India realty sector to get $4-5 b investments

India’s realty sector is set for inflows of $ 4 to 5 billion from global investors in the next couple of years, with Bangalore, Delhi and Mumbai emerging as favourites, according to the  Asia Pacific CEO of global real estate consultancy firm Jones Lang LaSalle (JLL).

“The early foreign investors in India, who came in around 2006-07, did not have very good experience, partly because of their inexperience in doing business in India and partly because of global financial crisis,” Alastair Hughes said at the World Economic Forum (WEF) Annual Meeting.

They don’t seem to be perturbed by it as India’s growth rate is still an attraction, according to him. “Foreign investors are now looking with a renewed interest at India, given its still robust economic growth rate as that bodes well for good returns to their investments,” Hughes said.

He  added that there is more international money today waiting to be invested in India than any of the last five years. Overseas investors have invested $ 14 billion into the Indian real estate sector over the period from 2006 to 2012.

In the last two years, foreign investment into Indian real estate has been around $ 1.2 billion per annum.

Around half of all transactions were invested in residential property, a quarter in the offices sector and the remaining quarter was split among other sectors.

According to him,  2013 and 2014 look more promising from an investment standpoint and the realty sector would get about $ $ 4-5 billion, mainly to buy income yielding SEZ assets at a capitalisation rate of 10.75 per cent.  Globally, Hughes said, there was a boom in 2007, followed by a bust in 2008, in the realty sector, while there has been a gradual recovery since the end of 2009.

Investments into Asia Pacific commercial real estate market fell around 10 per cent in 2012, from $ 98 billion to about $ 92 billion. “It was because of a sense of caution prevailing in different countries. But now we are seeing a change in the sentiments,” he said.

“One of the reasons for that is people looking to divert their investments from bonds to equities and other asset classes and that include real estate. Therefore more money is coming to real estate and a bigger proportion of that we see coming to Asia Pacific,” he added.

He said that in the retail sector, a very high growth is expected with the (likely) entry of foreign retailers.

Besides, manufacturing and industrial sector would also benefit a lot as retailers would need to set up logistics facilities. The residential space is also set for growth, he added.

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RBI step may boost real estate slump

The city developers welcomed the Reserve Bank of India’s decision of reducing the 25 basis point repo rate, hoping that it would lead to less expensive home loans.

However, the buyers feel that the developers also need to slash the highly inflated property rates to make housing affordable.

The developers said RBI’s move will help decrease the interest rate, boosting the slow down in real estate industry. “It is a small, but good beginning. We hope that RBI will come out with many more such steps. And, bankers will follow suit by cutting down the lending rates,” said Paras Gundecha, president of MCHI-CREDAI.

He added that it would boost liquidity in the real estate market, easing pressure on cash-strapped developers.
“Last year was particularly bad for the real estate sector. Due to liquidity crunch and costly EMIs, sales plummeted,” said Gundecha, adding that the RBI should take some pragmatic decision to support the capital- and labour-intensive real estate sector.

The real estate sector is reeling under the burden of huge debts and poor cash flows caused by slowdown in sales. “The consequential drop in home loan rates will greatly benefit consumers and stimulate demand for new housing. The long-awaited move will trigger off a change in sentiments and catalyse the required buyer behaviour,” said experts.

Real estate expert Atul Nemade said developers were asking to cut down interest rate.

“Now, they have to take some complimentary steps to make unaffordable houses affordable. Beside the bank interest, the current skyrocketed housing prices are major factor for low sale. Now, it is the developers turn to cut the property rates to boost the sale,” he said.

Joydeep Ghosh: Why real estate prices won’t fall!

There’s too much at stake for both builders and their lenders, as a correction would put both in a tight spot

It seems that everyone, except real estate developers, wants property prices to fall. But there is some serious doubt it will happen soon, or ever. What potential buyers can hope for at best, is a slow rate of growth in prices or a miniscule revision, especially in big cities.

The reason is quite simple: Too much is at stake. Most builders have borrowed from housing finance companies, banks and private equity players. The latter have lent at rates as high as 25-30 per cent a year. Yet, resistance to rate cuts is unlikely to come from them.

It is more likely to come from housing finance companies and banks that have funded both builders and borrowers quite aggressively in the past. They would be quite petrified at the thought of a real estate slump.
Though the Reserve Bank of India limited loan-to-value to 80 per cent and took registration and stamp duty charges out of the loan component a couple of years ago, enough players lent as much as 100 per cent before these guidelines came into place. Some gave even more than 100 per cent of the residence value, if one includes payment for stamp duty, registration fees and sometimes, even home improvement loans.

If there is a sharp correction – say even 20 per cent – buyers, especially those who own second and third properties, will simply dump them. Worse still, investors who are helping builders hold on to prices will exit at the first inkling of any correction. In such circumstances, both builders and financial institutions will be stuck very badly. The latter, as we know, are already saddled with non-performing assets in various sectors.

What else justifies an inventory of 80,000-plus flats (report by Knight Frank on July 2012), with an average price of Rs 1.2 crore, lying unsold in just one city… Mumbai? That is, flats worth almost Rs 1,00,000 crore have no takers, still builders are unwilling to cut prices sharply. In addition, another 50,000-100,000 flats are supposedly vacant, but not available for sale, suggest reports.

