FIRE Capital To Invest In Affordable Housing

October 3, 2008 – 11:26 pm

As affordable housing is becoming the new mantra for real estate developers, the concept is attracting a lot of attention from the real estate funds fraternity. The $250-million First Indian Real Estate (FIRE) Capital Fund Ltd is making its first deal in the segment.
According to industry sources FIRE Capital is currently in the due diligence stage with the affordable housing investment. “The deal should get concluded within 2-3 weeks,” said the source in the know of the deal.
While, the name of the real estate developer is being guarded by the realty fund, DNA Money has learnt that it is a firm operating out of the eastern region of India. “In most likelihood, the affordable housing project is being developed in West Bengal,” added the source.
The ticket size of the project will be between Rs 8 lakh and Rs 15 lakh across various permutations and combinations of apartment sizes.
Gautam Vashisht, executive director (investments), FIRE Capital Fund, said, “The intent is certainly there in the affordable housing segment in India, particularly in Tier II and Tier III cities.” However, he denied making any comment on the possible investment in affordable housing project in east India.
Fire Capital launched its first fund in 2006 with a corpus of $250 million and has already committed over $150 million across seven investments. Focusing on residential and mixed-use developments centred on residential use, its first investment was in the Indore-based M Jhaveri Group’s 137-acre township. Other investments are also in township projects in Jaipur, Bangalore, Nagpur, Chennai, Ahmedabad and Dehradun.
The venture fund typically makes investments ranging from $5 million to $30 million.
Now with close to 80% of the corpus being deployed, the venture capital fund is planning to raise another fund next year. The amount to be raised is rumoured to be in the region of $500 million. While the primary investors will be from the US and European markets the fund will also look at raising some part of it from the Middle East.
The second fund will also target real estate projects in residential and mixed-use developments (including hotels), and the focus will be on Tier II cities in the country.

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NCR Faces Fall In Real Estate Projects

October 2, 2008 – 11:40 pm

New housing project launches in the national capital region (NCR) slumped by 20% during January-June 2008. This is explained by the slowdown in demand due to appreciation in real estate prices and rising interest rates for borrowers.

The first half of this year also saw a marked shift in developers’ strategy towards mid-income houses, as the high-end segment witnessed increased resistance from buyers.

Project launches in the high-end category fell by two-third to just 5, while mid-income housing project launches rose by over 20% to 37.

As per a report by international property consultancy firm DTZ, the absorption of mid-income houses in July at 76% had overtaken that of high end houses (68%). This means that high end houses are selling at a slower pace than the mid income segment. The report says that the share of mid-income housing in the overall residential supply is expected to rise to 62% in three years, compared to 22% currently.

This translates into a CAGR of 131% for mid income housing units.

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Home Rates May Drop Upto 12%

October 2, 2008 – 11:37 pm

Last week, at Mumbai’s Grand Hyatt Hotel, leading city-based real estate developers were closeted in an hour-long meeting. The agenda: to discuss ways to counter the slump in home sales which has persisted for almost an year now.

The outcome: The bitter realization that the Indian developer has limited options before him to attract buyers. The builders unanimously agreed to allow customers to have a greater say in price negotiations — in other words, they decided to cut home prices.

The developers agreed to give a 10-12% reduction for all consumers, albeit couched in schemes such as ‘bearing’ 2-3% of the interest cost, flexible rates for parking and floor rise pricing. “Don’t be rigid on rates; allow the customer to have his say,” was how one participant who is involved in large housing projects in suburban Mumbai, described the conclusion of the meeting.

The developers’ move also assumes significance as a sharp correction in Mumbai home prices would have a ripple effect across the country. Though residential prices are down 20-25% across India, developers in Mumbai have been unwilling to cut prices, citing a huge demand-supply mismatch.

“This quarter was crucial for us,” said a developer who was present at the meeting. “Demand is still robust as far as residential markets are concerned. What we want is to convert the demand into actual deals. If pricing is hampering sales, we are willing to compromise on that,” he added.

Till now, developers were not ready to accept that demand at high prices would weaken. In fact, most developers were currently holding out and did not offer discounts. They could afford to do so, since they were sitting on huge profits accumulated over the past two years of bull run in realty market.

