Thursday, April 21, 2011

INDIAN REAL ESTATE-ROSE OF GROWTH WITH PAINS OF COST

In 2010 we witnessed one of the strongest and also the sluggish market of Indian real estate. The crash in the second half of 2008 and after that the revival and strong growth numbers posted by the sector made the Indian real estate one of the most favored destination of investments both domestically and overseas.

Valuations of residential and commercial properties, especially in Mumbai, Bengaluru and the Delhi-NCR region, rose abnormally from 2009 to 2010. Real-estate activity in many cities reached a frenetic pace. More and more hoardings showcasing new residential projects are once again dotting the landscape across various metros, like they were in 2007-08. The media also joined the race of the rally with high marginal prices at which transactions are being done as proof of a rising market .Properties prices swelled from 30% to 40% in most of states in 2010.Prices were

The weighted average rate of the unsold stock (as of December-end 2009) was 61% higher than the weighted average rate of the properties sold in 2008-09 (in Mumbai Metropolitan Region), according to a study by Liases Foras.

Developers and project investors are working hand-in-hand to block some part of the inventory, artificially jacking up prices for their properties. In 2010 we witnessed one of the worst second half for the Indian real estate sector due to jacked up prices and resulting fall of sales in properties.

Property prices were bound to have correction after the skyscraper price rise in the first half of 2010.Their was a wide gap between the affordability of housing and the price The below chart indicates the risk spread between consumer affordability and prices.

According the chart the real estate sector needed 25%-30% correction in prices which infact it has materialized to the tune of 30-40% till date in various parts of India.

THE CURRENT SPACE:
Indian real estate sector is facing the heat of the much blessings of RBI. In 2010 RBI have hiked the interest rates 6 times where as in 2011 it has already hiked 2 times resulting higher borrowing cost. Apart form manufacturing and infrastructure, real estate sector is facing one of the hardest times of its business cycles. It is worth noting that every 0.5% increase in interest rate reduces home loan eligibility by approximately 7% (by making home loans costlier and also by reducing the eligibility of the lower-income segment). Further the sector is blessed with scandals comprising from some big shot industry players.

• We finished the year 2010 with LIC housing scam, which made one of the strongest attack for the real estate sector making investors and buyers to defer their plans of buying taking jacked up prices by fraud intermediaries.

• Shahid Balwa, founder of a real-estate company DB Realty, was arrested in relation to a wide-ranging investigation into the government's 2008 sale of mobile-telephone spectrum.

• A Mumbai housing project that was meant for war widows was, instead, auctioned off, drawing attention to corruption in the industry.

DUAL BLESSINGS OF  INFLATION & RBI:
The list might become long but it is better to keep it short since all industries across the globe are entangled with one or their scandals at one point of time. The rising borrowing costs have affected the fund raising problems for the real estate sector.
• The costs of controlling inflation by RBI have affected this sector to its extremes. According to the Confederation of Real Estate Developers' Associations of India (Credai), the average cost of funding rose to 20% after the Reserve Bank of India restrained banks from lending to the sector .

• One of the prime reason for banks to run away from lending to this sector is the risky and rising bad loans. Along with this the sector is being turned down by banks even. They are less inclined to provide Blood to the real estate business.

• According to some industry head the sector is at its worst. The borrowing cost have been so high that it will affect the margins of the real estate sector in 2011-2012.

• Bank credit to commercial real estate (CRE) grew by 17.8% for the year till February, as compared with 0.9 per cent growth during the same period last year.

• On a financial year basis, credit to CRE grew 17.1% as against a decline of 0.9 per cent during the corresponding previous period. But this growth number is not enough for the real estate sector.

• Rising cost of higher inputs due to rising inflation, long gestation period for completion and clearance of payments makes the sector highly demanding for funding .
• Large firms such as DLF Ltd and Unitech Ltd are likely to miss their sales targets for the year to 31 March. If you measure the depth of the struggle being aced by real estate sector then we measure it with the stock market.

• The Bombay Stock Exchange realty index has dropped about 30.47% over the past year, compared with a 10.52% increase in the benchmark Sensex.

INDUSTRY COMMENTS.
Pujit Aggarwal, managing director of real-estate firm Orbit Corp., says banks have withdrawn their support for the industry. Almost everyone is paying higher interest rates, anywhere from 1% to 7% on the total cost of a project," Mr. Aggarwal said. For instance, on its borrowing of nearly $175 million, Orbit is paying an additional 1.5 percentage points on top of the 12.5% rate it initially received, which translates to $260,000 annually. With domestic findings being with drawn, he foreign inflow of funds have also dried up resulting more burden and pressure to keep the sector rolling on.

The other major factor contributing to higher housing prices is the various taxes imposed on these projects, accounting for 30%-36% of the project cost. At the same time the sector faces the problems from high prices or in other words exorbitant prices to the end user.

We have witnessed in 2010 that where the prices real estate went to an exorbitant levels.

INFLOW OF FUNDS.

