Mistry to launch real estate fund in Singapore

To unlock Tata Realty investment in IT parks and road projects
The $100 billion Tata group, now headed by real estate and construction baron Cyrus Mistry, plans to float a real estate investment trust or a business trust in Singapore.

The idea is to unlock a closely held subsidiary’s investment in projects such as IT parks, malls and roads already built or under construction assets such as IT parks, malls and road projects.

The subsidiary, Tata Realty & Infrastructure (TRIL), also intends to buy some smaller IT parks in India.

“We plan to float a real estate investment trust (REIT) in Singapore which will pool our completed IT parks… The REIT will helps us unlock capital from built and leased out assets and re-deploy it for infrastructure projects such as the Mumbai trans-harbour link which we have bid for,” a top official of the subsidiary told Financial Chronicle.

For the Mumbai harbour link, TRIL has formed an equal partnership with the Italy-headquartered, ¤8 billion Atlantia, one of the world’s largest operators of motorway infrastructure, and the ¤36.95 billion Vinci of France, a big construction company.

If the consortium manages to win the Mumbai bid, the planned REIT will help fund the equity contribution required for the project without a big cash infusion from Tata Sons, the parent firm.

The IT parks include Chennai’s Ramanujam IT special economic zone (SEZ) which plans a processing zone of 3.5 million sq ft of built-up area and a non-processing zone consisting of Cambridge Green a high-end residential enclave, a retail mall, service apartments and an international convention centre.

In March 2011, the company purchased a 700,000 sq ft greenfield IT park from Kotak India Real Estate Fund I for Rs 525 crore. It also plans to build a 600,000 sq ft IT park in Bangalore.

At the Ramanujam IT city 1.2 million sq ft of space has already been leased out to firms including HCL, Cognizant and TCS. In all 2.8 million sq ft will be ready for occupation by March.

Besides, the company plans to build mixed-use 1.3 million sq ft of space for retail and residential use, the Tata Centre in Bangalore, and is in the process of acquiring three toll road projects at a cost of Rs 600 crore.

“We are evaluating whether to float an REIT or a business trust in Singapore. A business trust will allow us to have a mix of both completed and leased assets as well as under development assets. An REIT can only be for completed assets such as toll roads and leased office space,” said the TRIL official.

If the company goes in for a business trust it could potentially fold in its 700,000 sq ft Trilium mall in Amritsar; the under construction Tritvam residential complex in Kochi and Capital Height, its 10 acre integrated residential and retail complex.

It also plans to pool in its subsidiary TRIL Roads that has been awarded the Rs 1,371 crore project of four-laning a 110 km stretch of the Pune-Solapur highway.

“We will take a call on which of the two routes to adopt depending on the valuation and advice from merchant bankers,” said the TRIL official. The business trust will target investors who are keen to have a rental base and a development play that generates capital appreciation albeit at a slightly higher risk of project execution.

The REIT, on the other hand, will target investors such as sovereign wealth funds and pension funds interested in a steady rental income.

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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.

Realty regulator will keep builders on a tight leash

A new law to give home buyers a better deal aims to ensure builders sell residential property on the basis of carpet area instead of ambiguous terms like “super area” while a regulator will ensure housing projects declare the status of important civic clearances.

The Real Estate (Regulation and Development) Bill, which the government plans to bring to Parliament in the budget session, has been framed under provisions dealing with property transactions in the concurrent list of the Constitution that applies to states, making the proposed legislation more than a model law.

In a bid to try and make sure developers stick to timelines, the proposed law states that realty players will have to park 70% of funds in a particular bank account so that resources are not diverted and buyers are not left in the lurch.

A real estate regulator in every state will make it mandatory for private developers to register all projects before sale of property and only after getting all necessary clearances, addressing a major concern of buyers about incomplete or fraudulent land acquisition.

According to the bill’s provisions, failure to declare status of clearances will invite up to a maximum three years imprisonment or fine that can amount to 10% of project cost.

