Property prices in Hyderabad set to fall...

Hyderabad may now be the country's second largest city. But the city's big growth could actually mean property prices falling, reports CNBC-TV18.

The Municipal Corporation of Hyderabad is now 450 sq km larger, second only to the National Capital Region (NCR). The additional areas will have all infrastructure and basic amenities that the center of the city enjoys. The project will require a total investment of Rs 28,000 crore from the government. Officials said the new supply would cause prices of residential property in the city to fall

Jayesh Canjan, Vice-Chairman of Huda said, “Property developers will be able to open up many more areas for residential purposes and the availability of housing in terms of supply will go up and because of that the prices will come down."

Hyderabad has seen an increase of % over the last two years because of the large gap between demand and supply of residential property. Real estate consultants expect the fresh land supply coupled with rising interest rates to lead to a 15% correction in property prices

Besides this, the Hyderabad urban development jurisdiction has been increased from 2,000 to 6,000 sq km and the authority is doubling its expenditure to Rs 2,000 crore a year to develop the area.

“We will announce a number of projects like new townships, as well as specialised area developments like medical tourism areas, eco tourism, health city, pharma city and so on," Canjan said.

Over the last year, the local Government has been accused of driving up real estate prices in the city unnaturally through highly priced land auctions with a huge amount of land set to hit the market all that could change, leaving consumers happy.

SEZs back on track, cut to size

Bowing to political pressure, the Centre on Thursday decided that no SEZ would be allowed beyond 5,000 hectares of land and states will not acquire land for industry. In the middle of a raging debate on SEZ policy, especially in the wake of the Nandigram violence, the empowered Group of Ministers took these decisions.

At the same time, the eGOM, headed by Foreign Minister Pranab Mukherjee, gave a clear signal that new SEZ norms would not compromise the industrialisation process and lifted the freeze, clearing 83 new projects.

"No state can compulsorily acquire land from farmers through Land Acquisition Act," Commerce Minister Kamal Nath said, adding that promoters would have to themselves go to farmers and acquire land at commercial rates. Further, the states would be empowered to reduce the size of SEZs below the 5,000 hectare limit set by the Centre.

Nath said under the new Relief and Rehabilitation Policy, which would be finalised soon, at least one member of the displaced family would have to be employed in the project. This would be in addition to the compensation paid to farmers.

With the freeze lifted, the government would approve all pending applications where there is no land dispute. Of the 234 SEZs with formal approvals, 63 have already been notified, while 83 more were today cleared for notification. The Board of Approvals will now take up 162 SEZs with in-principle approval and 140 pending applications.

The decision on limiting the size would hurt plans of companies such as Reliance Industries, besides real estate players DLF and Omaxe, which plan to set up mega SEZs.

Real Estate cooling off in Andhra Pradesh

Andhra Pradesh was hoping to rake in Rs 1800 crore from the sale of 60 acres of land. But the auction had barely any takers, reports CNBC-TV18.

The first phase of the Hyderabad Knowledge City remains unsold. The Andhra Pradesh Infrastructure and Industries Corporation had put two 30-acre plots under the hammer at a reserve price of Rs 16 crore rupees per acre and it expected the winning bid to be twice as much given the booming property market. While one of the plots received no bids at all, the other plot received only one bid at Rs 16.1 crore.

The APIIC is now awaiting the advice from the state government as to whether the plot should be handed over to the sole bidder or whether the auction should be invalidated altogether.

Hyderabad property consultants pin the blame on the new service tax on commercial rentals. This land was meant exclusively for an IT park and at Rs 16 crore an acre it would have to be leased out at Rs 55 per sq ft to break even. A rate higher than some parts of Mumbai.This coupled with a dampening of sentiment in the overheated property market would explain why the government's price was considered too high!

Realty and capital flows - A V Rajwade

Realty firms are finding they can earn more by increasing valuations on the stock market through proper governance.

Over the last three-four years, real estate prices, both housing and commercial, have gone up all over the country. To be sure, this rise had been preceded by a few years of relative stagnancy, but the central bank is also concerned about the issue and has taken various regulatory and monetary measures.

Equity prices of companies in the real estate business had earlier gone to sky-high levels, but many of these have since dropped by up to 50-60 per cent. Is this an indication that the market is cooling down? For, make no mistake, share markets are often the first to react to the possibility of bad times in business. (When I was on the board and rating committee of CRISIL, we often found that the share market often “downgraded” a company, before our own rating actions. The situation is not much different even in the United States —a couple of years back, Moody’s acquired a firm specialising in predicting rating downgrades on the basis of equity market prices!).

