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     SECTOR NEWS: Real Estate www.india-reports.com

     ththWeek: August 5 August 11, 2008

India Reports: Fighting the Slump

    With inflation stabilizing and signs of interest rate peaking being evident, the Indian real estate sector is now preparing to fight for ‘staying alive’. In the mean time the

    focus is rightly shifting on costs as the rising input costs can potentially derail the survival strategy. Various innovative strategies of cost cutting including enhanced use of information technology are being tried out. Meanwhile reports of slump continue to pour in but amid such reports investment opportunities in a bottomed out market are increasingly being realized, especially by fund managers from abroad, raising the potential of FDI inflows. This is good news.

    - Chillibreeze Business Research Team

General Information / Trends

Real Estate Sector adopts Information Technology

    The Indian real-estate sector is adopting information technology (IT) by taking to end-to-end IT solutions in a bid to automate their business processes. This has not only helped to increase efficiency and cut cost but also to make their functioning more transparent. It has enabled them to grow, as well. Rapid growth in business opportunities, inflow of foreign investment into the sector, and the entry of second-generation owners or managers into companies are largely the reasons behind the real-estate industry adopting IT solutions, say industry watchers.

    However, the use of complete end-to-end solutions is still fairly recent and is a three-four-year-old phenomenon. Earlier, different departments in a company would independently decide on the software they would use, but now enterprise resource planning (ERP) has become popular. The industry has moved from fragmented software to consolidated ERP solutions, though it involves a substantial cost escalation.

    Bangalore-based real-estate major Sobha Developers Ltd for example uses an ERP solution that connects projects in different locations and helps people communicate in an integrated fashion. The company also has another IT system that is largely for the employees. This has an HR module that allows employees to apply for leave, receive pay-slips and lodge complaints online. It also enables the bosses to approve leave and do appraisal online. This makes information readily available and brings in a lot of transparency. Employees can also register for training through this system. The main advantage is that employees do not have to go around asking for information. It also acts as the grievance handling mechanism. N Venkatramani, Executive Director, Sobha Developers, says the ERP solution is used for the estimation and the enquiry-generation cycles. The estimation cycle includes estimation, procurement, purchase-order, receiving of material and payment. The enquiry generation cycle includes enquiry generation, site visit, customer building, payment agreement and payment received from customers. Subscription enquiries:epublishing@chillibreeze.com

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    Adoption of the technology has helped to reduce document movement. It has also helped to control costs and get a better grip on operations. Sobha Developers also has an online quality management solution. Every aspect of quality for all the projects is evaluated and put on the intranet, where the details can be assessed by everyone. It enables the project managers to know where they stand, compared with the others. Incentives also depend upon this statistic, says Venkatramani.

    Puravankara Projects Ltd, also Bangalore-based, says a construction company has a complex business model and has to handle various operations such as architecture, construction and sales. IT can integrate each of these operations and make them talk to each other. The company says it has been implementing IT since 2006. It uses an Oracle solution. If the operations are all manual, it becomes cumbersome and one might lose control over operations. It also leads to inefficiency and hence costs go up.

    At present, demand for ERP solutions is high, but not many companies use high-end solutions. Industry experts believe the market will evolve over time and there will be demand for more sophisticated solutions. Once the market stabilizes, the demand for next generation solutions will start. The technology providers would have to show the value. Figuring out the right price point is also important.

    Technology adoption will keep growing. The market for IT solutions has huge scope within the real-estate ecosystem comprising suppliers, contractors, developers and investors. Among the 4,000 odd top-tier developers, only about 250 use an IT platform at present. In the SME category, there are about 11,000 players who could use IT. So the addressable market is huge.

August 11, 2008

    Source: Hindu Business Line

    URL: http://www.blonnet.com/ew/2008/08/11/stories/2008081150010100.htm

Build and Lease Model to promote Walk to Work Culture

    In Mumbai Metropolis, where land is scarce and comes at a premium, the build-and-lease model adopted in special economic zones appears to have many takers. This is despite some instances of developers tying up with their clients to put up the structures.

    Modern Mills intends to adopt the leasing route for its proposed Rs 650-crore software and hardware SEZ at Kapoli, which is on the outskirts of Mumbai city. About 4 million sq.ft will be built in three years, and leased out at Rs 32 per sq.ft. A leading public sector bank has, in principle, agreed to fund the project in consortium with a few member-banks. The debt portion is pegged at Rs 350 crore. Keen on making a difference in the project, the promoters will also focus on providing amenities such hotels, schools, healthcare and office space.