“But the same developers have realized that demand is unlikely now at the prices seen two years back,” said an analyst with Kotak Securities. “We believe demand can only come back if prices correct.”

Some of the developers who were learnt to have attended the Grand Hyatt meeting were Akruti City, Nirmal Lifestyles, Kanakia Builders, Evershine Builders, Rahejas and RNA.

In Delhi, several developers in the National Capital Region have started offering deeper cash discounts and have increased their marketing efforts. Developers are banking on more ‘genuinely-priced’ products, a good cash discount and more advertising to lure buyers. “We didn’t offer any discount during the festive season last year,” said Raheja Developers chairman Navin Raheja. “But this time, everyone is giving it, since market conditions have changed.”

Raheja Developers is offering an outright discount of Rs 200 per square feet or around 6-7% at its soon-to-be-launched high-end project in sector 109 in Gurgaon. Aiming to lure government employees — beneficiaries of the Sixth Pay Commission recommendations — the developer is offering them an additional discount of Rs 100/sq ft, which is over and above the Rs 200 discount offered to all.

This quarter, developers are caught in a pincer-grip of falling sales, dropping rentals and tight liquidity conditions. Developers said they have also asked industry associations and their officials to help bring back investors and buyers’ confidence in the real estate sector. The overall quantum of sales dropped over 60% in the past quarter due to rising interest rates and additional pressure on household budgets.

Developers across the country have now pegged hopes on the upcoming festive season, offering to pay stamp duty and gifts like a car or free home furnishing.

For instance, Mumbai-based Sunil Mantri Realty has waived stamp duty (5% of property value) for buyers at its Mantri Park project in Goregaon (East) in Mumbai and is also offering 5% discounts at its Bangalore and Gwalior projects.

The Citigroup-backed Golden Gate Properties has offered a car for every customer booking a flat at the Golden Palms project on Hennur-Banaswadi road, some 30 minutes from Bangalore’s new international airport. “We are offering a Skoda Fabia to every customer who books a flat at the Palms,” said Sanjay Raj, executive director at Golden Gate Properties. “For those who already own a car, we are providing a discount equivalent to the value of the car,” he added. Golden Palms comprises 450 apartments measuring 1,400-1,800 sq ft and is priced at Rs 2,600 per sq ft.

However, industry observers say that cutting prices alone may not bring in buyers, as sales have touched an all-time low and steep interest rates have put off many prospective buyers. “Home sales are at an all-time low. Pricing is a crucial factor, but it has to be supported by required policy support to revive the market,” said Pranay Vakil, chairman of real estate consultancy Knight Frank India.

After RBI raised interest rates, commercial banks have increased lending rates by 50-100 basis points. This has led to a sharp drop in pre-sales for property developers, their main source of project funding. Developers have also been hit by the falling stock markets, increased lending rates and bar on external borrowings which have limited their cash flows and execution capabilities.

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Parsvnath Expects Rs 2.10 Billion Revenue From Haryana Project

October 1, 2008 – 7:29 am

Real-estate firm Parsvnath Developers Ltd said on 30 september that it expects revenue of 2.10 billion rupees from a new housing project it launched at Dharuhera in the northern state of Haryana.

The project, spread over thirteen acres, is likely to be completed by 2011, the company said in a statement.

Earlier in the day, Parsvnath said it expects revenue of 400 million rupees from its just-launched housing project in Pune.

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Realty Investors Take Equity Route To Offset Tax Burden

September 30, 2008 – 2:10 am

Though the realty sector has been hit by the general economic slowdown, smart property investors, who raked in the moolah when the going was good, made use of the equity markets to reduce the tax they paid on those gains.

According to tax consultants, people whose income is derived from other sources, say a salaried employee, can and have in the past offset derivatives losses against short-term capital gains made in property transactions to reduce tax incidence on the property gains.

Gains from property are deemed short-term if they are held for less than three years. Once a derivatives loss is offset against the gain, the balance short-term capital gain is clubbed with the salary income and taxed at the normal rate.