Realty players will have to disclose project details and contractual obligations to ensure transparent, fair and ethical business practices. There can be a model agreement which is expected to reduce ambiguities in real estate transactions that not many buyers are familiar with.

Private builders are not comfortable with some of the bill’s provisions and voiced their objections at a meeting chaired by housing minister Ajay Maken and urban development minister Kamal Nath. Those who attended the deliberations included representatives of developers’ associations — CREDAI, NAREDCO and industry chambers CII and FICCI.

Builders maintain there is no need for a regulator as they are already subjected to clearances from multiple agencies. They felt the penal provisions hurt their interests, but the government might want to increase the odds in favour of consumers.

The meeting was called after the intervention of the Prime Minister’s Office which asked the ministries of housing and urban development to resolve differences and quickly finalize the long pending bill.

The government hopes that the move for a strong legislative protection for buyers, which will also rein in unscrupulous players, will help in gaining the appreciation of middle class voters who have drifted from Congress in the wake of a series of corruption scams.

Although realty developers have been asked to submit their views at the earliest, the government seems determined not to dilute consumer friendly provisions. “We are not going to compromise on any aspect of the bill that hurts the interest of common home buyers,” Maken said.

Real estate agents will also be asked to register with the regulator. “The agents, an important link between the promoter and buyer, have been unregulated. Once they are registered, it will be help in curbing money laundering,” an official said.

Mumbai, Kolkata top in adding new homes in 2012: Report

At a time when the real-estate sector across the country is witnessing a slowdown, Kolkata, Mumbai and Pune recorded significant growth in new residential units, in 2012.

According to study released by real estate consultants Cushman & Wakefield, the total new units launched across eight cities went down by approximately 16 per cent (to 162,000 units) in 2012 when compared to 2011.

Mumbai, Pune and Kolkata were the exceptions with 72 per cent, 34 per cent and 19 per cent increase.

The study was carried out across eight cities — Delhi & NCR, Ahmedabad, Bangalore, Hyderabad, Chennai, Mumbai, Pune, and Kolkata.

While Bangalore saw the highest decline of nearly 50 per cent (16,543 units), Mumbai witnessed the maximum growth of 72 per cent (22,423 units).

Of the total number of units launched, majority were in the mid-end segment, which comprised approximately 83 per cent of the total launches.

According to the report, a total of 8,900 units were launched in Kolkata in 2012.

Nearly, 62 per cent of these units were in the mid-end segment (5,535 units) and priced between Rs 36 lakh and Rs 60 lakh. This was followed by the high-end segment, priced upwards Rs 60 lakh, which accounted for another 38 per cent of the launches.

On a year-on-year basis, supply of mid-level homes increased by 26 per cent to 5,535 (from 4,372). Similarly, high-end home launches too increased to 3,360 units – 17 per cent up from the 2,863 units launched in 2011.

Interestingly, supply of luxury homes dipped drastically in 2012. The number of units launched dipped from 280 (2011) to just 23 (2012) — a near 92 per cent fall.

“Cash-strapped developers were not willing to take up projects that may fall short in interest from end users, thereby keeping their risk exposure minimum,” Sanjay Dutt, Executive Managing Director, South Asia, Cushman & Wakefield says.

According to the report, the short term outlook of the city suggests a cautious approach by end-users in the wake of high home loan rates coupled with inflation.

What does the new-age buyer want?

Vineet Relia of SARE Homes talks to Lakshmi Krupa about financial innovations, Chennai’s fascination for villa projects, and the city’s changing needs…

Customers almost always come with a checklist these days, especially in suburban areas where we do gated communities. In Chennai, proximity to schools, health facilities and security are of great importance. They are not looking for super luxury but a good lifestyle at a low ticket price.

How different is it being an FDI developer in a traditional market?