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    Mumbai-based Marathon Group is also working on an identical model though Mr Mayur Shah, Managing Director, says any offload of stake will be to real-estate investment trusts. The company is to develop a 26-acre Rs 1,800-crore IT/ITES special economic zone on its 100-acre holding in Navi Mumbai. The SEZ is set to meet the green building ratings (LEED certification).

    While SEZ norms do not dwell in detail on amenities such hospitality, retail, schools and healthcare, industry sources say that most developers have packaged their offerings to address tenant needs, especially when the intention is to promote walk-to-work culture.

August 10, 2008

    Source: Hindu Business Line

    URL: http://www.blonnet.com/iw/2008/08/10/stories/2008081050681700.htm

Operating Margins for Real Estate Companies under Pressure

    Realty stocks have taken a beating this year. While the BSE Sensex is down around 26 %, the BSE realty index has lost nearly 57 %. Some of the stocks have recovered from their lows, but the performance of the sector in the quarter ending June 2008 has been nothing to write home about.

    Analysts are concerned that companies are piling up debt - the net debt has increased by 19 % to Rs 28,400 crore for a sample of six companies that brokerage CLSA covers. In particular, DLF and Parsvnath have seen their borrowings increase sequentially while Puravankara reported a lower net debt position.

    Companies have resorted to borrowings mainly to make payments for land though some of it is understood to have been used for working capital. Given that the demand, especially for residential property, is slackening, its possible that developers may reduce

    prices to push sales. While that will no doubt ease their debt burden, it could put pressure on their operating margins as well.

    Already, operating profit margins for the six companies were under pressure in the June 2008 quarter leading to just a 16 % rise in their operating profits.

    On the whole, however, most companies have posted a satisfactory 22 % increase in revenues compared with the June 2007 quarter, with Puravankara being the only developer to have posted a sequential rise in revenues. Higher interest rates took their toll as the profit before tax was up just under 10 %. If the increase in net profits has been higher at 23 %, it is because the effective tax rate has been lower. Except for Sobha Developers, all others provided a smaller amount for taxes.

    Industry watchers believe that with interest rates rising, developers could find it difficult to raise resources. As a result, projects could get delayed. Construction is also getting delayed because of a shortage of labour and rising material costs. While there is clearly a Subscription enquiries:epublishing@chillibreeze.com

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    long-term opportunity for developers, there are challenges in the near future with the number of transactions having slowed down significantly over the last six months. Unless demand picks up, realty firms will find it hard to protect their margins.

August 8, 2008

    Source: Business Standard

    URL: http://www.business-standard.com/india/storypage.php?autono=330762

Real Estate Prices in Bengal likely to Rise

    Developers affiliated with the Bengal chapter of Confederation of Real Estate Association of India (Credai-Bengal) said if raw material prices held firm, apartment prices would rise by Rs 100 to Rs 500 a square feet. But if steel producers decide to raise prices to international level this month-end, the revision could be as steep as Rs 600 to Rs 1,000 a sq ft. There is no alternative but to raise prices. The price at which flats were sold a year ago have now become the construction cost. On an average, project cost has gone up by 43%. Some developers are on the verge of shutting shop, Credai-Bengal

    president Pradeep Sureka said.

    If the cost escalation does take place, it will be a double whammy for buyers as firming of interest rates on home loans has reduced borrowing capacity and forced many to postpone their purchase plans. Home loan offtake is down by 20-30%. Pawan Agarwal, director of NK Realtors, confirmed the slowdown.

    In the past 12 months, real estate price in Kolkata has already appreciated 10-20%. If developers do rise prices, a one-bedroom apartment could become dearer by Rs 40,000 to Rs 200,000, while a two-bedroom flat would cost Rs 75,000 to Rs 375,000 more. If steel prices are jacked up from Rs 45,000 a tonne to Rs 48,000 per tonne, the cost escalation for a single bedroom apartment would be Rs 240,000 to Rs 400,000 and two-bedroom by Rs 450,000 to Rs 750,000. At present, average construction cost is Rs 1,800 per sq ft while average land cost is Rs 600 sq ft. The average selling rate that is Rs 2,600 per sq ft now, could go up to Rs 3,600 per sq ft.

    Ruling out a Mumbai or Delhi-like price correction in Kolkata, Credai national vice-president Santosh Rungta said unlike other metros where land cost was 70-80% of apartment price, it was the opposite in Kolkata. No developer is taking up large plots of

    land right now. A huge demand exists but it is in affordable housing sector. For houses to be relevant to that segment, government has to offer relief by slashing taxes, levies and duties that currently amount to Rs 700 a sq ft, Credai executive committee member

    Sushil Mohta said.