Tax experts, like Ernst and Young director (financial services) Sameer Gupta, point out that in the context of shares, Central Board of Direct Taxes (CBDT) issued a circular in June 2007 laying down the tests for distinction between shares held as stock in trade vis-a-vis those held as investment.

Some of these tests include the scale and frequency of the transactions, whether owned funds or borrowed funds were utilized for the transactions, the accounting treatment, the motive behind entering into the transactions, etc. They add the tests are indicative and not decisive, and need to be examined on a case-to-case basis, including their applicability to futures transactions.

“It may be argued that a gain or loss arising from an exchange-traded futures transaction (NSE/BSE F and O) is in the nature of a short-term capital gain or loss as a person buying or selling a futures contract is creating a right or interest (in buying/selling a specific number of shares on a net settlement basis) and that when this right/interest is transferred by way of squaring off the transaction, there is a capital gain or a loss,” said E and Y’s Gupta.

Other tax experts buttress this argument by pointing out that a capital asset in the Income-Tax (IT) Act means property of any kind held by an assessee, whether or not connected with his business or profession.

“Under Sec 2 (47) of the I-T Act, a transfer in relation to a capital asset is defined as including the sale, exchange or relinquishment of the asset or extinguishment of any right therein or the compulsory acquisition thereof under any law. The word property used in Sec 2 (14) of the I-T Act is a word of the widest amplitude and the definition has re-emphasized this by the use of words “of any kind”. Thus any right which can be called property will be included in the definition of capital asset,” said senior vice-president (finance) of Tata Sons FN Subedar, drawing attention to a Bombay High Court decision in Tata Services versus Commissioner of Income-Tax case of 1979.

The implication of this is that a derivatives contract entered into by a person, and not held as stock in trade, is a capital asset and that when the futures contract is settled, the accrued gain or loss arising from the settlement of the contract is a capital gain or loss, added Mr Subedar.

Interestingly, while derivatives losses can be genuine, as is likely to be the case over the past nine months which has seen the Sensex declining by 38%, investors can also buy losses in a structured deal with brokers in order to set off the derivatives loss against the short-term capital gain arising on sale of immovable property in the same financial year.

Share brokers say this, though illegal, is not an unknown market practice. They are also quick to point out that structured deals wherein one party buys a loss while the other books a gain is restricted to the ‘unscrupulous’ variety of brokers and is not prevalent among reputed and big institutional and retail brokers.

Explaining the modus operandi of such transactions a broker said this practice was prevalent in the case of Nifty futures. Say, investor A wants to buy a loss and investor B wants to book a profit. The broker punches in a buy and sell order, respectively, on two different terminals using A’s client code for both the transactions (buy and sell).

Depending on how the index moves, the transaction can be squared off on the same day and the client code changed when the transaction is reversed. For instance, if investor A has bought and the Nifty futures move down, the broker changes the client code for the sell transaction by replacing A’s client code with B’s code. At the end of the transactions the broker is paid a commission by both parties to the deal.

Orbit Corporation MD Pujit Aggarwal says realty investors could make good profits even before construction is complete. For example, an investor gives a down payment of Rs 10 lakh for a property worth Rs 1 crore, construction of which will be complete in two years.

However, if the valuation of the property changes in six months to Rs 1.2 crore, the investor could sell it and make a cool profit of Rs 20 lakh on an investment of Rs 10 lakh. “This mostly happens when realty market is on a high,” Mr Aggarwal said.

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Design Arch To Invest In Greater Noida

