India Real Estate in Fragile Balance at the Moment

Dhruva Jyoti Chowdhury, Kolkata, India

Though the Indian real estate market is at present estimated to roughly US $16 billion, and has been ever growing, has been marred by various problems not only due to the Government policies, builders and the finance companies but even by the people in general who are putting in huge amounts of money to buy those properties.

While the market regulator SEBI has clearly said that it will allow registration of selective hedge funds that too at the merit of each case.

The Indian market which is expected to reach US $60 billion by 2010 and commercial real estate market would reach US$12 billion by the same time.

Shares of foreign investments in real estate will increase from current US$3.12 billion to about US$25-28 billion by 2010, matters pertaining to the horticultural planning, infrastructure development and potable water facilities remains unattended still. Another aspect of parking facilities, however, remains another area of neglect. Most of the multi storied buildings lack a proper parking facility for the apartment owners in most of the big cities.

The Indian market is mostly driven by the buoyant economy, flourishing IT/ITES sector, banking and financial, retail sector, ascending lending rates by private and public banks is also affecting the genuine buyers, investors, bankers and developers. The rates, which have increased by nearly 2 per cent in the last six months, are now having a deep impact on the coffers of the employed class.

Remember that all the establishments concerned with the promotion of real estate in the country is a cluster of groups consisting of industrial and service sectors like real estate (housing construction, construction of commercial offices, retail and industrial buildings and infrastructure projects), brokerage services, real estate finance services (mortgage banking, real estate investment), real estate operations, property management, architecture and design. And if any one of these does not goes parallel with the other or lack of planning and foresightedness, can bring immense loss to everybody concerned.

The fast development in the basic infrastructure among factors fuelling real estate boom, hold quite a promise in the group housing sector, considered the best alternative to solve the burgeoning needs of the people. Though the state government has already announced two separate multi-storied housing facilities to provide affordable houses for the urban poor, it is yet to come out with fresh schemes to cater to the needs of a large number of middle-class families wishing to have a roof over their heads. It is high time everyone get their socks up so that they do not suffer any loss due to carelessness and lack of foresight.

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The India Street Editor Musings – Deal Tracker

Readership at the India Street has grown tremendously thanks to all of you. In fact, we were recently mentioned by Digital Inspiration as one of Indian’s most widely read Finance Blog. We are soon going to bring entertaining investor related videos so that you can learn about Indian companies operating all over the world and by extension make money off the information. Stay tuned for these videos as they will be appearing in the next few weeks.

In interesting to note the discussions on a real estate bubble in India now and where real estate values are headed. I tend to examine the real world behavior of those closest to the situation. For example, DLF is focusing on Hotel and SEZ development in India. Rajiv Singh expects his revenue growth to strengthen in the short term from a thrust in middle-income housing. While prices paid are high compared to the past few years and will not likely go up in the double digits as in years past, we will still see price appreciation in Tier 1 cities and much higher price appreciation in Tier 2 and Tier 3 cities.

As I have said in past editorials, India needs to be completely rebuilt. It’s not practical to rebuild the older cities, so what is going to happen is that new city centers will appear alongside the old and you will see a large demographic shift happen as a result. You can bank on this prediction as it’s the only way to create modern cities without ripping up entire sections of India’s older cities.

Below, I have listed real estate deals for June 2007. The information was provided courtesy of Ernst & Young.

