By M H Ahssan
Future economic historians may remember the month that just ended as Black September. Lehman Brothers collapsed; the Bank of America acquired Merrill Lynch; AIG was nationalized; banks such as Washington Mutual and Wachovia were wiped out. As credit and finance markets around the world tumbled like ninepins, so did stock markets in India, with the Bombay Stock Exchange Sensitive Index (Sensex) falling 3.35% or 469 points on September 15. The worst affected was the realty index which dropped 7.6% on the same day. Since then, while stocks prices in India have seen massive swings, shares of real estate firms have remained depressed, falling a total of 20% as of October 1.
In addition to housing stocks, home prices are taking a beating. By some estimates, prices have dropped by 25% in certain urban markets. While in the U.S. -- and also in Britain -- the subprime mortgage mess has seen home prices fall dramatically, in India, such slowdowns have been rare -- at least in the past. Prices may soften, sales activity may slow and occasionally a distress sale occurs, but there has not been an overall fall in home prices. "India has not seen a boom-bust cycle in real estate mainly because the industry is still nascent," says Anurag Mathur, joint managing director of Cushman & Wakefield, a global real estate solutions company. "India has not seen a boom and bust cycle in almost any sector," adds Rajesh Chakrabarti, a professor of finance at the Hyderabad-based Indian School of Business (ISB). "While there have been variations, we have not had cycles of the kind we see in the developed countries. It is only after liberalization that the Indian economy has been seeing more cyclical movements."
According to Irfan Razack, chairman and managing director of the Prestige Group, a Bangalore-based real estate developer: "We have boom and bust cycles in India but because of our huge population, the demand keeps growing and that sustains the industry. You can build for the next 100 years and there will still be demand for housing in this country."
India has inadequate data on the real estate sector. For instance, no one tracks housing starts, an indicator that is regarded in many countries as an important yardstick of economic health. However, several real estate companies have gone public during the past couple of years, which makes information more transparent. Secondly, equity analysts have begun tracking these companies and the real estate industry.
Still, confusion continues. Consider the reaction of the markets to the Lehman collapse. Real estate was hit for two reasons. Lehman had invested $200 million in DLF Assets, a company belonging to DLF, India's largest real estate company. It had also acquired a 50% stake in Unitech's Mumbai project for $175 million. (Unitech is India's second largest real estate company.) Among other Lehman investments or proposed investments were those in the Mumbai-based Peninsula Land Ltd. and Housing Development & Infrastructure Ltd. (HDIL).
The market was worried that if the money had not already been received, the projects would be in limbo. Most companies (Unitech, for one) claim that the cash is already sitting in their bank accounts so there is no cause for concern. Others, like HDIL, have said the deals were not with Lehman Brothers but with sister companies. These are unlikely to be affected.
The crunch might hit in the future. "With banks reducing their exposure to real estate, coupled with rising interest rates and volatile stock markets diluting the confidence of retail investors over the past one year, private equity investments have emerged as one of the most important sources of capital for real estate developers," says a FICCI-Ernst & Young (E&Y) report on the Indian real estate market released in early September. "The overall private equity investments reported in the real estate sector in India from August 2007 to July 2008 are estimated to be more than $5 billion." This tap could be turned off as a result of the financial crisis in the U.S.
Real estate investors in India were also worried that Lehman might resort to a fire sale of its assets. While India has a three-year lock-in period for foreign direct investment (FDI) in real estate, it is unclear whether this applies when a company declares bankruptcy. The government is holding a meeting to decide the norms in such cases. The other issue is that Lehman holds small stakes -- bought from the market or in bulk deals -- in real estate and infrastructure companies such as IVRCL Infrastructure, Consolidated Constructions, Orbit Corporation and Vijay Shanti Builders. Here, too, there was the possibility of a fire sale, encouraging other investors to bail out.
Temporary Slowdown
Amid this gloom and the real estate-bashing that is going on in the market, many people are optimistic about the sector. Even the bears see only a temporary slowdown. "The Asia-Pacific property markets, which have seen a rapid run-up in rents and capital values in recent years, are now entering a slowdown that will continue over the next 12 months at least," says a report by real estate consultants Jones Lang LaSalle (JLL). Shobhit Agarwal, joint managing director (capital markets) of JLL Meghraj (JLLM), the global company's Indian division, says there is still some pain left. "There is now a period of stagnation, soon to be followed by a fall in prices in certain sectors and locations. Certain overheated micro-markets will see a 5% to 15% price decline. A correction of up to 10% is also expected in South Mumbai, some locations in Mumbai's suburbs, and certain areas of New Delhi that have seen unrealistic price trends.... The market will eventually consolidate."
"In the short term, we expect the market to consolidate," echoes a spokesperson of DHL. "We have not been impacted by any slowdown. We have launched many premium residential projects across the country during the past six months and have gotten a very good response. We feel that the market is moving in the right direction and there is no bubble to burst."
"In the past three to four years there has been a huge inflow of companies and funds in the real estate sector," says Chakrabarti of ISB. "It is possible that there may be a bit of a shake out and consolidation now. Given the fact that we have already seen a 20% to 25% correction, I don't expect prices to fall much further. It will probably now grow at a decent enough rate. Also, infrastructure development is a major area of emphasis and this will fuel real estate prices, especially in the smaller towns."
The problem seems to have affected residential property rather than commercial real estate or infrastructure developers. Several factors have contributed to this. First, the Reserve Bank of India (RBI) has been raising interest rates to tackle inflation. As a result, housing finance companies have had to raise rates on loans. In 2004, interest rates on housing loans were 7.75%; they have now gone up to 12.75%. On a $50,000 loan borrowed for a period of 20 years in 2004, the interest burden was around $48,000. This has now gone up to more than $100,000.
Most housing loans in India are at variable rather than fixed interest rates, which means that monthly mortgage payments -- or EMIs (equated monthly installments), as they are called in India -- go up when interest rates rise. As a first measure, housing finance companies increase the term of the loans. When that period extends beyond the working life of the home buyer, the EMIs are increased. Housing finance companies typically consider EMIs up to 50% of net income. If, in extreme cases, these payments double, home buyers can be left with nothing to live on.
Understandably, defaults on loan repayments are increasing. While specific numbers are hard to come by, bankers say this could develop into a crisis. The financial meltdown in the U.S. -- and the turmoil in the finance sector, which is a key market for information technology and IT-enabled services -- has seen a large number of finance professionals lose their jobs. These young, upwardly-mobile executives were the new generation of house buyers. They are now saving for the proverbial rainy day -- which has arrived. Confidence levels are down and house purchase plans have been put on the backburner.
Finance companies and banks are also being careful about approving loans. Their vetting process is taking more time. Even people who want loans and have the capacity to service their EMIs are being put through greater scrutiny.
Business as Usual?
India's largest mortgage company, Housing Development Finance Corporation (HDFC), however, says that it is business as usual. As Renu Karnad, HDFC joint managing director, told CNBC TV 18: "The demand story is a compelling one. Its plot is often repeated by HDFC's senior management that younger and younger Indians are opting for home loans. The average age of borrowers is down from 40 years to 35 years. Thanks to tax breaks, the effective cost of a loan works out to a moderate 6%. Unquenchable housing demand has the country short of 25 million homes. The loan market is a vast untapped one yet. It has taken 30 years for mortgage penetration to grow from 2.5% to 6% of GDP. With middle India kicking in, HDFC is confident that unlike other consumer goods, home loans are not that vulnerable to a slowing economy."