Currently, up to 100% FDI is allowed in real estate projects in India via the automatic route with conditions including a three-year lock-in on investments. The investor is also expected to bring in at least $5 million in the project, which is required to be of built-up size of at least 50,000 square metre, or 10 acres, of land in a plotted scheme.

DEMAND v/s GROWTH:
The demand for the sector is promising investments and growth for the coming days.

• While residential sales were subdued, the commercial space segment put up a stronger showing as lease rentals stabilized and leasing activity remained strong in information technology (IT) centres such as Bangalore, Chennai and NCR.

• With new expansions coming up in Indian corporate houses the demand for commercial properties is making the real estate to survive in turbulent times of finance. Companies in the legal sector, consumer durables, banking and manufacturing sectors are acquiring commercial spaces in newly launched and to-be launched projects.

• Demand is coming primarily form Mumbai and Delhi. There is a huge demand from the information technology (IT) sector. The total demand for office space all over India is 35 million square feet; of that, the IT sector alone accounts for 80%. The second sector from which there is a good demand is the financial services sector.

• Also, in Hyderabad, Chennai, Kochi and Bengaluru, builders are developing IT parks within as well as outside the city limits and many developers are creating residential complexes surrounding the IT parks.

• Some 150 malls will come up in the next one year – one almost every alternate day. There are 15 different types of malls – ranging from FEC (family entertainment centres) to discount-store malls.
• Organized retail in this country, a few years ago, was 2%; now, it has gone up to 4% and next year it will touch 6%.This 65 growth wll bring up more malls and more shopping plazas
• The biggest financial hub in India is coming up in Ahmedabad - it is a 70 million square feet area being built by IL&FS, called Gujarat International Finance Tec-City.

One question might come up in our minds about is that is the Indian real estate sector is poised for a bubble to burst. In simple words it is not.

On the other hand the Confederation of Real Estate Developers' Associations of India (Credai) is bringing radical changes into the real estate sector which will give new direction and Shape to industry.

• Credai is preparing a comprehensive check list of required approvals for real estate projects, and this would be submitted to the Union Urban Development minister Kamal Nath this month-end. The industry body wants the government to reduce the time for issuing approvals to three weeks.
• Credai is also coming up with host of other changes like making mandatory for all members to disclose the carpet area in their brochures and sale agreement, aiming to bring in transparency in the sector .Currently it as 10000 members under its belt. Credai is identifying growth for the real estate sector. It has taken responsibility of getting 5 lakhs people under its umbrella.
• It will also widen its membership base, and get members from eastern and central India.

• In the overall development these new emerging markets are all set to be the centre of attraction and key driving force in the real estate market.

• CREDAI will be setting up consumer redressal cells in every state to address consumer disputes. The objective is to resolve disputes amicably in quickest turnaround time of approx. 60 days.
The real estate sector is strongly supported with a prolonged gestation period due to getting clearance form start of the construction plan to execution. Till date around 40 approvals are required like environment / high rise / airport authority / police etc across many cities. This makes the gestation period a burden some and eats away much of the capital. Credai have formulated polices and will submit to the government where all these pains of the sector will get reduced but not eliminated.

Monday, April 18, 2011

CLEAN ENERGY AND EQUIPMENT INVESTMENT GROWTH

Burning GDP.
Burning crude prices are burning the pockets of the every economy. From US to India from west to east every corner of the world is feeling the heat of higher crude prices. Higher crude prices are swelling up the food prices and affecting the industrial production. Rising cost of input is reducing the margin of profit for the companies and results to lowered growth for shareholders returns.

In china we find that monthly crude demand of China picked up to 10% as compared to last year and 15% higher year-to-date pushing the figure to 9.5 million barrels daily.
The biggest twist in the tale is that more Chinese officials have tried to cool of the rising GDP growth from unprecedented levels to 7% the more demand of crude have gone up from 1 million extra barrels of oil per day. So it well clear that a slowdown in the Chinese GDP will not affect the demand fro crude and hence pressure of crude prices with increasing demand will play their roles in the coming years.

China to Cut Back Carbon Emission and Opportunities.

In between all these China is focusing to shift from a high bracket of Carbon Emission tagged country to a lower one. For its high carbon emission scores china went for an extreme level of merger of old industries with new ones and even close down of some manufacturing plants. Very recently China announced at the Copenhagen Climate Change Conference in 2010 that its carbon emissions per unit of gross domestic product (GDP) would decrease by 40% to 45% in 2020 from the 2005 levels. China is also in search of extensive coal blocks across the world and its rate of scouting have soared up to such levels where in every week we find new coal blocks coming up on the ladder of Chinese search.

Main reasons for such a mad chase of coal locks is that first china needs coal for running the GDP (Steel Manufacturing) of growth and secondly for its huge electricity demand.

China's electricity consumption rose 13.41% over the previous year in March to 388.8 billion kWh, increasing the first quarter power consumption to 1.09 trillion kWh, up 12.72% from last year, according to the National Energy Administration (NEA).
According to the NEA's statistics, power use by the secondary or industrial sector, rose 12.31% to 802.5 billion kWh, or about 73.5% of the country's total electricity consumption during the period.