August 7, 2008

    Source: The Times of India

    URL:http://timesofindia.indiatimes.com/Cities/Real_estate_prices_set_to_skyrocket/articleshow/3335313.cms

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Striving to Cut Costs

    Real estate developer Akruti City plans to use pre-fabricated slabs in its buildings, saving 15 to 20 % cost over manually-laid slabs. It is also exploring new techniques to build walls and pillars that could save up to 20 % over conventional techniques. Akruti is not alone in trying to cut costs as the realty slump caused by higher interest rates and capital curbs by the government begin to bite. All across India, property companies are sourcing cheaper materials, using more advanced technology and new techniques to reduce construction time even as overheads are being slashed. The drive to cut costs is becoming critical as key input costs - steel, cement and labour - that account for 40 % of project costs have escalated 50 % over the past year. Many developers used to spend money

    lavishly. Now, it is time to rethink expenses, said Akshaya Kumar, managing director,

    Park Lane Property Advisors.

    Unitech, the countrys second largest property developer, is bulk buying sanitary ware, wood flooring and other finishing materials from factories in Malaysia and Singapore. The company hopes to save Rs 400 crore with these measures this financial year. Recently, a team from Delhi-based realtor Ansal API visited China to source construction materials such as tiles, windows, cables and cement, which are 10 to 15 % cheaper than Indian products. The company recently tied up with UEM Malaysia, a large infrastructure firm, for technology and equipment to save costs and time in project construction. Small developers however cannot afford bulk buying or source their material from abroad and thus cut costs.

    Mahindra Lifespace Developers, the realty arm of industrial conglomerate Mahindra & Mahindra, recently set up an innovation cell to explore use of new construction materials such as fly ash instead of cement, better mechanization and technology to cut costs. The company has reduced the time taken to lay slabs from one month to 21 days and plans to cut it to a fortnight.

    Companies are also doing the obvious in paring employee overheads. For instance, Delhi-based Parsvnath Developers has cut down on five-star hotel stays, travel costs, entertainment and other expenditure. Bangalore-based Sobha Developers has set up design offices in cities such as Mysore in Karnataka and Trissur to reduce attrition and improve cost efficiencies. TDI infrastructure, another Delhi-based developer, has stopped outsourcing project management and doing it in-house, saving 10 % of the construction cost in the process. Parsvnath is focused on finishing projects in advance. Instead of three years, they try to finish the projects in two and a half years and save time and overheads. Instead of firing employees, putting a little pressure on them to finish the projects early makes sense.

August 6, 2008

    Source: Business Standard

    URL: http://www.business-standard.com/india/storypage.php?autono=330565

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FDI in Real Estate Likely to Touch $25 Billion in 10 Years

Foreign direct investment in the countrys real estate sector is likely to rise to a whopping

    $25 billion in the next 10 years from the present $4 billion, even as the industry faces a slowdown in the short term due to rising interest rates, an Assocham study said.

    Despite real estate market confronting a temporary depression with real interest rates hovering between 12-16 %, FDI in real estate market would increase by about $21 billion to touch USD 25 billion in the next 10 years, industry chamber Assocham said in its

    latest study. At present, the domestic real estate market is estimated at $15 billion, of which FDI contributions are about $4 billion, it pointed out.

    In future, higher interest rates would subside with India scaling a GDP growth of over 10 % for at least a decade, and create a huge space for overseas investors in its real estate sector, Assocham President Sajjan Jindal said.

    Real estate in India would be a hot market and investors are constantly looking at India for parking their surpluses as returns on such investments would be the highest in the near future, the study said. The sector would grow larger as the IT sector alone is expected to require about 200 million sq ft of space across the major and large townships, it added.

    It is also estimated that in Indias residential sector, housing shortage is around 20 million units. About 100 million sq ft is likely to be added by end of 2008 from over 300 mall projects.

August 6, 2008

    Source: Financial Express

    URL: http://www.financialexpress.com/news/FDIs-in-real-estate-may-touch-25-bn/344982/

Individual Real Estate Investors start to Panic in NCR

    Rising interest rates, shrinking pool of home buyers and anticipated fresh supply of DDA flats has set off what could be termed as early signs of panic among real estate investors in Delhi and its suburbs.

    An increasing number of investors are wary of holding the property any longer and are turning it back to developers or pushing property dealers to find buyers fast. Industry experts, however, feel end-users should not rush into buying property at present and wait till the festive season, following which there could be a major price correction.

