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.

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