September 26, 2008 – 12:55 am

Real Estate firm Design Arch said that it will develop a residential project with application of green technology in Greater Noida, which could entail an investment of Rs 150 crore.
Besides, the company plans to develop 10 such e-house projects in the metro cities across the country by 2010-11.
“We have just announced our first e-home concept called Gardenia E-Homes at Greater Noida. It will be followed by another nine such project in various metros over next three years,” Design Arch Managing Director J K Jain said.
He said the company is investing Rs 150 crore for the Greater Noida project and expects a realization of Rs 250 crore once the project is completed by mid 2010.
Jain, however, declined to disclose the investment figures for the other projects planned by the company.
“A green building may cost a little more initially, but saves through lower operative cost over the life of the building. There are many benefits, such as improving occupants’ health, comforts, productivity, reducing pollution and land fill waste,” he added.
He said the company is looking at developing both commercial as well as residential properties with this new concept.
Elaborating on the concept, Jain said structures would be electronic savvy, environment friendly, earthquake resistant besides other amenities.
“The green buildings in our project area will have four components, including energy saving, water saving, better indoor air quality and hygienic conditions and reduction of construction material waste,” he said.
The project would have some other eco-friendly concepts, like integrated rain water harvesting coupled with recycling of water and automatic fire detection sensors, he added.

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QVC Realty To Raise Funds For Spreading Out In South

September 25, 2008 – 12:25 am

Real estate developer QVC Realty plans to raise Rs 600 crore in 2009 through a mix of equity and debt, primarily to buy large tracts of land in the south, especially closer to the new airports in Bangalore and Hyderabad.

According to a senior official of the IL and FS backed QVC, it plans to use a portion of the funds, Rs 200 crore, for the development of its Rs 2,000 crore township project in Gurgaon. Delhi-based Uppal Group is a partner in this project.

“We will need funds to acquire land in the southern metros. We propose to acquire about 100 acres each in Bangalore and Hyderabad, close to the new airports in these cities, because we believe that both cities will grow in the direction of the airports. We will require funds to develop current projects,” said QVC’s promoter Prakash Gurbaxani.

According to Mr Gurbaxani, IL and FS is likely to invest up to Rs 400 crore in the company giving it the option to raise debt or bring on board a strategic investor into the SPV implementing the Gurgaon township. IL and FS has already invested $100 million into QVC in April, 2007.

QVC Realty, has six projects under various stages of development: integrated township projects in Gurgaon and Pune, apart from stand alone developments in Pune, Bangalore and Chikmagalur in Karnataka totaling about 20 million square feet.

The company has also partnered with Bangalore’s Sobha Developers and New Delhi’s Chintels India for its second township project in Gurgaon.

The company formally launched its Rs 150 crore Bangalore residential project - QVC Hills. It will construct 100 premium villas, priced upwards of Rs 5,500 per square feet, on a 26-acre plot located in close proximity to the Devanahalli airport.

Plans include developing an additional 50 acres in the coming years, investing additional Rs 250 crore, Mr Gurbaxani said.

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Realty Crash Shuts Exit Options For Investors

September 23, 2008 – 1:50 am

It has become well nigh impossible for those who invested in real estate last year to exit the scene as the downturn has deepened and the prices being quoted do not even cover the purchase costs and interest expenses.

Moreover, the negative global news flow has set off a panic reaction, inducing investors to close deals at losses.

The 35-year-old Rahul Verma, who works with a Noida-based IT company, exemplifies the experiences of late entrants into the property market. He bought a Rs 50-lakh flat in Greater Noida early last year by arranging for a bank loan to finance 85% of the cost.

His EMIs have continuously gone up since the purchase, thanks to a series of rate hikes by the RBI. The flat purchase was a pure investment decision. Rahul had jumped onto the bandwagon after hearing stories of skyrocketing returns made on property investments.

However, the prices haven’t climbed as expected and the interest outgo has made the property expensive. Rahul is now left with the only option of selling at a loss. And given the global economic gloom, he is willing to take a hit.

“Several investors are stuck simply because there hasn’t been enough price appreciation in the past one year,” says Raheja Developers Chairman Navin Raheja.

Several young investors invested in property at the peak of the property cycle last year. Many purchased two apartments simultaneously, assuming that they would finance one by selling off the other at a premium. They are now caught in a difficult situation as they bought at a higher market rate and are compelled to service two EMIs.

Some investors have started defaulting, according to a senior Parsvnath executive. “There is a significant rise in the number of people who are approaching us to cancel their bookings and return the money,” he says.

Property consultants feel that investors will have to bear huge losses if the markets do not improve during the festive season. Home buyers in the country are staying away due to the high interest rate regime and expectations of a correction following the realty crash worldwide.