Completed Deals

Name of Entity	Nature of Deal	Value		Additional Details
Procter and Gamble	Sold its general offices at Gurgaon	Rs 727.5 million		Sold five to nine floors at Global Business Park, Mehrauli Gurgaon Road, Gurgaon
Plaza Centers, a European property developer	Acquired about 10.8 acres of land At Trivandrum, Kerala	Rs 1.1 billion		Acquisition was made through a 50:50 JV with an Indian property developer; the plot will be used to develop a mixed-use project totaling 2.1 msf, comprising shopping and entertainment centers, offices and a hotel
Alpha Tiger Property Trust	Entered into an agreement with Xansa, an outsourcing and technology firm, to purchase 40 acres of development land and for the sale and leaseback of Xansa’s real estate interests in India		Rs 1.9 billion	The agreement appoints Alpha Tiger as Xansa's preferred provider in India; the agreement is conditional on local and Central government approvals, including SEZ notification and is expected to be completed in phases
Reliance Industries	Acquired 16,100 sq. m plot from Sterlite Industries at Vidyavihar, a Mumbai suburb		Rs 1.1 billion	–
Hotel Leelaventure	Acquired a three-acre plot at Vinay Marg in Delhi from National Buildings Construction Corporation		Rs 6.1 billion	Intends to develop a 250-room premium luxury hotel, to be operational before the Commonwealth Games in 2010
Karnataka State Government	Auctioned 73 acres of land in Bangalore		Rs 295.3 million	–
Orbit Corporation	Acquired a two-acre plot at Kalina in the suburb of Santacruz, Mumbai, from Ambuja Cements		Rs 3.3 billion	Orbit plans to redevelop the plot

Name of Entity	Nature of Transaction	Additional Details
Alony Hetz Properties and	Tied up with Wearology Limited of Poddar	To develop 500 acres at Karjat, near Mumbai;
Investments Limited, Israel	Group and LJCB Investment Group of Australia	the initiative comprises a luxury holiday home project spread over 200 acres at an investment of US$ 160–200 million
Garnet Construction	Entered into a 50:50 JV with the Dubai-based Sternon Group	To develop properties in Europe, with a prime focus on Sweden and Mauritius, off the African coast
Trent, the retail arm of Tata Group	Tied up with global private equity investor Xander	To develop real estate properties for its various retail ventures
RMZ Corp, a real estate development company	Entered into a 50:50 JV with AIG Global Real Estate	To build commercial properties and to evaluate hospitality development projects across India
DLF	Entered into an agreement with Kolkata Metropolitan Development Authority	To develop an integrated township in Hooghly District, West Bengal, with an investment of Rs 330 billion
Deals In the Making?
Name of Entity	Nature of Transaction	Additional Details
Quantum Fund (promoted by George Soros)	Plans to acquire a 4% stake in Ansal API for Rs 2 billion	With this, George Soros’ stake in Ansal API will increase to 5%; in 2006, George Soros had acquired a 1% stake in the company for about Rs 250 million
JP Morgan	Plans to invest US$ 100 million in Prestige Group through equity placement or debt financing	Prestige Group would utilize these funds to develop projects across South India, as it plans to expand its footprint outside Bangalore
Godrej Properties	Is negotiating with private equity investors to raise Rs 2 billion for its real estate projects in Kolkata and Hyderabad	–
Infinite India, a real estate fund floated by JM Financial and Old Lane (the New York-based India-focused hedge fund)	Are in advanced negotiations with textile firm Wearology to pick up majority stake in two real estate projects	Wearology is in the process of developing over 500 acres of land in various parts of Mumbai
Carlson Group, a US-based	Plans to acquire a 26% stake in a new JV	The JV will introduce the Regent hospitality
hospitality company	(called Elbrus Builders) with the Unitech Group for Rs 26 million	brand in India and invest Rs 4.5 billion to develop a luxury hotel property in Greater Noida
Al Fajer Properties, Dubai	Plans to invest upto US$ 1 billion in India	To develop commercial and township projects through JVs
A consortium by Government of Singapore Investment Corporation, Dean Witter of Morgan Stanley and Quantum Fund of George Soros	Plan to acquire a stake in Anant Raj Industries for Rs 6.8 billion	–
IL&FS Investment Managers (IIML)	Intends to provide US$ 100 million to QVC Realty	QVC plans to take up township projects in Gurgaon and Bangalore; IIML has raised over US$ 500 million to invest in real estate

New Money
Arrived
Name of Entity	Fund	Size	Additional Details
Morgan Stanley Real Estate	Raised a property fund, MSREF VI, that would primarily invest in the Asian markets including Japan, China and India	US$ 8 billion	–
Ascendas	Launched Ascendas India Development Trust (AIDT), a real estate development fund with a term of eight years	S$ 500 million	The company plans to increase its asset size to S$ 1 billion and will invest in integrated development projects in India
Tanglin Development	Raised funds from Hypo Real Estate Bank International	Rs 3.8 billion	The fund will be used for financing and development of 2 msf of additional IT office space at Global Tech Park in Bangalore
Red Ribbon UK Fund, a UK-based property investor	Plans to invest £ 250 million in the real estate sector in India in the next 5 years	£ 250 million	Of this, the fund will invest £ 50 million in budget hotel chains, £ 50 million to develop resorts in Kerala, £ 50 million in student accommodation, and £ 100 million in commercial properties
Expected Capital
Name of Entity	Fund	Size	Additional Details
CapitaLand	Plans to launch a fund to invest in real estate projects in India	S$ 500 million	–

Is the India Economy Overheating?