    A rising home loan rate has badly dampened consumer sentiments. July was bad and August will be worse. The latest round of loan rate hike would sink in over the next few Subscription enquiries:epublishing@chillibreeze.com

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weeks and its impact on home buyers could be visible by the end of this month, says an

    HDFC executive based out of Delhi.

    He says home loan inquiries have fallen by 35-40% in Dwarka, one of the biggest colonies of Delhi, which offers a large supply of apartments. Dwarka, which has seen prices move up almost four times in the past five years, is witnessing fewer transactions these days. Besides rising borrowing cost, an anticipation of DDA house allotment too is keeping buyers out of the market, say property dealers. DDA is likely to allot 5,500 one, two and three bed room apartments across Delhi over the next few months.

    A shrinking pool of buyers has made investors a little jittery in Delhi, Gurgaon, Noida and Ghaziabad. Many investors, fearing that the markets may worsen in the coming months, want to exit with the gains they have already made. Some of them have turned the property back to the developers. In many cases, investors have an option to sell the properties back to the developer at an agreed rate. In a market, where an investor thinks his property may not fetch more than the agreed price, he sells it back to developer. A Ghaziabad-based developer recently bought back over 25 apartments.

    Despite early signs of scare setting in among investors, prices remain stable in Delhi but have corrected by 10-15% in suburbs. Experts feel a deeper correction could be in the waiting. What we are seeing today is only the tip of the iceberg. We may see a deeper correction in November, says Knight Frank India chairman Pranay Vakeel. He says end users should wait, as developer intend to hold prices till festive season. Developers are

    banking on festive season to lift sales. But if it fails, they will have no option but to cut prices to sell, says Mr Vakeel. Meanwhile, as home buyers drive hard bargain,

    developers are hiking card rates to show they are offering a deeper discount to customers.

August 5, 2008

    Source: Economic Times

    URL:http://economictimes.indiatimes.com/Markets/Real_Estate/Realty_Trends/Property_investors_exit_as_downturn_worsens/articleshow/3326185.cms

Commercial and Retail Real Estate

Companies to Expand as NCR Rentals Fall

    Companies which have deferred expansion plans in the National Capital Region due to high property prices can now think of going ahead as rentals for office space in IT and SEZ segments have declined by up to 13 % during the second quarter of 2008. The

    rentals of IT/SEZ segment in Gurgaon and Noida witnessed correction with values declining by 3 % and 13 % over the quarter, respectively, global real estate consultant

    Cushman & Wakefield said in its report on office market for second quarter of 2008.

    Giving the outlook, C&W said office market is expected to remain firm with rental values rising except for the IT and SEZ segment of Gurgaon and Noida, which are likely Subscription enquiries:epublishing@chillibreeze.com

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    to see an estimated supply of 3.3 million sq ft during the third quarter that may raise pressure on rental values in the short term. Noida (IT and SEZ segment) is likely to

    witness correction in rental values due to over supply and high vacant stock, it added.

    During April-June quarter, the average vacancy rate across NCR was about 7 % but Noida witnessed the highest vacancy rate of 15 % as the demand supply gap further widened with the infusion of additional supply.

    The demand for office space during the quarter stood at 3.3 million sq ft, of which 64 % was contributed by absorption while the remaining constituted of pre-commitments. Total supply was recorded at 4.3 million sq ft in NCR, of which 60 % was IT/ITeS specific. Supply was spread across all micro-markets with majority of it in Noida at 54 %.

In a separate report on retail space in NCR, C&W said: Limited availability in

    prominent main street locations such as Khan Market, Connaught Place and Basant Lok has resulted in a slowdown in leasing transaction volumes that has kept the rentals firm.

    Rental values across all main streets remained stable or witnessed marginal increase except Karol Bagh, where it had soared by 24 % over the last quarter, it added.

    However, it said the average mall rentals remained stable across all micro-markets in the NCR as most of these projects had been in leasing for a few years now resulting the current leasing activity limited. The second quarter witnessed mall supply of about

    6,25,000 sq ft against four million sq ft of projected supply for the same period. Majority of the developments have been postponed to the next two quarters, which are currently under fit-outs or installation of services, the report said.

    Apart from the lifestyle malls, the market is also seeing second generation specialty mall developments that are aimed at niche segment, it added. The consultant estimated that about 5.8 million sq ft of supply would occur during the second half of the year.

    The South Delhi locations of Vasant Kunj and Saket are likely to witness most of the supply during the second half of the year with about 2.1 million sq ft, followed by Greater Noida with 1.38 million sq ft, it said, adding that the future supply in South

    Delhi was planned for premium and luxury segments.