To come back to real estate prices, clearly, in places like Mumbai, they are absurdly high — and may well threaten our comparative advantage in services. Some time back, in an article written after a visit to Thailand, I had speculated about how the Thai tailor can stitch a suit at a cheaper price than the Mumbai tailor, even while enjoying a higher standard of living. My analysis was that this could well be because of the difference in real estate prices — after all you need a place to do tailoring business from! Bangalore’s rise as the IT capital was helped by more reasonable real estate prices as compared to say Mumbai’s. Now, as HDFC Chairman Deepak Parekh who knows more about the subject than practically anybody else, said in a recent interview, urban commercial real estate prices are becoming fast unaffordable even to the best brands — in other words, the real estate cost will eat up the competitive advantages of organised retailing. And, to my mind, organised retailing has a major role to play in paying better prices to farmers, reducing agriculture produce waste, and giving cheaper prices to the urban consumer. Clearly, real estate prices do need to come down — it is absurd that one of the poorest countries in the world should have some of the costliest real estate. As far as Mumbai is concerned, the solution lies much more on the supply side — principally, in amending/scrapping the Urban Land Ceiling Act, which the state government is stubbornly delaying, despite pressure from the central government. Almost two years back, it was announced that this would be done in “one month”; the latest statement is that this would happen within the next twelve months. Clearly, there are very major vested interests (the netas? the babus? the builders?) in perpetuation of the Act.

The other side of the real estate market is the huge amount of foreign money that has already come in, and is waiting to come, subject to some regulatory issues. The reason does not seem to be merely expectation of further sharp increases in real estate prices — but real estate, like commodities, has become a part of the alternative investment market globally. Even conservative investors like pension funds and university endowments are investing in real estate, commodities, hedge funds and private equity. As for the regulatory side, presently foreign direct investment in real estate development is freely permitted subject to the development project satisfying conditions prescribed in Press Note 2 of 2005. (Incidentally, press notes as the definitive, quasi-legal regulatory prescriptions, seem to be a peculiarly Indian innovation.) Regulatory questions arise when FIIs, who are portfolio investors, are given preferential allotments at the pre-IPO stage. In principle, portfolio investment has to be done at market prices, that is in quoted companies. Pre-IPO, there is no “market” price for the share — therefore, the RBI insists on treating such investments as FDI and, hence, subject to the prescribed conditions in Press Note 2. There are also some indications that the convertible bond route is being used to get around regulatory restrictions.

But this apart, given the importance of real estate, both housing and commercial, to the country’s development and growth, I find the recent change in ownership of development companies very welcome. For too long, the “competitive advantage” of many developers/builders came out of their familiarity with the political/administrative setup involved in issuance of building permits, and the skill and resources they brought to get these. With an increasing number of real estate companies getting listed in India and abroad, and the number of institutional investors coming in, surely governance practices will have to change dramatically, and this will be all to the good. Perhaps many real estate tycoons are realising that there is far bigger money to be made by increasing valuations on the stock market through proper governance and disclosed profitability of operations than they could ever have made in unaccounted money so closely associated with the real estate market.

Real Estate Industry

Driven by positive growth in the economy, real estate in India is booming. The year 2006 started on a promising note when the Government of India opened the construction and development sector in February 2006, and allowed 100 per cent foreign direct investment (FDI) under the 'automatic route' in order to spur investment in the vital infrastructure sector.

The relaxation of the FDI ceiling saw big names like Dubai-based Emmar Properties -- the largest listed real estate developer in the world -- joining hands with the Delhi-based MGF Developments to announce India's largest FDI in the realty sector amounting to over US$ 500 million in projects having capital outlay of US$ 4 billion.

Groups showing interest in India include insurance company American International Group Inc (AIG), High Point Rendel of the UK, Edaw-US, Japan's Kikken Sekkel, Lee Kim Tah Holdings and Cesma International from Singapore.

The development of real estate in India focusses on two primary areas: retail and residential.

• The global real-estate consulting group Knight Frank has ranked India 5th in the list of 30 emerging retail markets and predicted an impressive 20 per cent growth rate for the organised retail segment by 2010.
• The organised segment is expected to grow from a mere 2 per cent to 20 per cent by the end of the decade, it said.