By Vipin Agnihotri

There is a complete integration of the Indian capital market with the rest of the world, in particular the US market. While this development has its antecedent benefits as well as problems, it is certainly heartening to note that in the growth sphere, leading global economies have seemingly managed to de-couple themselves from the US economy, despite greater liberalization and integration via trade; India is no exception.

The question now arises: Why is this relevant? For, India continues to post healthy growth rates in the current year, its economy having expanded at a record 9.4 percent in the financial year 2006-07 on a base of 9 percent clocked in the 2005-06, despite tighter monetary policy by the central bank to cool inflationary pressures.

No doubt, sterling performances by services and manufacturing sectors helped, with the latter growing at 12.3 percent as against 9.1 percent in the previous year. Though, the threat of a overheating of the economy continues to loom large, exacerbated by the high rate of inflation and the continuous inflow of foreign capital, which is making the monetary policy tools ineffective and putting pressure on the rupee.

Reserves have risen rapidly in recent months on the back of rising foreign investment, higher remittances and increased overseas borrowing by Indian companies. The Indian government is now working on a scheme to refund local taxes and levies to labour intensive industries with little import content, to offset the impact of the appreciating rupee.

With the dollar threat threatening to become a deluge, however, from the single-minded focus on tinkering repo rates and the CRR, the RBI, in its latest annual monetary policy statement has turned its attention to measures that could arrest capital inflows, which complicate both exchange rate and liquidity management. How successful it will be, only time will tell.

The rising rates have been a dampener on both the consumer and investment sentiments within the country. The Indian economy has been witnessing a paradigm shift and is all set to enter the high growth phase. But there are concerns on the levels it can attain. ADB estimates an 8 percent rise for this year, while IMF projects an 8.4 percent growth, which is further expected to slow to 7.8 percent in 2008.

Single digit growth in exports, slowdown in production of consumer durables and power generation are some leading indicators for the likely slowdown of the Indian economy in 2007-08.

Suggested Reading

· Lowering of Real Estate Prices in the Suburbs Likely · Visit our India Resource Page · The Latest India Real Estate Round Up · Comprehensive Real Estate Report by India City · Pictures: New Chennai Airport

Is the India Real Estate Boom Over?

DHRUVA JYOTI CHOWDHURY, KOLKATA, INDIA

In India, it has been all gold for real estate developers and especially rewarding for those companies who are floating their companies to cash on the booming demand and spiraling real estate prices.

Real Estate strategists in India feel that after the out-of-the world mergers in the real estate sector, it is now time for consolidation in real estate sector which is feeling constrained by falling inflow of funds, rising interest rates and the reserve bank of India axe which has cut off some of the profits of the realtors.

Further adding to the woes of the major real estate developers, the Indian Government last month decided to bar developers from raising money abroad to develop integrated townships in view to check excessive capital inflows in real estate sector in the country.

Though tightening of External Commercial Borrowing (ECB) norms was related to only integrated townships, the norms has spilled all over the real estate sector and affecting it in one way or the other.

Besides, RBI has raised risk weights on housing loans, followed by interest rate hikes to curb demand in the sector.

Much to the chagrin of real estate developers, Finance Minister P Chidambaram had recently said "Intention is to constraint demand in those sectors where there are signs of what you call overheating and example of that could be real estate and housing. I think in these sectors there is reduction in demand”.

"For big developers there is no impact of rising interest rate but small players are finding it difficult to raise money for their proposed projects. They would need to sell their projects to big developers," Ansal API Vice-President (Marketing) Kunal Banerjee told The India Street.

Distress sale of projects is already happening, he said, adding the industry would witness more of it in days to come.