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Indian Realty Prices May Return

September 21, 2008 – 11:42 pm

Indian property prices, which had taken off jet appears to be losing altitude after bad debts because of their origin to the real estate reduced the U.S. financial market to its knees.

Market-men see prices cooling and projects are blocked because of lack of funds cheap, but do not expect the market crash.

The collection of funds and American investors from Western Europe, which represent a large portion of money from overseas to India, will be difficult. “Developers should explore new avenues such as the Middle East and Korea,” said the consultant global real estate Jones Lang LaSalle Meghraj country head Anuj Puri.

The first to be affected would be the price of commercial real estate, even if a correction in the residential segment is also planned. Rate has almost doubled during the three years leading to 2007, when interest rates began to harden.

“The feelings of these events as (collapse of Lehman Brothers, Merrill Lynch and others) have an impact on Banking and Financial Services’ real estate requirement of India,” Puri said.

Failed investment banker Lehman and Merrill Lynch, which was supported by the Bank of America, commercial space in India extends over 2.5 lakh square feet - which itself is not enough to bring down prices crashing, but the feeling is.

“This is not a major exhibition to examine 50 million square feet of office space transactions each year in India,” Puri said, adding that there was not much of an impact direct result of both companies down under.

Property prices in a good location would not be affected much, said Amit Sarin, Chief Executive Raj Anand Industries, in which Lehman instead of 1.8% Thursday.

However, the first within areas could feel a pinch, said Sarin, whose company is mainly the construction of the IT space.

The tightening of credit affect investment from private equity players primarily in the United States, experts said.

The current environment is “difficult” for Indian real estate market, Puri said.

Asked about the overall impact on the market, he said there could be a drop in prices due to the negative.

Overall, banks have written over $ 500 billion in bad debts, exactly half the total expected losses by the International Monetary Fund because of losing loans from American banks for people with low credit or infamous “subprime” loans.

The slowdown is also due to high interest rates and the price system, particularly in the housing segment have softened in the last year.

Private equity firm Red Fort Capital Director Chawlla Kuldip said: “Flow of funds from the United States will certainly come, at least in the short term. Fund to both private and public actions of developers are likely to fall”.

The developers, who thought of raising funds through an IPO in the near future, now reluctant to go to the capital market, he added.

Sarin Raj Anand said that companies which have strong accruals would be through internal sailing, but those who depend on debt and private equity feel the pressure.

A director of a large real estate company said the collection of funds by private developers through equity at the end. He noted that developers are already facing difficulties in obtaining Indian debts of banking and financial institutions.

Lehman Brothers has taken 50% in Thursday Unitech project in Mumbai for Rs 740 crore. He also invested $ 200 million in assets DLF Ltd, which is formed by DLF promoters.

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US Financial Crisis Affects Real Estate Sector

September 18, 2008 – 12:10 am

The crisis in the US financial market will hit the Indian real estate sector hard. The sector was already reeling under tremendous pressure as RBI increased the interest rates to contain inflation, besides restricting the fund flow in it. Consultants said that in the present circumstances the real estate prices will go for a sharp correction in the short to medium term.
The financial crisis in the global market will affect the availability of fund for the domestic realty sector. As RBI has already put restriction on Indian banks to finance real estate companies in the country, they are depended on foreign funds through FDI route for their fund requirements. But, a senior consultant said following the development in US, many of the private equity funds are returning back to their mother countries.
The source said that many of these private equity funds were launched by investment banks. But, now as the fate of these investment banks is uncertain, their capability to raise funds in their country is doubtful. This will put severe constraint on availability of funds in India.
A large player in the sector said that as the availability of funds from banking sector is restricted for the realty sector, they are forced to borrow from the high net worth individuals at high interest rates at around 20%.
At the same time, the crisis in the global market has affected the demand for the real estate space in India. The development in US has affected the global economy, which has forced many of the global majors to either postpone or cut the expansion plan. According to a source in the industry, Google has cut its expansion plan substantially in the NCR region. Earlier, the global major has expressed intention to take lease of 5 lakh square feet of the office space. But now, it is learnt, it has cut its requirement to only 3 lakh square feet.

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