The boom is also attracting interest from foreign players. Vancouver-based Royal Indian Raj International Corporation (RIRIC) will invest a staggering US$ 2.9 billion in a single real-estate project named Royal Garden City in Bangalore over a period of 10 years. The retail value of the project is estimated at US$ 8.9 billion. Morgan Stanley Real Estate announced that it has invested around US$ 68 million in Mantri Developers Private Ltd, a private Bangalore-based real estate developer.

Key trends of the real estate boom

• A report on real estate trends by Merrill Lynch said that the number of malls in Mumbai, Bangalore, New Delhi, Hyderabad and Pune was expected to grow to about 250 by 2010 as against 40 now. In terms of total area, there was 12.40 million square feet (mnsqft) of mall space available in these cities, the report said quoting a survey by Knight Frank India.
• As the competition in the market is intense, builders are going out of their way to be different. Specialised malls have become the order of the day. Gurgaon, on the suburbs of New Delhi will soon have an auto mall, while Bangalore is about to get an exclusive furniture mall. Gurgaon is set to get the biggest mall of the world — a large US$ 89.78 sq ft sprawling property that is being developed by DLF Universal. It will be known as Mall of India.
• Similarly in the home segment, which is driven by the availability of easy home finance, most builders are trying to woo investors with interesting features, each more tempting than the other.
• Closed-circuit television and earthquake proofing are expected as standard features in most upmarket blocks. Evershine Builders, for instance, is providing a range of facilities from modular kitchens to piped gas and Internet connections. Some of its flats are even fully furnished.

The blanket ban on SEZs may be lifted...

The blanket ban on SEZs may be lifted soon. The government is likely to allow the Board of Approval (BoA) to clear 111 SEZ proposals where promoters have already acquired land and no fresh land is required. The government had frozen SEZ approvals following violent protests over land acquisition in Nandigram, West Bengal.

“As there is no land-related dispute over these SEZ proposals, it is likely that these projects will be allowed to take off,” an official said.

A decision regarding the fate of such proposals is expected in the next meeting of the empowered group of ministers (eGoM) headed by external affairs minister Pranab Mukherjee, government sources said.

It is understood that the chief ministers of Tamil Nadu, Andhra Pradesh, Karnataka and Gujarat are mounting pressure on the Centre for lifting the blanket ban on SEZ approvals. They have argued that delay in approvals may send wrong signals to foreign investors. Besides, several public sector companies are also awaiting approvals.

The eGoM has already allowed the BoA to grant “miscellaneous approvals” to 63 already-notified SEZs “where no fresh acquisition of land is required”, an official source said.

Of the 304 proposals pending with the BoA, 111 already have land in possession, a government source said.

Global property investments to exceed last year's total

Global commercial property investments in 2007 will probably exceed last year's US$682 billion, driven by demand for real estate in Asia, according to a report by Jones Lang LaSalle.

Commercial property investments rose 41 percent to US$94 billion in Asia in 2006, compared with those in the U.S., which gained about a third to US$283 billion, the report said. Asset sales in Europe surged 44 percent to US$305 billion last year, the most active real estate market for investments, it said.

Investors are focusing on Asia as the region's economic expansion is expected to drive demand for real estate. East Asian economies including China and India are expected to expand 4.4 percent this year, compared with 2.7 percent in the U.S. and 2 percent in Europe, according to the Asian Development Bank.

Asia is "certainly on the top of most investors' shopping list at the moment," Guy Hollis, international director at Jones Lang LaSalle, a property consulting group, said in an interview. There's "US$5 of money chasing every US$1 of product, and in Singapore, it's probably US$7 to US$8 chasing US$1."

Last month, Citigroup Inc.'s property unit raised US$1.29 billion for an Asian real estate-related fund, and Prudential Plc also plans to invest as much as US$1 billion in the region's property market.

Real estate investments likely to fall

Private equity players investing in the real estate market may not be a happy lot, with abundant commercial and residential supply likely to hit the market in 2007, as returns on real estate investments are likely to fall, reports CNBC-TV18.

The lucrative real estate market may not remain as profitable for private equity investors or developers as it has been in the past two years. The higher dividend distribution tax and the 12.36% service tax on commercial rents imposed by the Budget will eat into returns of investors. This comes on top of surging land prices, which have sharply reduced the margins of developers.

"There is too much liquidity foreign funds chasing the limited land supply so automatically the prices of land are very high and as a result of high land prices returns or margins of developers, investors, private equity players have fallen drastically" says Subodh Runwal, Managing Director, Runwal Group.

