chanakya volume i issue i

8/14/2019 Chanakya Volume I Issue I

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OVERVIEW

The real estate sector in India has evolved and is moving fast from anunorganized to an organized sector. There has been a substantialincrease in property prices, to an extent of 40%, over the last year which

is sustainable with the above average economic growth of 8.3%. Themarket is likely to boom for the next foreseeable future.

The companies that will draw maximum profitability would be those whohave (i) The ability to manage construction costs, (ii) Brand positioning,(iii) Geographical area of operation and geographical diversity, size andquality of land bank, (iv) General risk strategy, (v) Strategy to ensure alevel of committed sales before taking up development and (vi) strongFinancial profile.

Real Estate Outlook

Real Estate Analysis

Demand Drivers

The recent vagaries in the stock market and the low return on bankdeposits have brought a perception of real estate to be a safeinvestment. This is compounded by the growth of IT-ITeS industry which isgrowing at 28% in 2006, large format retailing and hospitality, inparticular. This massive growth figure of the manpower intensiveknowledge economy industries is likely to increase the disposableincome of individuals and families. This will increase the demand forquality real estate offerings.

Most of the above factors are likely to affect the demand positively.While the cost, and to some extent availability, of loans is likely to be

constrained due to the recent overture of RBI and finance ministryexpressing fear of overheating property prices. However, demand maybe slightly moderated due to these factors.

Expansion in Supply

As per the ASSOCHAM study on the future of real estates the total size ofthe real estate market is US$16 billion and is likely to go upto US$60 billionby 2010. The study also bring out that the realty industry is constructingprojects worth of around US$12 billion. Real estate projects typically taketwo to three years to develop and there is likely to be ample supply in

Inside This Issue

1 Real Estate Outlook

1 Real Estate Analysis

3 News Snippets

3 Market Snippets

4 Economic Snippets

4 Economic Indicators

5 Budget 2007-08

6 Team Chanakya

6 Upcoming Events

The size of the real

estate market is likely to

go upto US$60 billion by

2010 from the current

US$16 billion this is the

highest growth sector

next to IT and ITeS.

Chanakya

VOLUME 1 ISSUE 1

2 April 2007


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PAGE 2 CHANAKYA

the market given the projects those are already underway. The landsupply will increase with the trend of Government and corporatesfreeing up their huge chunk of unutilized land with them. The potentialgrowth would be fully realized once the favorable FDI Policy, regulatorycontrols such as the land ceiling acts, relaxed norms for built up area vis--vis plot are eased.

Cost Pressures

Economic growth and the focus on infrastructure development havecreated a boom in the construction industry. This has raised constructioncosts, including the cost of major inputs such as steel and cement. Theduel excise duty imposition on the cement sector has multiplied theeffect and is likely to increase the cement price by around 7% as per theanalysis of KPMG. The steel prices even though are in line with the globalprices, the increase in the iron ore prices world over is likely to have itsimpact on the Indian steel prices as well. To cap it all the recentmovement of urban land prices due to expansion of demand, agitationand compensation demands in the rural and semi-urban communitiesare likely to add pressure to the developers on the cost of development.

Pricing Drivers

Demand-supply mismatches are likely to affect real estate pricessignificantly. It is estimated that India would need 10 million housing unitsper year by 2030. The current housing shortage of 20 million units will callfor massive growth in residential construction. This will also affect theprices positively for the developers for the foreseeable future.

The present level of prices and concerns about overheating hasdampened sentiments to some extent. The serious measures that arebeing taken by the RBI and Government of India are escalating thethreat. RBI is been guiding the banks to reduce the real estate exposureand is continuously increasing the risk rating of such exposures. This willmake banks to reduce flow of debt money and increase the cost ofsuch money which will have its bearing on the price of real estates.Hence, we feel that the market may experience a (pricing) correction inthe near future for a short time.

Financial impact on developers

Rising costs coupled with price pressure will affect developers margins.Existing margins on projects developed on agricultural land or on landavailable in the land bank acquired at historical prices have amplecushion to absorb the effect. However, projects developed onauctioned land or on land acquired at market rates may be severelyaffected in the case of a price correction. Overall, as most of the

developers have a mix of projects, this risk will be spread over a largerbase.

