new malls are expected to witness high absorption and low vacancy levels through 2008. Currently demand is driven by local retail establishments like the Future Group and Reliance. However, if multi-brand foreign retail is allowed, TIS predicts the rental values will increase by 50% instead of the still robust 10-15% without multi-brand foreign retail.

In summary Chennai is a better place to invest today than most of the other top cities in India. That may change in the future, but investing in Chennai is currently a good bet. Remember however, the Indian real estate market is not a mature market. It is still in a fledgling stage, in terms of regulations. The markets abroad are much more developed and structured due to their stringent real estate laws. In places like the US and Europe, no agent can deal in property unless or until he or she has a real estate licence. The Indian market is totally unstructured in that sense. Anybody can deal in property, there is no licencing system so beware of those you partner or work with. Research them thoroughly and ask the tough questions. India is not transparent, and therefore due diligence is a must.

- The Editor

The India Street

Breaking News: India Banks Will Only Offer Real Estate Loans to Earthquake Resistant Buildings

New NDMA guidelines: Loans only for earthquake resistant buildings

By Vipin Agnihotri

Under new guidelines from the National Disaster Management Authority (NDMA), banks may only provide loans for earthquake resistant buildings. The main reason behind this is to enhance collateral security and also caution the borrower against purchasing substandard properties. Talking about NDMA, it was formed under the Disaster Management Act 2005 and is headed by Prime Minister, Dr Manmohan Singh.

If experts are to be believed, the recent guidelines clearly pinpoint the fact that banks will take into account the compliance of seismic safety before giving home loans and loans for construction of multi storeyed complexes.

It has come into the notice of The India Street that NDMA has sent copies of the guidelines to the Ministry of Finance, which in turn will forward it to the Reserve Bank of India (RBI) for issuance. As far as guideline is concerned, all building structures- residential and commercial, including shopping malls, multiplexes and bridges whose completion is after June 30, 2007- will have to mandatorily adhere to earthquake resistant design.

In my opinion, it’s a brilliant move, as the banks will lend only to earthquake resistant homes. In addition, the banks can set out responsibility on the construction industry to comply with the earthquake resistant codes and follow construction routines that achieve earthquake resistant homes.

When The India Street contacted experts in this regard, they were of the view that this will strengthen the collateral security of the bank against which the bank gives loans. “There is no doubt that new policy will ensure that homes attain a top quality standard of earthquake protection,” pointed out Zaheer Abbas, real estate expert based at India adding that banks will also feel secured to offer housing loans, as it gives strength to their collateral security, thereby minimizing their risk profile.

Not so long ago, banks were in a state of confusion when properties mortgaged were destroyed in an earthquake. The recent guidelines from the NDMA for revised building codes reveals that there is a requirement for better protection level against a natural calamity.

The main benefit of adopting higher levels of earthquake protection is that a much lower interest rate can be negotiated with the banks for the particular project.

Overview of India financial system

By Vipin Agnihotri

Financial intermediation in the organized sector of India is conducted by a wide array of institutions functioning under the overall surveillance of the Reserve Bank of India (RBI).

Reserve Bank of India-

The Reserve Bank of India as the central banking authority is at the apex of the Indian financial system. Established in 1935, it became a government owned institution from 1949 under the Reserve Bank Act of 1948. Under this Act, the Indian government is empowered to issue directions to RBI, after consulting with RBI’s governor.

RBI performs the following traditional functions of the central banking authority:

• It formulates and implements monetary and credit policies

• It functions as the banker’s bank

• It manages the liquidity reserves of the credit institutions and supervises their operations

• It plays an important role in maintaining the exchange value of the rupee

• It controls payments and receipts for international trade and regulates other foreign exchange transactions.

In addition to the traditional functions of the central banking authority, RBI performs number of functions aimed at developing the Indian financial system.

• It seeks to integrate the unorganized financial sector with the organized financial sector

• It encourages the extension of the commercial banking system in the rural areas

• It influences the allocation of credit

• It supports innovation in cooperative banks

• It promotes the development of new institutions (for example, it set up the Unit Trust of India, the Industrial Development Bank of India and the National bank for Agriculture and Rural development)

Commercial banks-

After RBI, commercial banks represent the most important institutions in the financial system of India. Public sector commercial banks dominate the commercial banking scene in the country. The changes in banking structure and controls in the last few years have resulted in

• Wider geographical spread and deeper penetration of rural areas

• Higher mobilization of deposits

• Reallocation of bank credit policy to priority activities

• Lower operational autonomy for bank management

One of the major activities of the commercial banks is to provide working capital advance to industry. “In recent years, RBI has been monitoring closely the credit extended by commercial banks to industry, which traditionally relied heavily on commercial banks and were the primary beneficiaries of the banking system,” pointed out Shalabh Saxena, business journalist based at India.