The FICCI E&Y survey agrees. "Despite the momentary slowdown witnessed over the past 12 months, 62% of developers foresee Indian real estate embarking upon a high growth trajectory in the long term," says the study. It does, however, point to one change. Real estate had become a speculators' haven. Now, seeing no hope of quick returns, they are bailing out. Builders believe it's the speculators who are responsible for the perceived slump. Once they are squeezed out -- many are selling at whatever price they can get to take care of their stock market losses -- things will return to normal. The study notes, "Respondents believe that genuine end-users have taken over from investors and account for 80% to 90% of sales in their current projects."
What are real estate companies doing to deal with the downturn? Well, they are putting their eggs in different baskets. In a way, it is a replay of the rush into real estate. Over the past decade, companies with no experience in property development had entered the market. Some had legitimate reasons. The textile mills in Mumbai, for instance, had been priced out of the market because of high labor costs. One of the first off the block -- Phoenix Mills -- has converted itself into a commercial, residential and entertainment complex. In August this year it raised 200 million euros from German real estate fund MPC Synergy for further development. Morarjee Mills has moved its operations to smaller (and cheaper) cities. Its properties are being developed by its real estate wing -- Peninsula Land.
In addition to the textile mills, 70-year-old Nesco Engineering, a moribund company, is today thriving because it has set up an exhibition center on its Mumbai property and has plans for an IT park. Media Video, an electronics games manufacturer and distributor, has recently listed its real estate subsidiary MVL. Its market capitalization at $87 million is eight times that of its parent. The Kolkata-based Emami group, a FMCG player, has moved into malls and housing complexes.
Now, real estate companies are exploring new investment opportunities. Builders of residential property are taking to developing commercial space. Others, such as Raheja -- a leading homebuilder -- are constructing special economic zones. Omaxe is modernizing and maintaining airstrips. DLF, Unitech and Omaxe are bidding for road projects being offered by the National Highways Authority of India. The Brigade Group is building a health spa in Chikmagalur near Bangalore. It will run the spa in tandem with Singapore-based hospitality brands Banyan Tree and Angsana. Sobha Developers already has an ayurvedic spa offering the traditional Kerala ayurvedic massage at Sobha City in Thrissur in Kerala.
Overseas Markets
The second trend is a move abroad to market real estate companies' products, raise funds, source raw materials and launch projects. PRA Realty has set up shop in Chicago to be closer to venture funds. It has also opened a marketing office in Dubai. According to JLLM, non-resident Indians (NRIs) are major buyers of Indian properties, accounting for up to 25% in certain categories.
Sobha Developers has opened an office in China, from which it sources a lot of raw material. It is building a five-star hotel in Dubai. Parsvnath Builders has a subsidiary in Singapore. Puravankara Projects has started operations in Sri Lanka to build super luxury villas on the outskirts of capital Colombo. It already has a presence in the UAE. "Considering that every market is subject to fluctuations, diversification is certainly the best hedging tool for avoiding the pitfalls of sudden downward movements in any sector," says Agarwal of JLLM. "If one component fails to generate anticipated returns, others will compensate."
Other real estate companies are casting their nets wider and embracing every opportunity that comes their way. Unitech has already made a foray into telecom. It is now eyeing insurance. Preliminary talks are on with a foreign major. Omaxe is moving into steel and cement. It has on its drawing board plans for a medical college and a hospital.
Mantri Realty has earmarked $500 million for a thermal power plant in Nagpur. The Hyderabad-based JR Realtors has aquired a 10% stake in Pennar Aluminium. Indiabulls Real Estate is setting up a solar power plant in the Bastar region of Chhattisgarh. Sobha has even moved into retailing mattresses under the brandname Restoplus. IT major Infosys has already placed the first order.
HDIL has lined up a whole array of diversifications. It is getting into entertainment under the Broadway brand name. It plans to invest $200 million in a chain of 150 theaters. It is also building a coal-fired power plant. It will begin power trading soon. In perhaps the oddest move, it is bidding for oil and gas exploration blocks being auctioned by the government. "Although oil and gas is completely disconnected from our core business and what we are doing now, I can say that it will help in providing better services to customers who we serve in our projects," Sarang Wadhawan, managing director of HDIL, told business daily Mint recently.
"In the long run, given that the India growth story is likely to continue, real estate prices will certainly increase," says Chakrabarti of ISB. "However, they will not see a meteoric rise as they did earlier. It will be a more stable market. Real estate companies are therefore diversifying into different areas where they expect better growth (like telecom). This is probably not so much by choice as by compulsion. It also reduces their risks. In some sense it is sensible given that the market conditions have changed, but whether it plays out in the long run remains to be seen. In general [not just with regard to real estate] unrelated diversifications don't work out very well."
The efforts of various companies haven't had much impact on their share prices. As a high share price is necessary for fund raising, some companies are trying financial engineering. DLF, for instance, has announced a share buyback, but it is also seeking fresh funds. Analysts wonder how the two can go together. "Promoters work in the best interests of the company," responds a DLF spokesperson. "The DLF share has been quoting much below its intrinsic value. We see the share buyback decision as a highly attractive opportunity for our shareholders and a strategic move of sharing returns with investors." HDIL, meanwhile, has come out with a 2:7 bonus issue. All this doesn't appear to have helped sentiments much; both the shares -- as with most real estate companies -- are quoting below their original IPO price.
"The companies that went public rode the boom, and they will bounce back once the markets and the sector picks up," says Razack of the Prestige Group. "At that time the valuations were so aggressive that we were also tempted to go public. We didn't do it because one can't really show quarter-on-quarter growth in real estate. It becomes more [like] window dressing."
Affordable Housing
Another major area into which many real estate firms are moving is affordable housing. Puravankara has set up a wholly-owned subsidiary -- Provident Housing & Infrastructure -- which will build 64,500 homes in Bangalore, Chennai, Hyderabad and Coimbatore over the next five years. Omaxe has set up the 100%-owned National Affordable Housing and Infrastructure, which will invest $20 billion over the next five years in building one million such homes. Many other builders are also climbing on the bandwagon.
The rush is partly explained by the response to government-led housing programs. The public sector Maharashtra Housing and Area Development Authority (MHADA) plans to sell 600 low-priced apartments in Mumbai around Diwali. They will be priced around $50 a sq. ft., at a time when market rates are four times as high. MHADA expects 200,000 applications; there will be a lottery to decide the buyers. Demand for such housing is obviously very strong. A similar prgram earlier this year for 900 apartments attracted 65,000 applications. In Delhi too, the Delhi Development Authority has received 850,000 applications for 5,010 low-cost apartments.
"Affordable housing, until now, was not a part of the Indian real estate sector boom," says the FICCI-E&Y report. "However, affordable housing has recently attracted attention from prominent developers and private equity players. The investment rationale for this asset class largely encompasses an early mover advantage, volume-driven profitability, priority-sector status accorded by government and subsidized land costs, among other drivers."
Yet skeptics see dangers here. First, affordable housing may end up as substandard housing as builders cut costs to maintain margins. Second, affordable housing will go to the less-privileged classes, financed by easier norms for bank loans. Earlier this year, the government wrote off $15 billion of farm loans, which severely impacted its finances. Some observers fear that "affordable home loans" could face a similar fate. They are, after all, subprime mortgages of the kind that sparked the housing crisis in the U.S.
The consensus view about Indian real estate is that the slowdown is temporary but lots of reasons exist for optimism about the future. "Short-term concerns on the sector remain," says a report by research house Enam Securities. "End user demand (is) subdued on account of high capital values and global uncertainty keeping the capital markets under check. Developers remain strapped for liquidity. However, the long-term outlook (is) still positive. Favorable demographics, increased urbanization and higher disposable incomes will result in continued demand." According to Mathur of Cushman & Wakefield, "If you believe in the India story, the outlook for real estate, which is a critical part of the whole development process, is bright. I am very bullish about it."
