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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Top India Banks may Accelerate Loan Pay Backs from Consumers

By Dr Suvrokamal Dutta

It’s all going downhill for housing loan customers. It has come into the notice of The India Street that if you have opted for a house loan, you may have to repay part of your borrowings or suffer very high Equal Monthly Installments (EMIs). You may ask: Why is it so? The answer is there is a scurry among banks to get rid of bad debts following successive interest rate hikes in the last two or three months.

The pivotal factor here is that private sector banks such as ICICI Bank and HDFC bank, who followed quite an aggressive strategy in the home loan segment during the low interest rate regime two years ago, are now focusing on tools like part repayment of loan or increased EMIs. They are implementing this route so that borrowers meet their liabilities before they retire.

If experts are to be believed, the bank has managed to absorb the effect by enhancing the tenure, which in large chunk of cases are limited to the active service age. However, it is worthwhile pointing that those in their late 30s or 40s will face pressure to repay part of the loan in advance.

When I contacted three prominent private sector banks (wherein the interest rate rose 4 per cent in the last year), I came to the conclusion that they are finding it difficult to manage potential defaults and have more or less resorted to asking debtors for prepayment of some part of the loan or agreed to enhanced EMIs.

In an ideal scenario, borrowers take a loan for a time period of around 15-20 years. And that is where a further enhancement in the tenure will mean that borrowers in their late thirties would have to pay monthly installments for a few years beyond the retirement age.

“The move to enhance EMI or repay a part of the loan will play a prominent part in assisting borrowers to repay the complete amount before the retirement age,” pointed out top official at ICICI bank.

When one takes a closer look at the home loan trends in last five years or so, you realize that home loan rates started moving northward sharply since October last year as the Reserve Bank of India raised short-term lending rates and the cash reserve ratio more often in order check demand and of course ease inflation. Therefore, unless the situation eases, the accelerated EMI situation may get worse before it gets better.

What's next for Stock Market?

By Vipin Agnihotri

No doubt, Bombay Stock Exchange (BSE) Sensex is making valiant attempts to decisively cross the 14,697 peak it reached on February 8 but has not been able to ever since.

In theory, the NSE Nifty, which is not a free-float index such as the Sensex, has managed to cross its previous peak. “Two large IPOs, DLF and ICICI Bank, will divert part of the funds that could otherwise have gone into the secondary market,” pointed out Rangita Chatterjee, stock market expert.

Last week, the Sensex failed to get its chin above the 14,697 bar and dropped back to end the week at 14,003, down 506 points. The biggest contributors were Reliance Industries (with 98 of those 506 points), Larsen & Toubro (47) and ITC (44). Investors are wondering which way the breakout will happen.

As far as money flow into the stock market is concerned, it has come into the notice of The India Street that Life Insurance Corporation of India is planning to invest Rs 115,000 crore in equity and corporate debt.

In addition, pension funds will be allowed to invest partly in equity. Furthermore, private sector mutual funds will get access to surplus PSU funds. “The Reserve Bank of India is releasing $5 billion of its over $200 billion forex kitty for investment in infrastructure. As India’s economy grows and the equity cult spreads, more money will keep pouring into the stock market,” pointed out N Yadav, business journalist based at India.

But experts believe that there are reasons to being cautious in the short term. First and foremost, public governance is abysmal, and getting worse as elections approach. Quite a number of times it is downright foolish as in the quest to squeeze tax resources with not a thought on how poorly those already raised are being utilized.

In my opinion, the fringe benefit tax on sweat equity is one example. Another one is the levy of a 12.3 per cent service tax on sale of tickets for international flights out of India. The result: ticketing business has gone to other countries.

“The most valuable state-owned company is ONGC, which has been headless ever since the Government refused an extension to its former chairman who made the firm hugely profitable,” pointed out Ramesh G, CEO of India research.

It is worthwhile remembering that the man nominated by an internal committee, RS Sharma, was refused the post by the Prime Minister’s Office and now, funnily, has been re-nominated! Similarly, State Bank of India, which has an unbelievable uninterrupted dividend history of over 150 years, is valued at $17 billion, less than private sector ICICI Bank and far lower than ICBC of China, which is valued at over $230 billion.

To see how the private sector extracts value, it is of utmost importance that one observes the $1 billion valuation sought to be extracted by Reliance Communication by hiving off its tower business into a separate entity.

The present stock of 110,000 towers is expected by the telecom regulator to grow to 350,000 by 2010. Reliance Communication’s valuation has shot up.

On the other hand, that of public sector Bharat Petroleum, Hindustan Petroleum and Indian Oil Corporation are languishing, because of the burden of subsidy forced upon them. Its not that these managements cannot extract value but, sadly, they are not allowed to. All in all, it’s better, therefore, to await a better opportunity to invest.

Home loan rates to stay hard for some more time

By Vipin Agnihotri

Home loan borrowers in India have to wait for a bit before they see interest rates softening up. Home loan experts while speaking to The India Street has said that this can only happen if the Reserve Bank of India (RBI) relaxes few of the fiscal curbs it has imposed on banks.

With loans no longer affordable in nature, and the ongoing correction in real estate prices, there is a possibility that the demand for home loans can slow down marginally. It is worth mentioning in this regard that the home loan industry grew by 25 per cent in 2006-07 compared to the previous year, but fact remains that the growth is expected to come down to around 18 per cent in the current financial year.

In my opinion, the correction phase in the real estate industry would continue till September. But during the festival season the market should see the reversal of the present trend. According to one estimate, real estate price are expected to correct between 15 to 20 per cent in certain pocket from its peak level.

“The real estate sector will again witness the same type of buoyancy it showed last year in 2008,” pointed out Dr Suvrokamal Dutta, real estate expert. Point to be noted here is that demand is a function of cost of funds - the interest rate- and the price of the product. According to Dr Dutta, in the coming eight to 10 months, both these would undergo changes.

There is no doubt that the present trend towards price correction would be finished, and more importantly they would stop falling any further. Simultaneously, if one takes into account the inflation trend, the interest rate would also begin softening during this time.

The main factor is the availability of housing in few areas. Though, there is a strong possibility that prices would remain inelastic in those regions. Furthermore, there were few pockets in almost all the cities where prices had not seen any correction because of the fact that no new products could be made available.

For example, in the case of Delhi, since the demand is far greater than supply, there has been hardly any correction, but experts believes that there is certainly few correction outside Delhi where supply of fresh products is coming or expected to come.

In other word, because of the rise in the interest rate, average size of the home loan in the last one or two years has dip down to Rs 12 lakh from Rs 14 lakh a year ago. The borrowers eligibility has come down due to substantial rise in the interest cost.

Interestingly, banks have not seen any slippage in their book. "The increase in interest rate and subsequent increase in he monthly installments have not affected the portfolio almost all the borrowers are the end users," pointed out Rajiv Sabharwal, Senior General Manager at ICICI Bank, and in-charge of its home loan division.

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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