Edelweiss Capital Senior Vice-President George Mathew pointed out that RBI has been squeezing all sources of funds gradually to rein in inflation and a possible correction in this sector could be in the offing.

"Higher funding cost is expected to reduce attractiveness of real estate projects, reduce the land banking run and bring prices down," he said, adding debt financing is not available for land acquisition.

"More than rising cost of borrowing, lack of availability of funds from financial institutions would lead to consolidation in real estate sector," Parasnath Developers Chairman Pradeep Jain said.

He said small developers would have no other option but to join hands with big players to fulfill their commitment to the end user.

Over the past six months, cost of borrowing has gone up over six per cent due to successive measures taken by RBI and the government to check surging property prices.

New players who joined the business in the last 2-3 years may have to sell their projects, said Zoom Developers CEO Rumneek Bawa.

As banks and financial institutions are hard-pressed with funds owing to stricter measures by RBI and the government, small developers are unable to get financing from these institutions.

Suggested Reading

Lowering of Real Estate Prices in the Suburbs Likely Visit our India Resource Page The Latest India Real Estate Round Up Comprehensive Real Estate Report by India City Pictures: New Chennai Airport

Challenges ahead for Indian real estate industry

By Vipin Agnihotri

No doubt, Indian real estate has seen a sustained upsurge in recent years, but there are number of issues and challenges confronting the industry.

Maharashtra’s draft housing policy is all set to be completed this month and will look into the areas of affordable housing, rental housing, transparency among other things. The best part about all this is that state government has accepted its role as a facilitator and enabler and is making attempts to erase the constraints faced by the real estate industry.

“The government could not be a mute spectator to the rising prices in residential real estate and affordable housing was a objective which it was striving towards,” pointed out SS Kshatriya, Principal Secretary, Housing Department, Government of Maharashtra. He also added that the sale and purchase of property on carpet area basis would be made mandatory.

When asked about the issue of having a regulator for real estate, he said, “When you liberalize a segment of industry, there is corresponding requirement for regulation, and real estate will follow power and telecom, in terms of having a regulator.”

In my opinion, spectre of rising prices in real estate may need to be regulated as well, but if the industry would do it by itself there might not be the need for state government to step into the regulation aspect as regards to pricing levels.

If experts are to be believed, the emphasis should be on creation of new areas with infrastructure and facilities rather than further developing existing urban areas. At present, land costs constitute around 50 percent of the total project cost and was largely responsible for the high prices.

Until and unless supply increases, through freeing up of land locked under the Urban Land Ceiling and Salt Pan reservations, the concept of reduced prices will remain just a mirage. If one flat is chased by ten buyers, prices will always rise. “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,” pointed out Anuj Puri, Country Head, Jones Lang LaSalle Meghraj.

The challenge lies ahead as to how to provide housing solutions for all segments. The government should go out of city centres and develop infrastructure. The secret of reducing prices is to create surpluses and that is only possible if restraints on FDI are removed.

Suggested Reading Lowering of Real Estate Prices in the Suburbs Likely Visit our India Resource Page The Latest India Real Estate Round Up Comprehensive Real Estate Report by India City Pictures: New Chennai Airport

Is the India Realty bubble set to burst?

Below is an interesting yet non-committal view of the subject of India Real Estate bubbles. We have a much more definitive view on the India Housing Bubble or listen to our Podcast on the subject.