Number of committees – the Dehejia Committee, the Tandon Committee has been set up to look into the problem of working capital credit and make suggestions. The major recommendations of these committees have been two fold: reduction in bank credit to industry and inculcation of a greater sense of financial discipline in industrial borrowers. By and large, RBI has accepted the recommendations of these committees.

A major problem faced by commercial banks in India is that their profitability is low. This is largely because of over staffing, inefficient procedures, subsidized lending to the priority sector and high incidence of bad debts.

Govt. to Bring Energy Code for Commercial Buildings

Considering a drastic increase in energy consumption in large commercial buildings, the government has decided to give these establishments a certificate declaring the buildings to be energy efficient if they plan to have a connected power of 500 kilowatts or more.

For the time being, the code will be applicable to new construction commercial buildings as well as integrated townships but a separate code will soon be formulated for reconstruction of old buildings soon.

The Bureau of Energy Efficiency (BEE) has finalized the Energy Conservation Building Code (ECBC) for making an effective use of energy and conservation in buildings. Union Power Minister Sushil Kumar Shinde launched the code.

There are certain specifications for minimum energy performance standards for commercial buildings using smaller glass surface, thermal insulators, windows to maximize natural light, shading devices and separate air conditioning system for areas used for long hours. All the details are listed in the code and compliance with the code will be voluntary to initiate with.

Compulsory enforcement of ECBC will help to save 1.7 billion power units per year. The calculated reduction in energy use for upcoming constructions hovers between 25% and 40%. There are few countries which follow building energy code. The list includes America, Europe, Union countries Japan and Canada, says BEE.

Since 2003, there has been a rise of 12.5% in the amount of electricity consumption in commercial sector. In addition, the office space has grown at the rate of 10%, says Dr Ajay Mathur, Director General, BEE.

Air conditioners in such buildings consume 60% of the total electricity available to them. Offices like call centers which has 24×7 environment can toe the building code and bring a drop in consumption by a significant 40% whereas offices operating in daytime can conserve up to 37 percent energy.

Indian realty in superfast lane

London/Mumbai: London may top the global property rates chart, but it’s high-end Indian real estate prices that are growing the fastest in the world.

A new study — ‘Wealth Report 2007’ — by real estate consultancy Knight Frank and Citi Private Bank shows that prime real estate rates in India, along with those in Russia and China, soared 40 to 50 per cent over the last year. The British capital, in comparison, recorded a price growth of 30 per cent in the high-end segment.

Pranay Vakil, chairman of Knight Frank India, told HT: “India’s most expensive residential properties, at an average of Rs 50,000 per sq ft, would be in Mumbai. This includes properties like the Chattan Bungalow on Malabar Hill or Sunita Apartments on Napean Sea Road.”

Liam Bailey, head of residential research at Knight Frank, said upcoming prime locations included St Petersburg and Moscow in Russia, Delhi and Mumbai in India, as well as Guangzhou and Beijing in China.

The report points to the growing influence of high net worth individuals — defined as those with $10 million (Rs 40 crore) in investable assets — on the global property market. This is indicated by the fact that prices for the most expensive properties rose on average by more than 14 per cent in 2006 compared to a 9 per cent rise in the mainstream market.

Rapid economic development, together with the creation of new wealthy sections of society, led to intense competition for the best apartments and villas in prime neighbourhoods — and boosted prices, the report said.

Bailey said prime property would continue to outperform mainstream markets. “Over the next five years, we believe the trend of growing wealth and greater wealth concentration will continue,” he said. “There will be a significant demand and supply imbalance in the best prime market locations. Price growth this year will be lower than in 2006, although prime markets will outperform mainstream markets by quite a margin.”

Incidentally, London is home to the most expensive residential property in the world. Prime property in the British capital costs $4,590 (Rs 1.87 lakh) per sq ft, just ahead of Monaco at $4,370 (Rs 1.79 lakh).