Showing posts sorted by relevance for query real estate. Sort by date Show all posts
Showing posts sorted by relevance for query real estate. Sort by date Show all posts
Saturday, January 24, 2009
Indian Real Estate Firms Face a Reality Check
By M H Ahssan
Future economic historians may remember the month that just ended as Black September. Lehman Brothers collapsed; the Bank of America acquired Merrill Lynch; AIG was nationalized; banks such as Washington Mutual and Wachovia were wiped out. As credit and finance markets around the world tumbled like ninepins, so did stock markets in India, with the Bombay Stock Exchange Sensitive Index (Sensex) falling 3.35% or 469 points on September 15. The worst affected was the realty index which dropped 7.6% on the same day. Since then, while stocks prices in India have seen massive swings, shares of real estate firms have remained depressed, falling a total of 20% as of October 1.
In addition to housing stocks, home prices are taking a beating. By some estimates, prices have dropped by 25% in certain urban markets. While in the U.S. -- and also in Britain -- the subprime mortgage mess has seen home prices fall dramatically, in India, such slowdowns have been rare -- at least in the past. Prices may soften, sales activity may slow and occasionally a distress sale occurs, but there has not been an overall fall in home prices. "India has not seen a boom-bust cycle in real estate mainly because the industry is still nascent," says Anurag Mathur, joint managing director of Cushman & Wakefield, a global real estate solutions company. "India has not seen a boom and bust cycle in almost any sector," adds Rajesh Chakrabarti, a professor of finance at the Hyderabad-based Indian School of Business (ISB). "While there have been variations, we have not had cycles of the kind we see in the developed countries. It is only after liberalization that the Indian economy has been seeing more cyclical movements."
According to Irfan Razack, chairman and managing director of the Prestige Group, a Bangalore-based real estate developer: "We have boom and bust cycles in India but because of our huge population, the demand keeps growing and that sustains the industry. You can build for the next 100 years and there will still be demand for housing in this country."
India has inadequate data on the real estate sector. For instance, no one tracks housing starts, an indicator that is regarded in many countries as an important yardstick of economic health. However, several real estate companies have gone public during the past couple of years, which makes information more transparent. Secondly, equity analysts have begun tracking these companies and the real estate industry.
Still, confusion continues. Consider the reaction of the markets to the Lehman collapse. Real estate was hit for two reasons. Lehman had invested $200 million in DLF Assets, a company belonging to DLF, India's largest real estate company. It had also acquired a 50% stake in Unitech's Mumbai project for $175 million. (Unitech is India's second largest real estate company.) Among other Lehman investments or proposed investments were those in the Mumbai-based Peninsula Land Ltd. and Housing Development & Infrastructure Ltd. (HDIL).
The market was worried that if the money had not already been received, the projects would be in limbo. Most companies (Unitech, for one) claim that the cash is already sitting in their bank accounts so there is no cause for concern. Others, like HDIL, have said the deals were not with Lehman Brothers but with sister companies. These are unlikely to be affected.
The crunch might hit in the future. "With banks reducing their exposure to real estate, coupled with rising interest rates and volatile stock markets diluting the confidence of retail investors over the past one year, private equity investments have emerged as one of the most important sources of capital for real estate developers," says a FICCI-Ernst & Young (E&Y) report on the Indian real estate market released in early September. "The overall private equity investments reported in the real estate sector in India from August 2007 to July 2008 are estimated to be more than $5 billion." This tap could be turned off as a result of the financial crisis in the U.S.
Real estate investors in India were also worried that Lehman might resort to a fire sale of its assets. While India has a three-year lock-in period for foreign direct investment (FDI) in real estate, it is unclear whether this applies when a company declares bankruptcy. The government is holding a meeting to decide the norms in such cases. The other issue is that Lehman holds small stakes -- bought from the market or in bulk deals -- in real estate and infrastructure companies such as IVRCL Infrastructure, Consolidated Constructions, Orbit Corporation and Vijay Shanti Builders. Here, too, there was the possibility of a fire sale, encouraging other investors to bail out.
Temporary Slowdown
Amid this gloom and the real estate-bashing that is going on in the market, many people are optimistic about the sector. Even the bears see only a temporary slowdown. "The Asia-Pacific property markets, which have seen a rapid run-up in rents and capital values in recent years, are now entering a slowdown that will continue over the next 12 months at least," says a report by real estate consultants Jones Lang LaSalle (JLL). Shobhit Agarwal, joint managing director (capital markets) of JLL Meghraj (JLLM), the global company's Indian division, says there is still some pain left. "There is now a period of stagnation, soon to be followed by a fall in prices in certain sectors and locations. Certain overheated micro-markets will see a 5% to 15% price decline. A correction of up to 10% is also expected in South Mumbai, some locations in Mumbai's suburbs, and certain areas of New Delhi that have seen unrealistic price trends.... The market will eventually consolidate."
"In the short term, we expect the market to consolidate," echoes a spokesperson of DHL. "We have not been impacted by any slowdown. We have launched many premium residential projects across the country during the past six months and have gotten a very good response. We feel that the market is moving in the right direction and there is no bubble to burst."
"In the past three to four years there has been a huge inflow of companies and funds in the real estate sector," says Chakrabarti of ISB. "It is possible that there may be a bit of a shake out and consolidation now. Given the fact that we have already seen a 20% to 25% correction, I don't expect prices to fall much further. It will probably now grow at a decent enough rate. Also, infrastructure development is a major area of emphasis and this will fuel real estate prices, especially in the smaller towns."
The problem seems to have affected residential property rather than commercial real estate or infrastructure developers. Several factors have contributed to this. First, the Reserve Bank of India (RBI) has been raising interest rates to tackle inflation. As a result, housing finance companies have had to raise rates on loans. In 2004, interest rates on housing loans were 7.75%; they have now gone up to 12.75%. On a $50,000 loan borrowed for a period of 20 years in 2004, the interest burden was around $48,000. This has now gone up to more than $100,000.
Most housing loans in India are at variable rather than fixed interest rates, which means that monthly mortgage payments -- or EMIs (equated monthly installments), as they are called in India -- go up when interest rates rise. As a first measure, housing finance companies increase the term of the loans. When that period extends beyond the working life of the home buyer, the EMIs are increased. Housing finance companies typically consider EMIs up to 50% of net income. If, in extreme cases, these payments double, home buyers can be left with nothing to live on.
Understandably, defaults on loan repayments are increasing. While specific numbers are hard to come by, bankers say this could develop into a crisis. The financial meltdown in the U.S. -- and the turmoil in the finance sector, which is a key market for information technology and IT-enabled services -- has seen a large number of finance professionals lose their jobs. These young, upwardly-mobile executives were the new generation of house buyers. They are now saving for the proverbial rainy day -- which has arrived. Confidence levels are down and house purchase plans have been put on the backburner.
Finance companies and banks are also being careful about approving loans. Their vetting process is taking more time. Even people who want loans and have the capacity to service their EMIs are being put through greater scrutiny.
Business as Usual?
India's largest mortgage company, Housing Development Finance Corporation (HDFC), however, says that it is business as usual. As Renu Karnad, HDFC joint managing director, told CNBC TV 18: "The demand story is a compelling one. Its plot is often repeated by HDFC's senior management that younger and younger Indians are opting for home loans. The average age of borrowers is down from 40 years to 35 years. Thanks to tax breaks, the effective cost of a loan works out to a moderate 6%. Unquenchable housing demand has the country short of 25 million homes. The loan market is a vast untapped one yet. It has taken 30 years for mortgage penetration to grow from 2.5% to 6% of GDP. With middle India kicking in, HDFC is confident that unlike other consumer goods, home loans are not that vulnerable to a slowing economy."