In some sense, in the real estate market, we see ourselves as game changers. The real estate market usually has family-run businesses or one-man businesses but being a corporate body with an independent board helps us remain objective. There is no personal agenda and our projects are all from the capital provided by funders such as Morgan Stanley and Goldman Sachs.

You have announced a few financial innovations (such as pay nothing until possession after the initial 20 per cent). Is this your reaction to the current market scenario?

While we continue to believe that the market is as robust as ever, our innovation is an effort to reduce the financial burden on potential homeowners. Consider a typical buyer — a couple with double income, buying a home on loan. They apply for the loan and until possession they have to carry the burden of their rent and the EMI. Sometimes, projects are delayed due to approval issues and in these cases they save a lot of time with this offer.

There has been a marked increase in villa projects along OMR and GST over the last one year. What explains this?

We find that the Chennai customer wants to stay as close to the ground as possible. That’s probably why high-rises don’t catch their fancy as much as villas do. You own your own piece of land and it comes with the option of expansion later. In our projects, we are offering expandable villas that come with a pre-approved plan for expansion. Owners can build another room anytime they want to and not even necessarily through us but any builder.

Infrastructure-wise how does Chennai compare with other markets?

I don’t think a lot of people even know that Chennai has seen the highest amount of FDI in the last two to three years. A lot of activity is happening, especially around the Oragadam area, and a detailed Master Plan with more structure will take the city to a higher platform almost certainly.

13 insights for India real estate in 2013

The year 2012 closed with a few notes of positivity as the inflation was below the Reserve Bank of India’s (RBI’s) projected levels and the Index of Industrial Production (IIP) growth increased in the last two months of the year, giving new hopes for 2013.

Overall, 2012 remained inactive, affecting all the major sectors in real estate. Office space absorption remained lower compared with 2011. Meanwhile, retail faced challenges of quality supply, affecting the overall absorption. The residential demand improved; however, developers continued to struggle with unsold inventories. With the expected moderation in inflation and strengthening policies, we have gathered few interesting insights for 2013 from real estate experts.

1. Economy – As per RBI, the policies will focus towards growth in 2013, although risks of inflation will continue to remain. Interest rates are expected to witness a downward correction of 100 to 150 bps in 2013. The softening of interest rates is expected to reduce the home loan rates, in turn increasing the buying of real estate assets. Increasing urbanisation and consumption despite the slowdown in GDP growth will be the key drivers of the economy in 2013.

2. Policies – The recent policy initiatives are expected to improve the investment climate and business environment, and they are likely to benefit the real estate sector in 2013. Few policies to look at in 2013 are: the Real Estate Regulation Bill, likely to be tabled in the upcoming winter session of the parliament; the real estate investment trusts (REITs) or real estate mutual funds (REMFs), expected to get launched in 2013; and the Land Acquisition and Rehabilitation and Resettlement Bill, likely to be tabled in the upcoming budget session in 2013.

3. Infrastructure – The infrastructure sector achieved a substantial FDI of USD 2.8 billion, accounting for a notable 7.7% of the total FDI inflow in FY 2012. In the year 2013, the relaxation of FDI policies in multi-brand retail is expected to surge the investment in back-end infrastructure development such as logistics. Moreover, an FDI of up to 100% is also permitted under the automatic route in built-up infrastructure and is likely to surge the development of the city and the regional level infrastructure in 2013.

4. Office Real Estate – Office space absorption in 2013 is likely to remain equal to that in 2012. Supply correction will lead to fewer options for occupiers, and steady absorption will decrease vacancy levels. Competition for space in prime buildings in prime locations is expected to increase in 2013, and these spaces will start earning a premium. Rents are expected to increase from 2H13 onwards as fewer new projects are being launched, and vacant spaces are steadily filling up. Decisions on occupying special economic zone (SEZ) spaces will be taken by occupiers who are sure of taking a position in India as they have to go live by March 2014 to avail the benefits.