The other financial impact is in the form of financing cost. With the highrisk rating of the debts to the real estate sector the financing cost is alsolikely to increase.

India would need 10

million housing units per

year by 2030 and the

current shortage of 20

million will call for a

massive growth


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News Snippets

Tata Group to Invest in Real Estate Market in India

The Tata group is planning to set up Tata Realty & InfrastructureCompany with a corpus of USD 1 billion with an aim to invest in theIndian real estate sector. The company will invest in Residential andCommercial Real Estate projects, SEZs and infrastructure projects likeports, roads and airports. The company is likely to build seven town shipprojects in the area of 60 to 110 acres each in the outskirts of Mumbai,Chennai, Delhi, Kolkatta and Bangalore in the initial phase. Thecumulative investment in the projects may exceed $2.27 billion. Thecompany has roped in KPMG to strategies on this venture.

Colachel port to be developed as a major port

Mr. TR Baalu minister of shipping, road transport and highwaysinformed the parliament that Tamil Nadu government has undertakena techno economic feasibility and detailed project reports as well asenvironmental impact assessment studies to make Colachel Port as amajor port.

The project is to be implemented on BOT basis, for which a letter ofintent has been issued to the consortium of Port of Singapore AuthorityInternational Pvt Ltd and South India Corporation Limited Logisticsduring November 2006.

As per the draft license agreement, the licensee guarantees that theproject completion shall be achieved in accordance with theprovisions of the agreement on a date not later than 24 months fromthe date of award of the license.

Snippets on a recent survey from FICCI Survey

Sample: 24 leading real estate consultancy firms, developers,

construction companies, builders and financial institutions

1. 67 per cent respondents did not foresee a sudden collapse inthe property prices

2. 80 per cent of the respondents supported the view that rise inprices was perceived in the commercial and residentialsegment of Tier-II cities.

3. 41% respondents said residential property is driven byspeculation and 27% respondents felt it is demand driven

4. 8.3% felt that commercial property is driven by speculationand 75% felt it is driven by demand from end users.

5. 90 per cent of the respondents felt IPOs would drive in highercorporatisation, accountability and transparency. Close to 60per cent of them believed that it would lend more credibilityto the sector

Estimated FDI in RE sector in 2006 US$4 Bn

Bank credit to the Real EstateSector during 2005 - 06, wasRs.2,60,223 crore againstRs.1,45,605 crores during 2004 05

As per CLSA, a foreign brokeragefirm, over the next 5 years India willneed more than US$ 150 billionworth of Houses

In 2002, only 7 million sq. ft of office

space was built as against 30.4million sq. ft during 2006

Various foreign Real Estate Fundshave raised US$ 8 Billion to invest inIndia.

During the last 10 years, theaverage age of Borrowers hascome down to 43 years - 35 yearsand the average size of the loanincreased to 2 lakh - 10 lakh

Market Snippets


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`

Inflation Likely to come down..?

Latest data shows that the inflation as on 15 February has climbed to6.73% yoy. WPI inflation was last seen at these levels in December 2004.

Government has implemented various monetary measures to curbinflation with no much result. In yet another measure the governmentannounced the cut in retail fuel prices from February 16. This is likely tobring down the galloping inflation by 0.2%. The RBIS is also beenincreasing the CRR in the view of reducing the money supply. Evenafter these measures the inflation has been stabilizing and is refusing tocome down. So effectively the inflation is here to stay for at least in thenext three month.

Analysis

What will it do for us? The inflation will show its first effect on the risinginterest rate, especially on the home loan rates. The RBI will further

increase the CRR requirement which will force the banks to minimizethe credit exposure and increase the PLR rates. This will also forcebanks to reduce their exposure to real estate markets as per the RBIguidelines.

Economic Snippets

Forex Reserves

The forex reserve with the central banker was ruling at $187.21 billion as of15 March 2007. This is an increase of over $5.3 billion over the week and isexpected to continue to rise and may touch $190 billion by the end of theyear.