by Anuj Puri The high appreciation rates that India’s property market is currently witnessing, is due to the interest rates reduction that the NDA Government instituted after 2001. In early 2004, home loan rates sank to a record low of 7.5% and this paved the way for the alarming spiking that typified the country’s property rates in many Indian cities. The very amenable borrowing rates encouraged individuals to avail of home loans to buy residences, while up to then actual property purchase had only been an option for the considerably rich. This resulted in a huge demand for quality real estate all over the country post 2003. Since March 2005, Indian real estate rates have displayed an unstoppable upward curve. This is directly related to the opening up of FDI in real estate. The market has been expanding at an unbelievable rate of 100%+. This can also be traced to the heightened NRI interest in real estate. Many presently feel that the Indian real estate market is a bubble, and will eventually burst. It is true that residential rates in many Indian cities like Mumbai and Delhi are comparable with property rates in the West now. However, let us take an investor’s point of view of this phenomenon. Behavioral finance has repeatedly proved that whenever asset prices start escalating, the initial interpretation has been of a ‘bubble’. In-depth analysis of price appreciation in real estate and the reasons thereof would help in comprehending these fears. Price appreciation in real estate is backed by the following fundamentals: 1. Rising income levels, resulting in increased demand for quality constructions and aspirations for better locations in residences. This has also been made easy by nuclear families and double-income households. 2. IT / ITeS continues to be a major revenue driver and rising outsourcing trends have driven demand for office space. 3. Hospitality industry is operating on more than 85% occupancy in major metros and rising business activity is resulting in increased investment in hospitality 4. The organised retail industry is in its infancy and with huge investments from major corporates the demand for real estate is rising. The focus on ‘Location, location and location’ is leading to an increased appetite for developing area-specific shopping complexes. With land always being a scarce resource, property prices would follow basic economics of demand-supply and pricing, whereby property prices seem to have increased. Normally, real estate returns are in line with inflation and if we look at the current price rise, the returns which real estate has delivered in this rally seem to just compensate the investor against inflation during the longer holding term. The Author is Chairman and Country Head – Jones Lang LaSalle Merghraj.

Will India's real estate bubble burst?

By Mark Kleinman, Asia Business Editor

It seems destined to become one of the most ostentatious symbols of India's emerging wealth. Situated in the heart of Mumbai, the new $500m (£255m), 28-storey home of Mukesh Ambani, chairman of Reliance Industries and one of India's richest men, will tower above its surroundings: on one side, a view over the Arabian Sea; on the other, a panoramic perspective across Asia's biggest slum.

	India's economic growth last year was more than 9pc

This juxtaposition of wealth and extreme poverty underlines the vast potential of India's burgeoning real estate industry, into which hundreds of millions of dollars are being poured every month.

This week, one of India's biggest property developers, DLF Universal, is undertaking the biggest domestic share offering to date, with a fundraising target of about $2.4bn.

Run by one of the country's wealthiest people, Kushal Pal Singh, DLF is expected to be valued at about $23bn once the listing, handled by banks including Citi and Merrill Lynch, is completed. The flotation on India's National Stock Exchange will not be DLF's first attempt, having aborted an effort to list last August amid concerns about its valuation.

DLF has ambitious plans to use proceeds of its IPO to accelerate its expansion by swallowing a larger chunk of the demand for new residential and commercial property.

India's economic growth last year was more than 9pc, its second-fastest level since the country gained independence from Britain in 1947. India's young and increasingly wealthy middle-class are buying homes at an unprecedented rate. Property analysts expect demand for at least 20m new homes in five years. The overall real estate market is forecast to be seven times larger by 2015. Foreign investors, including 3i and Blackstone, the private-equity groups, have signalled an intention to grab a slice of the Indian economy with funds dedicated to infrastructure projects, which most analysts consider to be the most urgent requirement.

A property boom in India is potential good news for hordes of British retailers and leisure companies, such as Mothercare and Whitbread looking for development opportunities.

"India's real estate opportunity is genuine, large and will last a long while - a prospect not lost on developers and capital providers," said Ashish Jagnani, a Mumbai-based real estate analyst for Citi.

Since the beginning of last year, at least eight companies with an emphasis on the Indian property market have listed in London. Yesterday, seven of them were trading beneath the price at which they listed. In total, the companies have a market value of well over £1bn.

Among the glut of Aim-listed Indian property funds to have underperformed in share price terms is Trinity Capital, which raised £238m when it floated at 100p in April 2006. Despite being fully-invested in a range of commercial, hospitality and residential projects, the share price has continued to trail behind at around 90p.

Some analysts warn of the risk of a bubble in Indian real estate prices that could undermine growth prospects for the whole market.

Yesterday, a fund set up to invest in non-performing Indian assets, Dhir India Investments, announced plans to list on Aim and tap into a market for distressed assets estimated by PricewaterhouseCoopers to be worth $50bn.

But if bearish predictions of a real estate bubble are accurate, that pile of distressed assets could turn into a mountain as tall as Mr Ambani's new home.