5. Retail Real Estate – The relaxation in FDI policies in multi-brand retail interestingly has surged aggressive growth amongst Indian retailers to take the first-mover advantage. This is expected to drive the demand in 2013. However, as supply of retail malls remains a challenge, retailers are likely to opt for built-to-suit (BTS) options or high-street properties. As most developers are focusing on residential developments, the supply of malls will reduce in the major cities over the year. In 2013, retailers will be cautious and take more time to execute agreements as they will do a detailed analysis before closing transactions. Retailers will commit to space only if they see approvals in place and the construction of the space in progress.

6. Residential Real Estate – REITs in India allowing investments in rental housing is a new trend worth watching. The framework and details of REITs, once formulated, are likely to drive the investor demand across the prime cities in India in 2013. Another interesting trend observed in the last two years was that the stock in the range of INR 2,000-3,000 per sq ft was fast sold out. In 2013, this range is likely to shift to INR 3,000-5,000 per sq ft with the increase in inflation and construction costs.

7. Industrial Real Estate – Sale-cum-leaseback of exiting industrial assets by existing companies is likely to increase in 2013. MNCs testing the waters in India are likely to focus on BTS industrial properties. Warehousing companies are now preparing for the goods and services taxes (GST) and are slowly moving from godowns to distribution centres. The growing trend in e-retailing and FDI in multi-brand retail is expected to surge the demand for warehousing spaces in 2013.

8. Education and Health Care – There are aggressive growth plans in K-12 and skill-space educational institutions in 2013, particularly in the non-metro cities of India, where there are large opportunities. In the health care segment, hospital chains, along with day care centres, are expected to expand aggressively in 2013. Both these segments are expected to attract private equity investment in 2013.

9. Investment Sentiments – Debt capital is likely to increase in 2013. Banks are expected to be more flexible in lending. Most of the realty funds are close to their exit periods as they were invested around 2006-2007. Therefore, the exit of real estate funds is expected to increase in 2013. Meanwhile, interest on income-producing assets by institutional investors is likely to increase over the year. However, the availability of such assets will continue to remain a challenge. Assets will witness a softening of yield rates amidst increased liquidity.

10. Delhi – Most of the absorption in Delhi NCR is likely to focus around Gurgaon and Noida, with the exception of Delhi International Airport Limited (DIAL) and few select stand-alone Grade A projects of Delhi. As the demand supply gap of quality office space is expected to increase because of the supply constraints in select precincts of Delhi NCR, rents are expected to increase in certain micro-markets by 2H13. Developers will focus on delivery of the products.

11. Mumbai – Office absorption and residential demand will continue to increase in Mumbai. The trend of completion of highquality new office projects pushing up Grade A office vacancy levels and providing tenants with greater bargaining power will reduce in 2013. With banks drastically reducing lending activities over the last two years, resulting in debt remaining a constraint, not much of new  commercial supply (except spill over from 2012) is expected to be completed in 2013 and 2014. Residential launches are expected to increase; however, price drop is unlikely to happen over the year. Amidst constrained supply of quality retail malls, rental gap between Grade A malls and Grade B malls will further widen in the year.

12. Bangalore – In terms of office space, Outer Ring Road will continue to be the sought-after destination in 2013. For residential real estate, North Bangalore is expected to continue to remain as the best performing region in the city with strong infrastructure development, increased demand and price appreciation in 2013. Meanwhile, Whitefield will continue to retain its sheen for both office and residential real estate because of affordability, proximity to key work places and good social infrastructure.

13. Other Cities – Chennai, which witnessed a historical high number of residential launches in 2012, is likely to slow down in 2013. This trend is also expected in Pune. Meanwhile, Kolkata and Hyderabad are likely to witness increased launches. Prices of residential units are likely to increase in all the cities because of the increased construction costs. Ahmedabad, Bhubaneswar Kochi and Coimbatore are other cities in India that are likely to witness immense development activities in 2013.

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.