Industrial Growth of India in Emission Equipments the Bottle Necks.

We find demand of industrial investments into goods related to carbon emission reduction equipments. Engineering and light as well as heavy industrial equipments will find high demand of sell as well as manufacturing in China. China is very poor in terms of manufacturing of these products.

Where as in the world we find US is having adequate technical as well as production knowledge about reduction in emission standards.

India is basically into carbon trading which is also at its nascent stage. India presence in to Carbon Emission Equipment manufacturing is also negligible but it has huge growth. But if Indian industries go out for export of Emission Reduction Equipments then it will face some strong hardships.
The following are the glimpses of the hardships with which Indian manufacturing of Carbon Emission is surrounded:

• Higher cost of input

• Fluctuating Exchange Rate

• Higher import bill of Inputs imported by India

• Red Tape policies in duties and Subsidies offerings for promotion of exports.

• Lack of manpower and Technical schools for generating man power

• Price increase pay backs to sub suppliers and not able to clear from the end consumer the higher price hikes.
On the other hand we find operational issues and low government interest in boosting up the growth of these companies. Octrio, land permit, road permit and tax structure are the other operational problems. These problems make the growth as well as the ROI less attractive as compared to china and US investments.

Where India finds opportunities?

If Indian companies goes to china and opens shops their we find lot of support for opening up new ventures in China. China have been a favored destination for new open ups and also for its lucid structural changes. Moreover manpower and technical skilled labor gap is less in china and other operational and taxation structures are lucid and favoring to growth. India is getting flooded with finance in clean energy. India attracted $4 billion in private investments, ranking 10th among the G-20 countries. If Indian companies open up the shops in china then these hardships will be negligible, resulting this number of $4 billion PE investments swelling to $16billion within next 5 years.

The new model that has emerged is a Hybrid Model where among venture capital, hedge funds, and private equity funds coming together to fund ad reap the long term growth. This will derive the growth of Indian clean energy equipment market. Higher global energy demand growth will continue to drive return on investment (ROI) higher in the clean-tech space. Emissions reductions, renewable energy credits, and energy efficiency are three prime areas where an investment of hybrid nature is focusing. Investment interest is now more focused on how to invest in new technologies and gain investment streams that encompass two or three of these environmental benefits and should benefit from multiple credit streams .India lags in these advance stages where as China is way ahead. This is the reason why China is best destination for doubling the returns on Investments.

If we look at some of the new opportunities of clean energy Business we find the demand of equipments going to come up in the coming years.

Classification of the Clean Energy Business Opportunity

Type of Opportunity Type of Opportunity

Alternative energy

Solar

Wind

Hydro, tidal, and wave

Geothermal

Bioenergy and biofuels

Distributed energy

Combined heat and power

Microturbines

Fuel cells

Hydrogen generation

Flywheels

Energy efficiency

Lighting

Buildings

Transportation engines Energy recycling

Waste-to-energy

Battery technology/energy storage

Medical and biological crossovers

Environmental technologies

Water and wastewater treatment

Clean coal gasification

Emissions mitigation

Desalination of water

Information technology

Net metering and real-time pricing

Demand response (energy efficiency)

Energy management systems

Remote sensing
What Indian needs for having a stupendous growth in good venture projects for the clean technology space are (1)Technical support and infrastructure, (2) a seasoned management team to grow the business, and (3) a defined exit strategy (usually by an initial public offering, trade sale, or roll up).India lags in all the three. More interesting are the second-stage investments in clean technology and alternative energy that do have revenue and can make money for investors. Several venture funds are focused on these later-stage investments, and the investment space is beginning to get crowded. There is a great need for viable later-stage companies. Higher global energy demand growth will continue to drive return on investment (ROI) higher in the clean-tech space.

According to a report from the Pew Charitable Trusts last month, global clean energy finance and investment surged to $243 billion in 2010, a 30% increase over 2009. Excluding research and development (R&D), worldwide investments in clean energy are 630% higher than they were seven years ago.

Chinese Investments

The wealthy G-20 countries dominated last year's clean energy funding, with 90% of clean energy investments in 2010 directed to companies and projects based in the G-20. Minus R&D funding, clean energy finance and investment last year grew by 33% to $198 billion among the G-20.

China has made huge investments into clean energy. When we break the figures of the Chinese investments we find investment rose 39% from $39.1 billion in 2009 to $54.1 billion, setting a world record. Hence If India goes to china for then its cheap manpower and super red tape policies will make the ROI on investments to grow by manifolds.

Indian Mutual Funds.

If we come into the Indian mutual fund space we don’t find any dedicated funds for alternative energy or related to carbon emission or carbon trading related. We should have a starting point of new ventures rather than flocking with old Infrastructure name tagged mutual funds.

In addition to venture capital, both private equity and hedge funds will supply additional billions more as new technology is rapidly commercialized and deployed globally. The need is that great. Demand pull of global financial markets is accelerating. We have entered the world of Kyoto Protocol implementation in 2008 in 174 countries, and that already has impacted environmental project finance.

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