The FICCI E&Y survey agrees. "Despite the momentary slowdown witnessed over the past 12 months, 62% of developers foresee Indian real estate embarking upon a high growth trajectory in the long term," says the study. It does, however, point to one change. Real estate had become a speculators' haven. Now, seeing no hope of quick returns, they are bailing out. Builders believe it's the speculators who are responsible for the perceived slump. Once they are squeezed out -- many are selling at whatever price they can get to take care of their stock market losses -- things will return to normal. The study notes, "Respondents believe that genuine end-users have taken over from investors and account for 80% to 90% of sales in their current projects."
What are real estate companies doing to deal with the downturn? Well, they are putting their eggs in different baskets. In a way, it is a replay of the rush into real estate. Over the past decade, companies with no experience in property development had entered the market. Some had legitimate reasons. The textile mills in Mumbai, for instance, had been priced out of the market because of high labor costs. One of the first off the block -- Phoenix Mills -- has converted itself into a commercial, residential and entertainment complex. In August this year it raised 200 million euros from German real estate fund MPC Synergy for further development. Morarjee Mills has moved its operations to smaller (and cheaper) cities. Its properties are being developed by its real estate wing -- Peninsula Land.
In addition to the textile mills, 70-year-old Nesco Engineering, a moribund company, is today thriving because it has set up an exhibition center on its Mumbai property and has plans for an IT park. Media Video, an electronics games manufacturer and distributor, has recently listed its real estate subsidiary MVL. Its market capitalization at $87 million is eight times that of its parent. The Kolkata-based Emami group, a FMCG player, has moved into malls and housing complexes.
Now, real estate companies are exploring new investment opportunities. Builders of residential property are taking to developing commercial space. Others, such as Raheja -- a leading homebuilder -- are constructing special economic zones. Omaxe is modernizing and maintaining airstrips. DLF, Unitech and Omaxe are bidding for road projects being offered by the National Highways Authority of India. The Brigade Group is building a health spa in Chikmagalur near Bangalore. It will run the spa in tandem with Singapore-based hospitality brands Banyan Tree and Angsana. Sobha Developers already has an ayurvedic spa offering the traditional Kerala ayurvedic massage at Sobha City in Thrissur in Kerala.
Overseas Markets
The second trend is a move abroad to market real estate companies' products, raise funds, source raw materials and launch projects. PRA Realty has set up shop in Chicago to be closer to venture funds. It has also opened a marketing office in Dubai. According to JLLM, non-resident Indians (NRIs) are major buyers of Indian properties, accounting for up to 25% in certain categories.
Sobha Developers has opened an office in China, from which it sources a lot of raw material. It is building a five-star hotel in Dubai. Parsvnath Builders has a subsidiary in Singapore. Puravankara Projects has started operations in Sri Lanka to build super luxury villas on the outskirts of capital Colombo. It already has a presence in the UAE. "Considering that every market is subject to fluctuations, diversification is certainly the best hedging tool for avoiding the pitfalls of sudden downward movements in any sector," says Agarwal of JLLM. "If one component fails to generate anticipated returns, others will compensate."
Other real estate companies are casting their nets wider and embracing every opportunity that comes their way. Unitech has already made a foray into telecom. It is now eyeing insurance. Preliminary talks are on with a foreign major. Omaxe is moving into steel and cement. It has on its drawing board plans for a medical college and a hospital.
Mantri Realty has earmarked $500 million for a thermal power plant in Nagpur. The Hyderabad-based JR Realtors has aquired a 10% stake in Pennar Aluminium. Indiabulls Real Estate is setting up a solar power plant in the Bastar region of Chhattisgarh. Sobha has even moved into retailing mattresses under the brandname Restoplus. IT major Infosys has already placed the first order.
HDIL has lined up a whole array of diversifications. It is getting into entertainment under the Broadway brand name. It plans to invest $200 million in a chain of 150 theaters. It is also building a coal-fired power plant. It will begin power trading soon. In perhaps the oddest move, it is bidding for oil and gas exploration blocks being auctioned by the government. "Although oil and gas is completely disconnected from our core business and what we are doing now, I can say that it will help in providing better services to customers who we serve in our projects," Sarang Wadhawan, managing director of HDIL, told business daily Mint recently.
"In the long run, given that the India growth story is likely to continue, real estate prices will certainly increase," says Chakrabarti of ISB. "However, they will not see a meteoric rise as they did earlier. It will be a more stable market. Real estate companies are therefore diversifying into different areas where they expect better growth (like telecom). This is probably not so much by choice as by compulsion. It also reduces their risks. In some sense it is sensible given that the market conditions have changed, but whether it plays out in the long run remains to be seen. In general [not just with regard to real estate] unrelated diversifications don't work out very well."
The efforts of various companies haven't had much impact on their share prices. As a high share price is necessary for fund raising, some companies are trying financial engineering. DLF, for instance, has announced a share buyback, but it is also seeking fresh funds. Analysts wonder how the two can go together. "Promoters work in the best interests of the company," responds a DLF spokesperson. "The DLF share has been quoting much below its intrinsic value. We see the share buyback decision as a highly attractive opportunity for our shareholders and a strategic move of sharing returns with investors." HDIL, meanwhile, has come out with a 2:7 bonus issue. All this doesn't appear to have helped sentiments much; both the shares -- as with most real estate companies -- are quoting below their original IPO price.
"The companies that went public rode the boom, and they will bounce back once the markets and the sector picks up," says Razack of the Prestige Group. "At that time the valuations were so aggressive that we were also tempted to go public. We didn't do it because one can't really show quarter-on-quarter growth in real estate. It becomes more [like] window dressing."
Affordable Housing
Another major area into which many real estate firms are moving is affordable housing. Puravankara has set up a wholly-owned subsidiary -- Provident Housing & Infrastructure -- which will build 64,500 homes in Bangalore, Chennai, Hyderabad and Coimbatore over the next five years. Omaxe has set up the 100%-owned National Affordable Housing and Infrastructure, which will invest $20 billion over the next five years in building one million such homes. Many other builders are also climbing on the bandwagon.
The rush is partly explained by the response to government-led housing programs. The public sector Maharashtra Housing and Area Development Authority (MHADA) plans to sell 600 low-priced apartments in Mumbai around Diwali. They will be priced around $50 a sq. ft., at a time when market rates are four times as high. MHADA expects 200,000 applications; there will be a lottery to decide the buyers. Demand for such housing is obviously very strong. A similar prgram earlier this year for 900 apartments attracted 65,000 applications. In Delhi too, the Delhi Development Authority has received 850,000 applications for 5,010 low-cost apartments.
"Affordable housing, until now, was not a part of the Indian real estate sector boom," says the FICCI-E&Y report. "However, affordable housing has recently attracted attention from prominent developers and private equity players. The investment rationale for this asset class largely encompasses an early mover advantage, volume-driven profitability, priority-sector status accorded by government and subsidized land costs, among other drivers."
Yet skeptics see dangers here. First, affordable housing may end up as substandard housing as builders cut costs to maintain margins. Second, affordable housing will go to the less-privileged classes, financed by easier norms for bank loans. Earlier this year, the government wrote off $15 billion of farm loans, which severely impacted its finances. Some observers fear that "affordable home loans" could face a similar fate. They are, after all, subprime mortgages of the kind that sparked the housing crisis in the U.S.
The consensus view about Indian real estate is that the slowdown is temporary but lots of reasons exist for optimism about the future. "Short-term concerns on the sector remain," says a report by research house Enam Securities. "End user demand (is) subdued on account of high capital values and global uncertainty keeping the capital markets under check. Developers remain strapped for liquidity. However, the long-term outlook (is) still positive. Favorable demographics, increased urbanization and higher disposable incomes will result in continued demand." According to Mathur of Cushman & Wakefield, "If you believe in the India story, the outlook for real estate, which is a critical part of the whole development process, is bright. I am very bullish about it."