Hyde Park is among the most expensive in London, commanding a price of $8,000-$10,000 (Rs 3.26 lakh to Rs 4 lakh) per sq ft, said Vakil.

Source: www.hindustantimes.com

India Real Estate is Surpassing India Stocks for Investors

By Vipin Agnihotri

Lucknow, India: First some facts,

Circa 1999: The term ‘Indian real estate’ was a scary one. As a matter of fact, investing in real estate for capital appreciation and income was unheard of.

Circa 2005: The consensus was that there is a real estate ‘bubble’ that can burst anytime.

Circa 2007: Real estate in India emerged as another asset class perfect for diversification as well as in optimizing returns.

As you can pretty much imagine, this is how the opinions about investing in Indian real estate changed over the years. With real estate markets more vibrant than ever before, and most importantly with increasing institutional participation in this market, there scope is proliferating. Because of this, increased investor confidence and increased investments in the sector.

In the last few years or so, with more investment avenues opening up and giving better returns, investment in Indian real estate had taken a back seat. The pivotal factor responsible for this situation is the price appreciation in real estate and markets opening up with more sustainable demand.

According to experts, 50 years ago, India does not have a vibrant rental market for retail and commercial space. With increasing demand for retail space and office spaces, these two segments are witnessing improved rental yields and also attractive price appreciation. What’s more, with increased buoyancy, the Indian real estate market now falls in league with stocks, bonds, mutual funds, gold and commodities, and insurance policies as a viable investment option for investors in all categories- individuals, corporates and funds.

On the other side of the coin, residential property is a relatively simple investment route especially for a small individual investors/ buyers, who can buy properties both under construction and ready possession for capital appreciation. It is worth mentioning in this regard that returns increase if expected capital appreciation is higher than interest rates on housing loans. In such kind of situation, individuals can invest in a house property by borrowing from a housing finance company.

“Office and retail space is a more interesting investment option for bigger investors. Here, an investors buys a property and lets it out to a company or a retailer,” pointed out Saddia Abid, Assistant Vice President of Megha Real Estate. She also added that it earns regular rental income and carries the advantages of price appreciation, too. Generally speaking, rental income can range between 11 per cent to 12 per cent on investment, and there is room for capital gains. Again, it is worthwhile remembering that investors are able to leverage much more efficiently by taking the assistance of Lease Rental Discounting (LRD).

According to Rahul Mahajan of Surabhi Real Estate, an investor can buy a vacant or under construction property, invariably available at a lower price as compared to a leased-out asset. The main objective is to earn a higher rental income and a higher yield on his investment. Investor here has to take a call on increase in prices and demand. This in turn results in higher rental. Though, the investor undertakes the responsibility and risk of leasing it out. Eventually, basics of investing prevails- higher the risk, higher the return.

Inflation Increase May Mean More Fears Ahead

Although, India can today boast of its bullish economy which is growing more than 8.5% annually since 2003 but has brought with it a significant drop in number of consumers who are unable to carry the burden of rising prices anymore.

The situation has become worst with interest rates on loans hitting the sky, which has made it a Hercules task for borrowers to repay loans, which have been rising at a faster rate than incomes have risen.

While property rates in India and real estate stock prices continue increasing at such a pace, its enormous impact on overseas investments cannot be ignored. However, both the government and Reserve Bank of India (RBI) are trying hard to cut the inflation.

In a step to cool the growth, RBI raised interest rates a number of times over the past year thereby persuading banks and housing finance companies to increase lending rates, in turn causing consumers with adjustable rate loans.

The consumers find themselves in a situation to break their bank in order to pay their monthly mortgage payment which has witnessed a jump of over 20% to $41,000.

However, the weaker section of society will be the worst sufferers if inflation persists as the costs of basic commodities like vegetables and cooking oil have already gone high in the past three years.

The inflation rate (As far as wholesale prices are concerned), has reached the mark of 6.73% in February and has been above 6%. Contrary to this, retailing in India has risen as much as 10% from what it has been a year ago.

Adding to woes of RBI is the ever increasing inflow of foreign direct investments (FDI) and remittances in India which has left banks flushed with funds.

Loans have marked an increase of 30% annually. Interestingly, banks are showing more exposure towards the commercial real estate. For that reason, the central bank is releasing more stringent guidelines for the banks to cut their interests towards the commercial segment. Some major players in banking sector have already begun focusing what could potentially turn into risky assets.