    Mall rentals are expected to stabilise across most of micro-markets as most of the quality supply, likely to enter the market, has already been pre-leased, it viewed. ...The high

    price points attained will limit further appreciation in the near future. Leasing in prominent main streets is likely to be subdued in the short run, subject to availability of desired space by retailers, it added.

August 11, 2008

    Source: Business Standard

    URL: http://www.business-standard.com/india/storypage.php?autono=331071

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Excess Supply in Commercial Real Estate

    The general economic slowdown has started impacting the commercial real estate sector as was evident by slower uptake during the April-June period of the year. During the period, commercial real estate demand was only at 9.74 million square feet as against the supply of 18.07 million square feet. This was revealed in a report by real estate services firm Cushman & Wakefield.

    There has been a slowdown in the actual transactions witnessed in the period 2008 owing to a number of factors, primary amongst which is a general slowdown of the economy, Cushman & Wakefield Director Kaustuv Roy said.

    The IT/IteS sector, which has been one of the largest consumers of commercial real estate, has deferred their expansion plans, leading to a slowdown in the uptake during the period, he said. Most corporations, both Indian and multi-national, have been adopting a wait-and-watch policy throughout most of the period, he added.

August 6, 2008

    Source: Economic Times

    URL:http://economictimes.indiatimes.com/Markets/Real_Estate/News_/Economic_slowdown_impacts_commercial_real_estate_uptake_Cushman/articleshow/3330270.cms

Mall Rentals Drop Thirty Percent

    Rentals in shopping malls have come down by up to 30 % in the past couple of months as supply outstrips demand, but realty players doggedly refuse to acknowledge such a trend. In some locations they (rentals) have fallen up as much as 30 %. This is a major correction, which has happened in the sector, Reliance Retail President and Chief

    Executive (Life Style) Bijou Kurien said.

    A variety of reasons are responsible for the fall in rentals, including additional supply and holding back of expansion plans by retailers in the face of rise in rates, he added.

Footwear and apparel major Woodlands General Manager (Sales and Marketing) Lokesh

    Mishra said high retail rentals had always been a worry as it constituted the biggest chunk of expenditure for any retailer, but fortunately rentals are going down after skyrocketing over the past two years. In the last two months, we have seen a drop of 15 % in the

    figure quoted by builders and realty people, he added.

    Expressing the same sentiments, Hindustan Sanitaryware Vice President and Business Head D K Jairath said the rentals have softened and the company expects another 15-20% fall over the next two quarters.

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    However, major real estate developers, who are running shopping malls across the country, do not agree with this view and said that they have not witnessed any correction in rentals and there is no dearth of demand for retail spaces.

August 7, 2008

    Source: Financial Express

    URL: http://www.financialexpress.com/news/Mall-rentals-slide-30-realty-players-dont-know/345430/

Real Estate Finance

Berggruen Holdings forays into India

    Private investment company Berggruen Holdings (BH) has forayed into the realty space in India, lining up a slew of commercial and residential projects. It plans to take advantage of the sluggish market scenario to make investments.

    The real estate market is going to be difficult for a couple of years. It will be bad because the projects will be slower. But it will be a better opportunity for people willing to invest. But the valuations are more reasonable now, says Berggruen Holdings founder

    Nicolas Berggruen.

    Also, the investments are not constrained in terms of sector or asset classes, because BH is not answerable to investors. It manages and invests its own proprietary capital, which exceeds $1 billion.

    The firm has pumped in $30 million so far and will add another $20 million to this. Its first project in the realty space, a Rs 350-crore commercial project in Hyderabad, will kick off at the end of the year. The other locations for the realty space include Nagpur, Coimbatore, Mysore, Raipur and Vizag.

In India, the firms been active for the past two years and invests across asset classes

    private equity, real estate and public markets. The firm has invested $100 million in the country so far. In terms of sectors, its spread across hospitality, education, car rentals,

    warehouse & logistics, equipment rental and real estate. Berggruen typically invests $10 million to $100 million in any single transaction.

    India has the advantage of being vast and presents dynamic opportunities. We decided to start business from zero, instead of buying into existing ones, Mr Berggruen added.

    Retail and energy are the other sectors that the firm is looking at in India.

August 9, 2008

    Source: The Economic Times

    URL:http://economictimes.indiatimes.com/Markets/Real_Estate/News_/Berggruen_Holdings_forays_into_Indian_realty_space/articleshow/3343718.cms

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