Future economic historians may remember the month that just ended as Black September. Lehman Brothers collapsed; the Bank of America acquired Merrill Lynch; AIG was nationalized; banks such as Washington Mutual and Wachovia were wiped out. As credit and finance markets around the world tumbled like ninepins, so did stock markets in India, with the Bombay Stock Exchange Sensitive Index (Sensex) falling 3.35% or 469 points on September 15. The worst affected was the realty index which dropped 7.6% on the same day. Since then, while stocks prices in India have seen massive swings, shares of real estate firms have remained depressed, falling a total of 20% as of October 1.
In addition to housing stocks, home prices are taking a beating. By some estimates, prices have dropped by 25% in certain urban markets. While in the U.S. -- and also in Britain -- the subprime mortgage mess has seen home prices fall dramatically, in India, such slowdowns have been rare -- at least in the past. Prices may soften, sales activity may slow and occasionally a distress sale occurs, but there has not been an overall fall in home prices. "India has not seen a boom-bust cycle in real estate mainly because the industry is still nascent," says Anurag Mathur, joint managing director of Cushman & Wakefield, a global real estate solutions company. "India has not seen a boom and bust cycle in almost any sector," adds Rajesh Chakrabarti, a professor of finance at the Hyderabad-based Indian School of Business (ISB). "While there have been variations, we have not had cycles of the kind we see in the developed countries. It is only after liberalization that the Indian economy has been seeing more cyclical movements."
According to Irfan Razack, chairman and managing director of the Prestige Group, a Bangalore-based real estate developer: "We have boom and bust cycles in India but because of our huge population, the demand keeps growing and that sustains the industry. You can build for the next 100 years and there will still be demand for housing in this country."
India has inadequate data on the real estate sector. For instance, no one tracks housing starts, an indicator that is regarded in many countries as an important yardstick of economic health. However, several real estate companies have gone public during the past couple of years, which makes information more transparent. Secondly, equity analysts have begun tracking these companies and the real estate industry.
Still, confusion continues. Consider the reaction of the markets to the Lehman collapse. Real estate was hit for two reasons. Lehman had invested $200 million in DLF Assets, a company belonging to DLF, India's largest real estate company. It had also acquired a 50% stake in Unitech's Mumbai project for $175 million. (Unitech is India's second largest real estate company.) Among other Lehman investments or proposed investments were those in the Mumbai-based Peninsula Land Ltd. and Housing Development & Infrastructure Ltd. (HDIL).
The market was worried that if the money had not already been received, the projects would be in limbo. Most companies (Unitech, for one) claim that the cash is already sitting in their bank accounts so there is no cause for concern. Others, like HDIL, have said the deals were not with Lehman Brothers but with sister companies. These are unlikely to be affected.
The crunch might hit in the future. "With banks reducing their exposure to real estate, coupled with rising interest rates and volatile stock markets diluting the confidence of retail investors over the past one year, private equity investments have emerged as one of the most important sources of capital for real estate developers," says a FICCI-Ernst & Young (E&Y) report on the Indian real estate market released in early September. "The overall private equity investments reported in the real estate sector in India from August 2007 to July 2008 are estimated to be more than $5 billion." This tap could be turned off as a result of the financial crisis in the U.S.
Real estate investors in India were also worried that Lehman might resort to a fire sale of its assets. While India has a three-year lock-in period for foreign direct investment (FDI) in real estate, it is unclear whether this applies when a company declares bankruptcy. The government is holding a meeting to decide the norms in such cases. The other issue is that Lehman holds small stakes -- bought from the market or in bulk deals -- in real estate and infrastructure companies such as IVRCL Infrastructure, Consolidated Constructions, Orbit Corporation and Vijay Shanti Builders. Here, too, there was the possibility of a fire sale, encouraging other investors to bail out.
Temporary Slowdown
Amid this gloom and the real estate-bashing that is going on in the market, many people are optimistic about the sector. Even the bears see only a temporary slowdown. "The Asia-Pacific property markets, which have seen a rapid run-up in rents and capital values in recent years, are now entering a slowdown that will continue over the next 12 months at least," says a report by real estate consultants Jones Lang LaSalle (JLL). Shobhit Agarwal, joint managing director (capital markets) of JLL Meghraj (JLLM), the global company's Indian division, says there is still some pain left. "There is now a period of stagnation, soon to be followed by a fall in prices in certain sectors and locations. Certain overheated micro-markets will see a 5% to 15% price decline. A correction of up to 10% is also expected in South Mumbai, some locations in Mumbai's suburbs, and certain areas of New Delhi that have seen unrealistic price trends.... The market will eventually consolidate."
"In the short term, we expect the market to consolidate," echoes a spokesperson of DHL. "We have not been impacted by any slowdown. We have launched many premium residential projects across the country during the past six months and have gotten a very good response. We feel that the market is moving in the right direction and there is no bubble to burst."
"In the past three to four years there has been a huge inflow of companies and funds in the real estate sector," says Chakrabarti of ISB. "It is possible that there may be a bit of a shake out and consolidation now. Given the fact that we have already seen a 20% to 25% correction, I don't expect prices to fall much further. It will probably now grow at a decent enough rate. Also, infrastructure development is a major area of emphasis and this will fuel real estate prices, especially in the smaller towns."
The problem seems to have affected residential property rather than commercial real estate or infrastructure developers. Several factors have contributed to this. First, the Reserve Bank of India (RBI) has been raising interest rates to tackle inflation. As a result, housing finance companies have had to raise rates on loans. In 2004, interest rates on housing loans were 7.75%; they have now gone up to 12.75%. On a $50,000 loan borrowed for a period of 20 years in 2004, the interest burden was around $48,000. This has now gone up to more than $100,000.
Most housing loans in India are at variable rather than fixed interest rates, which means that monthly mortgage payments -- or EMIs (equated monthly installments), as they are called in India -- go up when interest rates rise. As a first measure, housing finance companies increase the term of the loans. When that period extends beyond the working life of the home buyer, the EMIs are increased. Housing finance companies typically consider EMIs up to 50% of net income. If, in extreme cases, these payments double, home buyers can be left with nothing to live on.
Understandably, defaults on loan repayments are increasing. While specific numbers are hard to come by, bankers say this could develop into a crisis. The financial meltdown in the U.S. -- and the turmoil in the finance sector, which is a key market for information technology and IT-enabled services -- has seen a large number of finance professionals lose their jobs. These young, upwardly-mobile executives were the new generation of house buyers. They are now saving for the proverbial rainy day -- which has arrived. Confidence levels are down and house purchase plans have been put on the backburner.
Finance companies and banks are also being careful about approving loans. Their vetting process is taking more time. Even people who want loans and have the capacity to service their EMIs are being put through greater scrutiny.
Business as Usual?
India's largest mortgage company, Housing Development Finance Corporation (HDFC), however, says that it is business as usual. As Renu Karnad, HDFC joint managing director, told CNBC TV 18: "The demand story is a compelling one. Its plot is often repeated by HDFC's senior management that younger and younger Indians are opting for home loans. The average age of borrowers is down from 40 years to 35 years. Thanks to tax breaks, the effective cost of a loan works out to a moderate 6%. Unquenchable housing demand has the country short of 25 million homes. The loan market is a vast untapped one yet. It has taken 30 years for mortgage penetration to grow from 2.5% to 6% of GDP. With middle India kicking in, HDFC is confident that unlike other consumer goods, home loans are not that vulnerable to a slowing economy."