On the other hand a slew of developed projects are likely to flood the market this year. Realty consultants Cushman and Wakefield projects that business hubs like Bangalore will add 16 million sq feet of developed office space, Chennai will another 12 million sq feet, Delhi and the NCR region will see 10.5 million square feet of new office space and the commercial capital Mumbai will see 9.1 million square feet entering the market. Though nearly 40% of this office space is estimated to have been already pre leased to tenant, developers expect prices to fall with so much supply entering the market.

Rupee returns is expected to be 15 to 20%, which is lot more than what is expected from markets like Australia or Europe. So people will get returns of 15 to 20% not euphoric returns of 30% about which we have talked earlier,” adds Pranay Vakil, Chairman, Knight Frank

The other factors that are likely to impact investor returns are raising construction costs for developers and also higher interest rates for genuine homebuyers, which may dampen buying sentiment. These will also contribute to the correction in real estate prices

Experts say that though private equity investors are unlikely to flee the Indian real estate market they will certainly re-examine their investments in India. Nearly USD 17 billion is waiting to enter the market, but all of it may not come in.

Who's likely to move in Hyderabad's Knowledge City?

The Andhra Pradesh government is expected to rake in Rs 1,800 crore from the sale of 60 acres of land in Hyderabad's Knowledge City, that's Rs 30 crore an acre. CNBC-TV18 reports on who's likely to move in.

The proposed Knowledge City is an IT park spread across 414 acres. It's right next to Hitech City, which houses Infosys , Wipro and Microsoft. That's why the Andhra Pradesh Industrial and Infrastructure Corporation expects to rake in big bucks. Officials at the corporation say even though the bids will open at Rs 16 crore an acre, they expect the final price to shoot past Rs 30 crore.

The property already has its infrastructure in place, boasting of the best roads in Hyderabad. Besides sources from the government tell us that companies like DLF, Raheja and L&T have shown interest in the Knowledge City land.

Even so Hyderabad's property consultants are sceptical about the feasibility of building an IT park in the area. They say the new service tax on rentals will delay the break-even point. They say the only way the park will be profitable is if it gets SEZ status. Inspite of all that, the government hopes to get twice as much as the reserve price of Rs 16 crore an acre.

Kalpathis of SSI to enter VC funding activity

SSI promoters sell 51 p.c. stake to PVP Enterprises
Sale consideration to be partly invested in debt instruments

CHENNAI: The Kalpathis are keen to become VCs (venture capitalists) now that they have announced their decision to cede management control in SSI Ltd., a company founded by them, to Hyderabad-based PVP Enterprises Private Ltd.

The Kalpathis have already identified a couple of emerging industries to provide VC funding. They should be able to kick-start their first VC funding a few months hence by which time the entire formalities for the takeover of SSI by the new owners would have been completed.

Kalpathi Suresh, Chairman of SSI, told this correspondent that though the promoters had sold in all 51 per cent of their holdings to the Hyderabad entity in two tranches, they had still retained 20 per cent equity holdings in the company. He indicated that the Kalpathis would eventually sell their remaining holdings too in SSI at an appropriate time and price.

Kalpathi S. Aghoram is currently the managing director of the company while Kalpathi S. Ganesh is a director on the board.

Mr. Suresh said the sale of 51 per cent would fetch the Kalpathis around Rs. 625 crore. While declining to specify the two areas for VC funding, he said the sale consideration would partly be invested in debt instruments and banks.

A part of it could be placed with portfolio management companies to fetch better return, he pointed out.

Mr. Suresh said the sale of SSI would also mean the transfer of some properties such as the Binny land at Ambatur, the building at Vadapalani (which is on lease to TCS), the 6-floor space on the Harington Road and the property on East Coast Road to the new owners.

Builders vie for Guj Ambuja’s Kalina property

City-based builders HDIL, Akruti Nirman and Kalpataru are in the race to buy out Gujarat Ambuja Cement’s two acres in Kalina, Mumbai, report Our Bureau.

At current market valuations, the property could fetch upwards of Rs 300 crore, property market sources said. International property consultant Knight Frank is believed to be working on the deal.

“It is an ideal location. We are keen to buy it out.” a bidder involved in the deal said. “We have an office property in Kalina which was vacated in 2005 after the Mumbai floods. We moved our office to Andheri,” a GACL official said. Anil Singhvi, MD, GACL, was not available for comment.

As land prices in India surge, many corporates are in the process of selling unutilised land in the city and suburbs. Currently, HLL, Bayer, Fiat and Colgate are in the process of selling their excess land in the city and suburbs while others like Glaxo and NRC have already sold their land in Worli and Kalyan.