chanakya volume i issue v

8/14/2019 Chanakya Volume I Issue V

1/5

arg Constructions Ltd

On a city level demand supply analysis in

conjunction with macroeconomic

fundamentals considering a growth rate of 9%

and an forex reserve of above US$ 200 billion

and inflation of 5%, indicates that the office

rentals would be nearing its plateau in the

next six to twelve months barring a few

exceptions. The oversupply in the market is

likely to lead to a correction in the office

rentals. Simply put, the correction will not be

due to lack of demand but of oversupply of

build-up.

There are various factors that had

necessitated this correction. The thresh hold

for this correction has been brought forward

by the monetary measures taken by RBI like

increase in repo rate from less than 5% to

7.5% and CRR from 4% to 7% and increase in

the risk weightage of loans to real estate firms.

The real estate in India saw its last crest in

1995-96 with pricing soaring by more than

200% over the previous years, the following

year saw a correction. This also saw the first

wave of evolution of the market. The change

was brought by the new foreign occupiers and

corporate and IT firms that were establishing

in India. A pronounced change of this

evolutionary phase was the redefinition of A

Grade office space and CBD.

We are now entering the second crest of the

real estate cycle. The change drivers for this

phase are the foreign capital that is finding its

way into the Indian real estate market. This

phase as well brings in significant changes and

industry participants will go through a fast and

somewhat painful learning curve.

A study conducted by DTZ reveals that across

all metros the oversupply situation is

Changing SkylineCommercial Real Estate Likely to Face Oversupply

Contents

Changing Skyline 1

Competitiveness of IndianMaritime Sector-II 2

Fortune at the Bottom of

the Pyramid 3

Story of SEZ 3

Chennai RE Outlook 4

Team Chanakya 5

becoming apparent and Chennai it is the highest.

(Million.ft2

City Absorption

in 2006

Est.

Supply

in

2007

Est.

Absor-

ption

in

2007

Over

suppl

%

Delhi 10.60 15.90 13.2 20%

Bangalore 12.00 18.30 13.30 38%

Chennai 5.30 19.50 6.50 200%

Pune 4.60 14.30 5.80 146%

Kolkatta 3.90 8.30 5.00 66%

Hyderabad 3.80 6.10 4.60 33%

Mumbai 6.40 6.90 7.50% (8%)

Overall Impact

1. In cities where there is a significant oversupply the rental values will stabilize and

undergo a correction in others this effect

will be reflected only in some micro

markets.

2. An oversupply situation will also result inlarger gestation period for absorption for

bigger projects/multi phase projects like

SEZs.

3. Rising interest rates means higher cost ofcapital and reduced project net present

value assessments. This will lead to lowerproject and land valuations and extended

break even of projects.

4. The drive towards quality will dictate thewinner

The above factors will completely redefine the A

Grade office space and CBD again. As demand grows

and supply tapers off the situation will change in the

long term. Till such time the stake holders needs to

re define their strategies for accepting and thriving

in this market reality.

Volume I Issue V

ChanakyaChanakyaChanakyaChanakyaStrategic Planning DepartmentStrategic Planning DepartmentStrategic Planning DepartmentStrategic Planning Department


2/5

In the last issue it was discussed what will make the

ports, particularly Indian ports competitive in the

global market. In this issue the emphasis is placed

on what is happening in that direction. A tariff

comparison is also undertaken to understand the

efficiency of tariff structure of Indian ports. The

trends that are emerging in India that will raise thebusiness worthiness of Indian ports are as follows:

Corporatization: The process of corporatization of

the port is being undertaken both nationally and

internationally. The entry of big corporate like Tatas

and Reliance is likely to change the face of the port

business in India. Today port trusts generate around

Rs.1000 crores of combined net profits which can

grow by 15% through cost rationalization, increase

traffic and by providing value added services. This

will generate a surplus investible fund of around

Rs.2000 crores per annum for the next 10 years,

enabling an investment of Rs.100,000 crores in the

maritime sector. The market capitalization of suchcompanies may increase to US$10 billion.

Public Private Partnerships: The process of PPP in

the port sector has come of age. The most

commonly adopted approach is to unbundle various

assets and operations within the port and privatizing

them separately. The initial success of the model has

driven the international players like P&O, DPI and

Competitiveness of Indian Maritime Sector II ..Continues from last

The port companies

have the potential to

generate Rs.2000cr per

annum in the next 10

years and have a market

cap of $10 billion

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PSA to be active in the Indian market.

Integrated Logistics Convergence:

Convergence of businesses like shipping and

port maritime to logistics to supply chain

management is happening in India. SCI and

CONCORs seriousness to get into the terminalbusiness is a step towards this direction. In

the future this will develop into Port

companies entering into Railways and Road

sector to reach their customers in hinterland

and development large format SEZs within

their vast land holdings. The integration of

Mundra port and Adani developed SEZ can be

sighted as an example.

Benchmark of Indian Port Charges: The

benchmarking of Indian port charges reveal

that the Indian ports charges are comparable

if not competitive with their peers around the

world.