The FICCI E&Y survey agrees. "Despite the momentary slowdown witnessed over the past 12 months, 62% of developers foresee Indian real estate embarking upon a high growth trajectory in the long term," says the study. It does, however, point to one change. Real estate had become a speculators' haven. Now, seeing no hope of quick returns, they are bailing out. Builders believe it's the speculators who are responsible for the perceived slump. Once they are squeezed out -- many are selling at whatever price they can get to take care of their stock market losses -- things will return to normal. The study notes, "Respondents believe that genuine end-users have taken over from investors and account for 80% to 90% of sales in their current projects."
What are real estate companies doing to deal with the downturn? Well, they are putting their eggs in different baskets. In a way, it is a replay of the rush into real estate. Over the past decade, companies with no experience in property development had entered the market. Some had legitimate reasons. The textile mills in Mumbai, for instance, had been priced out of the market because of high labor costs. One of the first off the block -- Phoenix Mills -- has converted itself into a commercial, residential and entertainment complex. In August this year it raised 200 million euros from German real estate fund MPC Synergy for further development. Morarjee Mills has moved its operations to smaller (and cheaper) cities. Its properties are being developed by its real estate wing -- Peninsula Land.
In addition to the textile mills, 70-year-old Nesco Engineering, a moribund company, is today thriving because it has set up an exhibition center on its Mumbai property and has plans for an IT park. Media Video, an electronics games manufacturer and distributor, has recently listed its real estate subsidiary MVL. Its market capitalization at $87 million is eight times that of its parent. The Kolkata-based Emami group, a FMCG player, has moved into malls and housing complexes.
Now, real estate companies are exploring new investment opportunities. Builders of residential property are taking to developing commercial space. Others, such as Raheja -- a leading homebuilder -- are constructing special economic zones. Omaxe is modernizing and maintaining airstrips. DLF, Unitech and Omaxe are bidding for road projects being offered by the National Highways Authority of India. The Brigade Group is building a health spa in Chikmagalur near Bangalore. It will run the spa in tandem with Singapore-based hospitality brands Banyan Tree and Angsana. Sobha Developers already has an ayurvedic spa offering the traditional Kerala ayurvedic massage at Sobha City in Thrissur in Kerala.
Overseas Markets
The second trend is a move abroad to market real estate companies' products, raise funds, source raw materials and launch projects. PRA Realty has set up shop in Chicago to be closer to venture funds. It has also opened a marketing office in Dubai. According to JLLM, non-resident Indians (NRIs) are major buyers of Indian properties, accounting for up to 25% in certain categories.
Sobha Developers has opened an office in China, from which it sources a lot of raw material. It is building a five-star hotel in Dubai. Parsvnath Builders has a subsidiary in Singapore. Puravankara Projects has started operations in Sri Lanka to build super luxury villas on the outskirts of capital Colombo. It already has a presence in the UAE. "Considering that every market is subject to fluctuations, diversification is certainly the best hedging tool for avoiding the pitfalls of sudden downward movements in any sector," says Agarwal of JLLM. "If one component fails to generate anticipated returns, others will compensate."
Other real estate companies are casting their nets wider and embracing every opportunity that comes their way. Unitech has already made a foray into telecom. It is now eyeing insurance. Preliminary talks are on with a foreign major. Omaxe is moving into steel and cement. It has on its drawing board plans for a medical college and a hospital.
Mantri Realty has earmarked $500 million for a thermal power plant in Nagpur. The Hyderabad-based JR Realtors has aquired a 10% stake in Pennar Aluminium. Indiabulls Real Estate is setting up a solar power plant in the Bastar region of Chhattisgarh. Sobha has even moved into retailing mattresses under the brandname Restoplus. IT major Infosys has already placed the first order.
HDIL has lined up a whole array of diversifications. It is getting into entertainment under the Broadway brand name. It plans to invest $200 million in a chain of 150 theaters. It is also building a coal-fired power plant. It will begin power trading soon. In perhaps the oddest move, it is bidding for oil and gas exploration blocks being auctioned by the government. "Although oil and gas is completely disconnected from our core business and what we are doing now, I can say that it will help in providing better services to customers who we serve in our projects," Sarang Wadhawan, managing director of HDIL, told business daily Mint recently.
"In the long run, given that the India growth story is likely to continue, real estate prices will certainly increase," says Chakrabarti of ISB. "However, they will not see a meteoric rise as they did earlier. It will be a more stable market. Real estate companies are therefore diversifying into different areas where they expect better growth (like telecom). This is probably not so much by choice as by compulsion. It also reduces their risks. In some sense it is sensible given that the market conditions have changed, but whether it plays out in the long run remains to be seen. In general [not just with regard to real estate] unrelated diversifications don't work out very well."
The efforts of various companies haven't had much impact on their share prices. As a high share price is necessary for fund raising, some companies are trying financial engineering. DLF, for instance, has announced a share buyback, but it is also seeking fresh funds. Analysts wonder how the two can go together. "Promoters work in the best interests of the company," responds a DLF spokesperson. "The DLF share has been quoting much below its intrinsic value. We see the share buyback decision as a highly attractive opportunity for our shareholders and a strategic move of sharing returns with investors." HDIL, meanwhile, has come out with a 2:7 bonus issue. All this doesn't appear to have helped sentiments much; both the shares -- as with most real estate companies -- are quoting below their original IPO price.
"The companies that went public rode the boom, and they will bounce back once the markets and the sector picks up," says Razack of the Prestige Group. "At that time the valuations were so aggressive that we were also tempted to go public. We didn't do it because one can't really show quarter-on-quarter growth in real estate. It becomes more [like] window dressing."
Affordable Housing
Another major area into which many real estate firms are moving is affordable housing. Puravankara has set up a wholly-owned subsidiary -- Provident Housing & Infrastructure -- which will build 64,500 homes in Bangalore, Chennai, Hyderabad and Coimbatore over the next five years. Omaxe has set up the 100%-owned National Affordable Housing and Infrastructure, which will invest $20 billion over the next five years in building one million such homes. Many other builders are also climbing on the bandwagon.
The rush is partly explained by the response to government-led housing programs. The public sector Maharashtra Housing and Area Development Authority (MHADA) plans to sell 600 low-priced apartments in Mumbai around Diwali. They will be priced around $50 a sq. ft., at a time when market rates are four times as high. MHADA expects 200,000 applications; there will be a lottery to decide the buyers. Demand for such housing is obviously very strong. A similar prgram earlier this year for 900 apartments attracted 65,000 applications. In Delhi too, the Delhi Development Authority has received 850,000 applications for 5,010 low-cost apartments.
"Affordable housing, until now, was not a part of the Indian real estate sector boom," says the FICCI-E&Y report. "However, affordable housing has recently attracted attention from prominent developers and private equity players. The investment rationale for this asset class largely encompasses an early mover advantage, volume-driven profitability, priority-sector status accorded by government and subsidized land costs, among other drivers."
Yet skeptics see dangers here. First, affordable housing may end up as substandard housing as builders cut costs to maintain margins. Second, affordable housing will go to the less-privileged classes, financed by easier norms for bank loans. Earlier this year, the government wrote off $15 billion of farm loans, which severely impacted its finances. Some observers fear that "affordable home loans" could face a similar fate. They are, after all, subprime mortgages of the kind that sparked the housing crisis in the U.S.
The consensus view about Indian real estate is that the slowdown is temporary but lots of reasons exist for optimism about the future. "Short-term concerns on the sector remain," says a report by research house Enam Securities. "End user demand (is) subdued on account of high capital values and global uncertainty keeping the capital markets under check. Developers remain strapped for liquidity. However, the long-term outlook (is) still positive. Favorable demographics, increased urbanization and higher disposable incomes will result in continued demand." According to Mathur of Cushman & Wakefield, "If you believe in the India story, the outlook for real estate, which is a critical part of the whole development process, is bright. I am very bullish about it."