It’s not that bankers have not been wary of lending to builders. But builders raised money at obscene rates to repay debts as well as to hold on to prices. Like a private equity player said, “One builder wanted a loan of Rs 100 crore just for one month, after deducting interest, because he did not want to default on his bank repayment. The interest cost: Rs 5 crore for just one month.” In other words, he was willing to pay 60 per cent interest instead of selling his inventory.

A little chat with market players will tell you that some banks are helping builders raise funds to avoid any default or disaster. Many banks, through their wealth management arms, are roping in high-networth individuals with lucrative offers. Others are using their private equity arms to fund them.

Yes, there can be corrections, in fact sharp ones. But only if the Reserve Bank of India and the government step in. RBI can make loans for investors or second/third property holders very difficult. Also, if projects are not completed or delayed, financial institutions should be able to take them over and sell them, much like the Sarafaesi Act. This way they can protect themselves.

The government can put pressure on civic bodies to use powers vested with them to check a builder’s record before giving clearances. If a developer has delayed a project or sold more than 10 per cent of a previous building to investors, they should not be given clearances for the next project. But that is called… living in hope.

Signs of improvement visible in real estate: India Ratings

India Ratings has revised its outlook for the Indian real estate sector to ‘negative to stable’ for 2013, from negative in 2012.

The rating agency sees signs of improvement in terms of stability of margins and the easing of liquidity pressures, with free cash flows turning positive since the second half of 2012.

According to the report, in financial year 2011-12, companies generated positive free cash flows and the trend continued into the first half of 2012-13. “Apart from stable demand, other efforts to improve liquidity included strategies like monetization of land and non-core assets, exercising prudence in new launches and adopting the JV route to developing projects,” India ratings, which is part of the international ratings agency Fitch Group, said in a report. Also, EBITDA margins, which steadily declined to 30% in 2012 from about 55% in 2008, stabilized at that level during 2012. “That this was possible despite increases in construction costs, signals a potential return of stability,” the report said.

However, demand remains subdued and EBITDA margins low, leading to weak credit metrics for companies in the sector, India Ratings said.
According to India Ratings, demand for residential real estate stabilized in 2012, with banks’ exposure to home loans growing by about 17.4% in November 2012 compared with the previous year. However, exposure to the commercial real estate sector increased by just 1.7%, during the first 11 months of 2012.

Also, according to the report, the sales of large players declined marginally in 2012. “Economic weakness continued with the associated apprehension of employee downsizing and salary freezes, which adversely affected consumer sentiments,” the company said in the report.
High inflation and high interest rates continue to reduce affordability, and high property prices will continue to hinder improvement in demand, according to the report. “Commercial demand will be hit by subdued job growth in the IT sector, where average quarterly net headcount addition in 2012 has been around 28%-32% lower than in the previous two years. Demand for retail space is likely to be muted in the near term,” the report said.

With funding options limited, the key to sustainability for real estate companies is growth in sales, India Ratings said. Private equity inflow, too, into the sector has been moderate. “The limited funding options imply a continuance of dependence on operational cash flows for funding growth and debt servicing,” the agency said in the report.

Indian economy to grow at 6.7 percent in 2013-14: CRISIL

India’s economic growth is expected to accelerate to 6.7 percent in 2013-14 from the projected rate of 5.5 percent in the current financial year on a revival in consumption, CRISIL said in a report Wednesday.

A pick-up in agriculture, predicated on a normal monsoon, lower interest rates and higher government spending will support private consumption demand, the research and ratings agency said.

“India’s GDP growth in 2013-14 will be supported by the revival of the private sector consumption growth aided by higher growth in agriculture, high government spending and lower interest rates,” Roopa Kudva, managing director and chief executive officer, CRISIL,  said in the report.

According to the report, core inflation is expected to come down to 7 percent in the financial year beginning April 1, 2013, as against the projected inflation of 7.7 percent in 2012-13.

“The improved agricultural output, along with a stronger rupee and lower crude oil prices will also help in reducing Wholesale Price Inflation (WPI) to around 7 percent from 7.7 percent projected for 2012-13,” it said.

CRISIL expects that the Reserve Bank of India (RBI) would cut interest rates by 75-100 basis points this year on the back of easing inflationary pressure. This would lower retail lending rates and boost demands in interest rate sensitive segments.

“The likely increase in government spending in the form of higher expenditure on social sector schemes and rural development will be driven by the upcoming general elections in 2014,” it said.

Increased welfare expenditure by the government, lower interest rates, moderation in inflation, and high farm incomes (assuming a normal monsoon) will boost household spending and, thereby, benefit sectors such as consumer durables, hotels and restaurants and financial services, the report said.

“Further, improved external demand, as a result of marginal recovery of global growth, could raise India’s exports, especially in the IT and IT-enabled services sector. We, therefore, expect the services sector to remain healthy at 8 percent in the next fiscal,” it added.

According to the report, the agriculture sector is expected to grow by 3.5 percent in the 2013-14 financial year.