As on 15.03.07

House Loan 10.25%

Rs./US $ rate 44.09

6 month forwardPremium 3.68%

Forex Reserve $187.21bn

Bank Credit 29.6%

Deposits 23.2%

Money Supply (M3) 21%

IIP 11.1%

RE Sector 30% (aprox.)

The real estate investment in the over all FDI is been growing rapidly. In2003-04, India received total FDI inflow of US$ 2.70 billion, of which only4.5% was committed to real estate sector. In 2004-05 this increased to US$3.75 billion of which, the real estate share was 10.6%. In 2005-06 it wasUS$5.46 billion at 16% and in 2006-07 it is around US$8 billion and forms26.5% of the total.

Economic Indicators

In 2003-04, Indiareceived a total FDI

inflow of US$2.7 billion,

of which only 4.5% was

in RE, in 2004-5 this

increased to US$3.75

billion 10.6%, in 2005-06

it is US$5.46 billion and

16% of total and in

2006-07 the estimates

show that US$8 billion

and26.5%


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This is a moderate budget as far as its positive implications on the realestate sector are concerned. The five-year tax holiday afforded toDelhi, Gurgaon, Ghazi bad, Faridabad and NOIDA in context with theupcoming Commonwealth Games will benefit those areas. This move

will pump in demand for property in these areas and therefore pushprices up.

The fact that service tax will be levied on commercial properties isdefinitely a step backwards. It will cause the cost of lease rentals torise proportionately another added burden that will be transferreddirectly to the end users. The dual excise on cement is likely to pushup the input cost for the real estate industry which in turn will reducethe margin and increase the cost.

The higher initiative to continue in public-private partnerships isdefinitely encouraging. It will help maintain growth in the real estatesector.

The $6 billion infrastructure fund formulated by the Deepak ParekhCommittee last year is being put into effect and this is nothing butgood news for the infrastructure industry. Investment in infrastructurewill become easier, helping to escalate infrastructure development.This will obviously have positive repercussions on the real estate sectoras well.

The prospect of completion of all major undertakings associated withthe Golden Quadrilateral project by 2009 is extremely positive, sincethis will enhance connectivity between metros and bring in aconsiderably supply of land. New corridors will open up, and these willbe typified by affordable rates that will benefit end users. In fact, thebudget's thrust on rural infrastructure will escalate real estateopportunities in areas that were hitherto neglected. Moreover, it will

lessen the movement or rural dwellers to urban areas, thus decreasingthe load on our already saturated cities.

The introduction of reverse mortgage and mortgage guaranteecompanies is positive in the budget, which will translate into directsecurity for homeowners. Reverse mortgage is a special loan againstresidential properties that allow for conversion a portion of the equityin such properties into cash. But unlike a traditional home equity loan,line of credits or second mortgage, no repayment is required until theborrower no longer uses the home as principal residence.

Because the budget denies Venture Capital Funds tax exemption toall other than those investing in certain high-tech industries, there isnow far less incentive to invest in real estate-related VCFs. This is a

serious limitation, considering that India has not yet adopted REITS asvehicles for investment in real estate. Though denial of tax exemptionfor VCFs is applicable only from the coming financial year, thoseexisting now will also be affected.

No regulatory provisions for controlling home loan rate areannounced. In other words, interest rates are still left to the marketand no provisions to guard against further escalations are in place.However, the fact that the budget aims to exceed the yardstick of 15lakh houses under Bharat Nirman Program is extremely good newsgood for the low-cost housing sector. Corporates would now beencouraged to invest in this sector, which will provide very healthyprofit margins after this new development.

BUDGET 2007 - 08

The fact that service tax

will be levied on

commercial properties

is definitely a step

backward. This will

cause the cost of lease

rentals to rise

proportionately.


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Events

Real Estate Investment

World, Mumbai 23-25March 07

SPG Meeting 7 April 07

EC Meeting TBC

Team Chanakya

Subramanyam

Head Strategic PlanningPh: 044 2454 1111 (extn-304)

D.Joel K PandianDGM-Strategic PlanningPh: 044 2454 1111 (extn-306)

N.GayathriSecretaryPh: 044 2454 1111 (extn-315)

chanakya volume i issue i

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