Real Estate Developers Can Expect Relocation, not Dislocation, from the Internet
By M H Ahssan
Some real estate developers see the Internet revolution the same way an aristocrat during the French revolution might have viewed the guillotine. The reasons for their dread are easy to fathom. As more and more CEOs recognize that the Internet is here to stay, they wonder how e-commerce will affect demand for real estate. E-commerce, after all, is about moving business from physical to virtual space and replacing brick-and-mortar storefronts with digital ones. As mainstream Corporate America embraces e-commerce, shouldn't those whose revenues and profits are derived from brick-and-mortar construction fear for their lives?
Not really. Real estate developers and brokers must recognize that the coming of the Internet does not eliminate demand for real estate; it simply changes it, according to academics and industry professionals who met at Wharton recently for the fall members' meeting of the Samuel Zell and Robert Lurie Real Estate Center. Speaker after speaker at the conference — which featured the first Max M. Farash Roundtable on E-Commerce and Real Estate — pointed out that the Internet offers more opportunities than threats to property developers and brokers. As such, real estate professionals would be better off embracing e-commerce rather than ignoring or fearing it.
How does e-commerce change demand for real estate? By way of an example, consider Amazon, the Seattle-based granddaddy of online merchants. The company, which did not exist five years ago and now claims to offer the biggest selection of products on earth, does not occupy a single square foot of space in any mall or shopping center. And yet, as its operations have grown, the company has had to build large stocks of inventory and find warehouses to house them. "Amazon wants to build a fleet of warehouses," says Christopher Peacock, president of Jones Lang LaSalle, a global real estate services firm. In New Jersey alone, Amazon last year was in the market for one million square feet of warehouse space.
That is just one way e-commerce changes demand for real estate. It also changes the skills requirements within real estate companies, which must now increasingly build expertise in technology. "We must help our clients make the right infrastructure decisions," Peacock says. "Our challenge is not just to hire brokers but experts in telecommunications, energy, corporate finance and logistics." Building such skills is crucial as real estate firms seek to redefine their roles for the digital economy. "Success does not begin and end with designing a web page for your company," Peacock adds. "We should use e-commerce to serve our clients."
Jones Lang Lasalle has begun to explore ways of doing that. The company's property management business buys services worth $6 billion from more than 35,000 vendors. In the past, sales orders were typically placed and processed by fax. Recognizing the potential of the Internet to transform the purchasing process, the company decided to move these operations online. Result: Jones Lang Lasalle was able to slash costs by 10% — or $600 million. "That's just one project, so consider the potential," says Peacock. "The future will be even more exciting. I can see a day when the ability to trade in intellectual property relating to real estate will be as valuable as the real estate itself."
Other speakers emphasized that the Internet makes it essential for companies to act fast. One reason is that the web itself has grown — and continues to grow — at an incredible pace. In a presentation on "Forces Shaping the Digital Economy," Gerald Lohse, research director of the Wharton Forum on Electronic Commerce, pointed out that while radio took 38 years and television 13 years to reach 50 million users, the Internet reached that milestone in just five. E-commerce, too, has been exploding. Forrester Research, a consulting firm, estimates that global e-commerce transactions by 2003 will exceed $3.2 trillion. (To put that number in context, Lohse explains, the U.S. economy today is $20 trillion.)
In a panel on e-commerce and retail, Wharton real estate professor Todd Sinai offered another perspective. Discussing whether e-commerce would cannibalize or augment bricks-and-mortar retail, he pointed out that the latter would certainly happen in some markets. "There are places where no one would set up a shopping center, and the Internet can pick up those sales around the edges," he says. In other instances, though, e-commerce sales may not cannibalize traditional retail as much as catalog sales. Time-starved consumers who once browsed through catalogs and ordered products by phone or by mail may now do so over the web. "The Internet is a direct marketing channel," he says.
The Internet also transforms where and how property is built, which means that real estate companies must re-think old assumptions. The maxim that the three most important things in real estate are location, location and location assumes a new meaning in a global, web-based economy. When business is transacted over the web, producers of intellectual products need no longer be physically close to their customers or even their suppliers. Carrie Byles, an architect with the firm Skidmore, Owings & Merrill, says that if one country's regulations are too onerous, Internet-based companies could easily move overseas or to tax havens. Technology, in many ways, makes location less relevant than it used to be. "For companies like Yahoo, the most important consideration is being close to bandwidth," she says.
Technology also makes it possible for architects to design better environments in which people can work. "We can create offices with casual collision spaces, where new ideas spawn," she says. "Our goal is to create environments that support learning, casual interaction, flexibility and speed in a setting where technology is invisible and the buildings and landscape sustain the human soul."
James Young, president of the Jameson Group, points out that the coming of the Internet is not a short-term change, like the typical 10-year real estate cycle. "This is a major socio-economic shift," he says, comparable in world historic terms to the agricultural revolution and the industrial revolution. The implications for real estate companies, Young says, are clear. "If you sold barns at the end of the agricultural age, you might consider something called a factory."
Some real estate developers see the Internet revolution the same way an aristocrat during the French revolution might have viewed the guillotine. The reasons for their dread are easy to fathom. As more and more CEOs recognize that the Internet is here to stay, they wonder how e-commerce will affect demand for real estate. E-commerce, after all, is about moving business from physical to virtual space and replacing brick-and-mortar storefronts with digital ones. As mainstream Corporate America embraces e-commerce, shouldn't those whose revenues and profits are derived from brick-and-mortar construction fear for their lives?
Not really. Real estate developers and brokers must recognize that the coming of the Internet does not eliminate demand for real estate; it simply changes it, according to academics and industry professionals who met at Wharton recently for the fall members' meeting of the Samuel Zell and Robert Lurie Real Estate Center. Speaker after speaker at the conference — which featured the first Max M. Farash Roundtable on E-Commerce and Real Estate — pointed out that the Internet offers more opportunities than threats to property developers and brokers. As such, real estate professionals would be better off embracing e-commerce rather than ignoring or fearing it.
How does e-commerce change demand for real estate? By way of an example, consider Amazon, the Seattle-based granddaddy of online merchants. The company, which did not exist five years ago and now claims to offer the biggest selection of products on earth, does not occupy a single square foot of space in any mall or shopping center. And yet, as its operations have grown, the company has had to build large stocks of inventory and find warehouses to house them. "Amazon wants to build a fleet of warehouses," says Christopher Peacock, president of Jones Lang LaSalle, a global real estate services firm. In New Jersey alone, Amazon last year was in the market for one million square feet of warehouse space.
That is just one way e-commerce changes demand for real estate. It also changes the skills requirements within real estate companies, which must now increasingly build expertise in technology. "We must help our clients make the right infrastructure decisions," Peacock says. "Our challenge is not just to hire brokers but experts in telecommunications, energy, corporate finance and logistics." Building such skills is crucial as real estate firms seek to redefine their roles for the digital economy. "Success does not begin and end with designing a web page for your company," Peacock adds. "We should use e-commerce to serve our clients."
Jones Lang Lasalle has begun to explore ways of doing that. The company's property management business buys services worth $6 billion from more than 35,000 vendors. In the past, sales orders were typically placed and processed by fax. Recognizing the potential of the Internet to transform the purchasing process, the company decided to move these operations online. Result: Jones Lang Lasalle was able to slash costs by 10% — or $600 million. "That's just one project, so consider the potential," says Peacock. "The future will be even more exciting. I can see a day when the ability to trade in intellectual property relating to real estate will be as valuable as the real estate itself."