Port Charges: As can be seen from the

comparison below the container traffic of

Indian ports are comparable to regional ports

of South Asia and Middle East. Only the

marine charges are significantly higher and

THC is second lowest. We have the entire

ingredient to be a successful maritime nation.

It is left to the imagination of us how to make

KPPL a success in this scenario.Benchmarking Indian Port Charges (2004)

Tariff Heads JNPT Fujairah Colombo Salalah Dubai Port

Klang

Port dues 8500 1566 3950 1650 1900 950

Pilotage cum Towage 21000 567 2275 272 284 66

Birth Hire 7000 243 1100 190 203 60

Tugs 810 322 1060 1108 240

Moorings 351 64 64 39

Pilot Boat 81 320 344

Mooring Boat 81 55 54

Total Maritime Charges 36500 3699 7647 3611 3957 1355

Marine Charges per TEU 14.60 1.48 3.06 1.44 1.58 0.54

Container Handling (Loaded TEUs) 132653 219375 370000 272500 285000 152500

Container Yard to Truck and Vice

versa

20408

Total Container Handling Charges 153061 219375 370000 272500 285000 152500

Total Charges 189561 223074 377647 276111 288957 153855

Container Handling Charges/TEU 61.22 87.75 148.00 109.00 114.00 61.00

Total Port Charges/TEU 75.82 89.23 151.06 110.64 115.58 61.54

Vessel Capacity TEUs (4000), GRT (50000), NRT (29000), Stay at Berth (1 day), Parcel size handled TEUs (2500),

Exchange Rate 1USD =Rs.46, 1USD=3.6 Dhd


3/5

Fortune at the Bottom of the Pyramid

Even though the real estate sector is at its

all-time-high in the country and is

apparently showing signs of slowing down,

total returns or operating profit from thesector is likely to moderate in future in

comparison with those of the past three

years. According to the ICICI Bank Global

Investment Outlook for July, brought out by

the banks Private Banking Research Division,

operational income of the sector grew at a

rate of 179% over the past 5 quarters, with

operating profits up by a massive 469%.

Average margins ofconstructors are now ashigh as 29 per cent with some real estate

companies in the national capital region and

the Mumbai-Pune belt earning an

astronomical 170-200%. Despite the boom,

the sector is unlikely to be able to fulfill the

growing housingdemands of the country,especially of the middle and lower income

groups. The likely demand forthe LIG andMIG housing are in the region of 27 million

houses by 2012.A prosperous middle class, higher incomes

and fast urbanization has presented

opportunities to develop the retail sector

especially. All these years, till now, the

developers have been promoting the upper

middle and high end products without

having bothered about the huge untapped

potential of LIG and MIG houses in the range

of Rs.10-25 Lakhs. There is no denying that

the margins are better in these high end

developments but housing is slowly

becoming a commodity and will evolve into

a volume play in the near future.

India has a total housing shortage of around

24.71 million units as of March 2007. Out of

this 24.67 million is in the EWS/LIG group

(upto Rs.12.50 Lakhs). The shortage for HIG

and Upper Middle class (Rs.15 lakh and

above) is around 0.04 million. Tamil Naduaccounts for a total housing shortage of

around 2.58 million in the LIG/EWS group.

The margin in the development of these

types of houses has kept the developers for

far too long into entering this segment.

There are innovative and cost effective ways

of building technology to make do this

situation.

The property prices for upper middle and

The Story of SEZ

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HIG segment have stabilized over 6 months

as developers cannot afford to hold flats.

There are reports that suggest, North and

Western India is likely to see 15-20 per centcorrection in realty prices and a fall of 50 per

cent in real estate off-take. The sector will

continue to have the potential to deliver

attractive returns, albeit at lower levels than

seen in the past three years.

The first movers to adapt to the changing

dynamics of the housing business as a

commodity and look at the bottom of the

pyramid will be the ultimate winners in the

long run. This resultant stagnation may force

the developers to look into the other

avenues of unfulfilled demand segments like

the EWS/LIG.

There are approximately 847 SEZs in

globally till end of March 2006. Leading in

the pack is the US with around 213 SEZs,

followed by China at 124 SEZs. These are

called by various names like Export

promotion zones, Export Processing

Zones, Free Trade Zones, Free Zones,

Economic Processing Zones etc. but they

all mean the same.

Globally there is no common definition

for SEZs. The definition was standardized

in the Kyoto Convention as Specifically

delineated, duty free enclave that shall be

deemed as foreign territory for the

purpose of trade operations, duties and

tariffs. Globally around 74% of foreign

trade excluding commodity trade happens

from SEZs. In the past 10 years the

countries with these zones have shown a

marked improvement in trade

performance.

The share of global trade of the 102countries with SEZs have grown from 73%

in 2000 to 75% in 2006 and the share of

the other 126 countries without SEZs have

come down from 27% to 25%. The major

hit was taken by the middle income

countries which have lost 2% and the high

income countries have kept their share of

19% constant and the low income group

also has kept their share at 1% of the

growth in the global trade volume.

In the first year of approval itself Indian

SEZs have attracted an investment of

around US$5 billion which is around 60%

of the total FDI during 2006. This will

increase to US$20-25 billion in the next

three years. In the last 15 years the

EPZs, SEZ in its early avatar, saw an

investment of Rs.3600 crores and

created 1 lakh jobs. After the SEZ act in

the first 11 months alone, around Rs

11,600 crore investments has been

received in SEZs, creating 15,000 jobs.This will create 8.9 lakh (890,000) jobs in

the next three years.

The total turnover of Indian SEZs

(companies located within the SEZs) by

the end of 11th

five year plan i.e. 2012 is

expected to be Rs.15,00,000 crores.

Currently these EPZs have been doing a

combined turnover of Rs.28,000 crores.

In the eve of Industrial revolution (1770)

India was the 2 largest economy in the

world contribution around 20% of worldoutput, which has declined to 3% in

1970, lowest in the recorded history.

Now with this SEZs India is likely to

reaffirm its rightful place in the global

economic map.

Let the Asian giants sleep, lest they

will take the world like a swirl wind

Napoleon referring to India and China.


4/5

Indicator July 2007 June 2007

Bank Credit 24.6 25.6

Deposits 24.5 23.3Money Supply 21.7 21

Forex Reserve

(Bn)

US$ 215.6 US$220

WPI Inflation 4.03% 4.13%

Home Loan

Rates

11.25% 11.25%

Forex Rate

1USD = Rs.

40.13 41.56

Core Sector

Index

8.7 7.4

Looking at the monthly economic indicators it is

likely that the real estate sector will start looking

up in the near term.

Analysis

There is a considerable decline of around 1%,

within one month, in the bank credit. This is

mainly due to the increase in the interest rate. It

can also be noted that the deposit rates has

increased by 1.1%. This means that the Indian

companies, people and investors are interested in

keeping their money in the bank rather than

borrowing money from the bank. The area of

concern here is, even with this trend the money

supply has increased by a notch of 0.7%.

With robust money supply and decrease in bank

credit spells a blessing for inflation. This will force

the banks to decrease the interest rate to sustain

Monthly Economic Indicators

the economic

indicators points

that the real

estate sector will

start looking up in

the near term

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their margins and to have an asset-

liability match. The other indicator that

confirms this trend is the increase in the

value of INR against the USD. This shows

the confidence of the Indian economy.

The current account deficit for this

quarter for the Indian economy (trade

deficit) has increased from US$9.2 to US$

9.6, but this has been offset by the huge

capital account receipts to turn the BOP

to a positive figure. This has been

reflected in the increase in the value of

INR against the USD. Is this good or bad is

a debatable issue and a different subject

altogether!

It is, in our view, will increasingly bereflected in the value of investments in

the Indian economy and one of the

beneficiaries would be the real estate.

The other factor that supports this theory

is the high capital accretion in the real

estate industry in this quarter. The total

capital that has come to India for real

estate investment has increased from

US$I.8 billion to US$ 2.3 billion on a

quarter on quarter basis.

Conclusion

In view of these factors, our take on

market is that, in the short term we can

witness a fall in the interest rate and a

general increase interest on the real

estate market.

Port Snippets

The Average availability of Equipment

of the Indian ports is 70% against 90%

for the European ports

Number of containers handled per shipper hours in 10 in JNPT (the most

efficient Indian port) against 69 in

Singapore and 30 in Colombo

The cost to the Indian economy on

demurrage charges, transshipment

charges, pre berthing delays and vessel

turnaround times is US$ 1.5 billion

annually

The Average tones of cargo

handled per employee in a year

for Indian ports is 1,474 tons

against 50,500 t0nes by

Rotterdam port and 47,280 tonsby UK ports

The logistics cost of India as a

percentage of GDP is around

13% against 8.7% in US AND

9.3% in Europe-scope for

improvement!

India has 150 maritime training

institutes, 4 in Government and

146 in private sector, that

produce 11,164 seafarers

annually.


5/5

Mr. Subramanyam M

Head Strategic Planning

Mr. Lakshmanan C V

GM Corporate Finance

Mr. D Joel K Pandian

DG- Strategic Planning

Mr. Anup Choudhary

AM Strategic Planning

Mr. Sheetal Shah

AM- Strategic Planning

Ms Gayathri N

Executive Secretary

Team Chanakya

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Were on the Web!

See us at:

www.margconstructions.com

Quiz of the Month

From this issue on Chanakya will come with a quiz.

Believe us the winner will get a prize worthy toremember.

How many minor ports that India has?

How many jobs that the SEZs in the earlier

avatar as EPZs generated in India?

What is the housing shortage in the

EWS/LIG category in India?

Where is port Klang located?

What is the drop in the bank credit over

the last month?

What is the increase in the capital flow to

the real estate industry quarter on

quarter?

Please fire your answers to

[email protected] to win exciting prizes.

chanakya volume i issue v

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