Other speakers emphasized that the Internet makes it essential for companies to act fast. One reason is that the web itself has grown — and continues to grow — at an incredible pace. In a presentation on "Forces Shaping the Digital Economy," Gerald Lohse, research director of the Wharton Forum on Electronic Commerce, pointed out that while radio took 38 years and television 13 years to reach 50 million users, the Internet reached that milestone in just five. E-commerce, too, has been exploding. Forrester Research, a consulting firm, estimates that global e-commerce transactions by 2003 will exceed $3.2 trillion. (To put that number in context, Lohse explains, the U.S. economy today is $20 trillion.)
In a panel on e-commerce and retail, Wharton real estate professor Todd Sinai offered another perspective. Discussing whether e-commerce would cannibalize or augment bricks-and-mortar retail, he pointed out that the latter would certainly happen in some markets. "There are places where no one would set up a shopping center, and the Internet can pick up those sales around the edges," he says. In other instances, though, e-commerce sales may not cannibalize traditional retail as much as catalog sales. Time-starved consumers who once browsed through catalogs and ordered products by phone or by mail may now do so over the web. "The Internet is a direct marketing channel," he says.
The Internet also transforms where and how property is built, which means that real estate companies must re-think old assumptions. The maxim that the three most important things in real estate are location, location and location assumes a new meaning in a global, web-based economy. When business is transacted over the web, producers of intellectual products need no longer be physically close to their customers or even their suppliers. Carrie Byles, an architect with the firm Skidmore, Owings & Merrill, says that if one country's regulations are too onerous, Internet-based companies could easily move overseas or to tax havens. Technology, in many ways, makes location less relevant than it used to be. "For companies like Yahoo, the most important consideration is being close to bandwidth," she says.
Technology also makes it possible for architects to design better environments in which people can work. "We can create offices with casual collision spaces, where new ideas spawn," she says. "Our goal is to create environments that support learning, casual interaction, flexibility and speed in a setting where technology is invisible and the buildings and landscape sustain the human soul."
James Young, president of the Jameson Group, points out that the coming of the Internet is not a short-term change, like the typical 10-year real estate cycle. "This is a major socio-economic shift," he says, comparable in world historic terms to the agricultural revolution and the industrial revolution. The implications for real estate companies, Young says, are clear. "If you sold barns at the end of the agricultural age, you might consider something called a factory."
Real Estate Developers Can Expect Relocation, not Dislocation, from the Internet
By M H Ahssan
Some real estate developers see the Internet revolution the same way an aristocrat during the French revolution might have viewed the guillotine. The reasons for their dread are easy to fathom. As more and more CEOs recognize that the Internet is here to stay, they wonder how e-commerce will affect demand for real estate. E-commerce, after all, is about moving business from physical to virtual space and replacing brick-and-mortar storefronts with digital ones. As mainstream Corporate America embraces e-commerce, shouldn't those whose revenues and profits are derived from brick-and-mortar construction fear for their lives?
Not really. Real estate developers and brokers must recognize that the coming of the Internet does not eliminate demand for real estate; it simply changes it, according to academics and industry professionals who met at Wharton recently for the fall members' meeting of the Samuel Zell and Robert Lurie Real Estate Center. Speaker after speaker at the conference — which featured the first Max M. Farash Roundtable on E-Commerce and Real Estate — pointed out that the Internet offers more opportunities than threats to property developers and brokers. As such, real estate professionals would be better off embracing e-commerce rather than ignoring or fearing it.
How does e-commerce change demand for real estate? By way of an example, consider Amazon, the Seattle-based granddaddy of online merchants. The company, which did not exist five years ago and now claims to offer the biggest selection of products on earth, does not occupy a single square foot of space in any mall or shopping center. And yet, as its operations have grown, the company has had to build large stocks of inventory and find warehouses to house them. "Amazon wants to build a fleet of warehouses," says Christopher Peacock, president of Jones Lang LaSalle, a global real estate services firm. In New Jersey alone, Amazon last year was in the market for one million square feet of warehouse space.
That is just one way e-commerce changes demand for real estate. It also changes the skills requirements within real estate companies, which must now increasingly build expertise in technology. "We must help our clients make the right infrastructure decisions," Peacock says. "Our challenge is not just to hire brokers but experts in telecommunications, energy, corporate finance and logistics." Building such skills is crucial as real estate firms seek to redefine their roles for the digital economy. "Success does not begin and end with designing a web page for your company," Peacock adds. "We should use e-commerce to serve our clients."
Jones Lang Lasalle has begun to explore ways of doing that. The company's property management business buys services worth $6 billion from more than 35,000 vendors. In the past, sales orders were typically placed and processed by fax. Recognizing the potential of the Internet to transform the purchasing process, the company decided to move these operations online. Result: Jones Lang Lasalle was able to slash costs by 10% — or $600 million. "That's just one project, so consider the potential," says Peacock. "The future will be even more exciting. I can see a day when the ability to trade in intellectual property relating to real estate will be as valuable as the real estate itself."
Other speakers emphasized that the Internet makes it essential for companies to act fast. One reason is that the web itself has grown — and continues to grow — at an incredible pace. In a presentation on "Forces Shaping the Digital Economy," Gerald Lohse, research director of the Wharton Forum on Electronic Commerce, pointed out that while radio took 38 years and television 13 years to reach 50 million users, the Internet reached that milestone in just five. E-commerce, too, has been exploding. Forrester Research, a consulting firm, estimates that global e-commerce transactions by 2003 will exceed $3.2 trillion. (To put that number in context, Lohse explains, the U.S. economy today is $20 trillion.)
In a panel on e-commerce and retail, Wharton real estate professor Todd Sinai offered another perspective. Discussing whether e-commerce would cannibalize or augment bricks-and-mortar retail, he pointed out that the latter would certainly happen in some markets. "There are places where no one would set up a shopping center, and the Internet can pick up those sales around the edges," he says. In other instances, though, e-commerce sales may not cannibalize traditional retail as much as catalog sales. Time-starved consumers who once browsed through catalogs and ordered products by phone or by mail may now do so over the web. "The Internet is a direct marketing channel," he says.
The Internet also transforms where and how property is built, which means that real estate companies must re-think old assumptions. The maxim that the three most important things in real estate are location, location and location assumes a new meaning in a global, web-based economy. When business is transacted over the web, producers of intellectual products need no longer be physically close to their customers or even their suppliers. Carrie Byles, an architect with the firm Skidmore, Owings & Merrill, says that if one country's regulations are too onerous, Internet-based companies could easily move overseas or to tax havens. Technology, in many ways, makes location less relevant than it used to be. "For companies like Yahoo, the most important consideration is being close to bandwidth," she says.
Technology also makes it possible for architects to design better environments in which people can work. "We can create offices with casual collision spaces, where new ideas spawn," she says. "Our goal is to create environments that support learning, casual interaction, flexibility and speed in a setting where technology is invisible and the buildings and landscape sustain the human soul."
James Young, president of the Jameson Group, points out that the coming of the Internet is not a short-term change, like the typical 10-year real estate cycle. "This is a major socio-economic shift," he says, comparable in world historic terms to the agricultural revolution and the industrial revolution. The implications for real estate companies, Young says, are clear. "If you sold barns at the end of the agricultural age, you might consider something called a factory."
Some real estate developers see the Internet revolution the same way an aristocrat during the French revolution might have viewed the guillotine. The reasons for their dread are easy to fathom. As more and more CEOs recognize that the Internet is here to stay, they wonder how e-commerce will affect demand for real estate. E-commerce, after all, is about moving business from physical to virtual space and replacing brick-and-mortar storefronts with digital ones. As mainstream Corporate America embraces e-commerce, shouldn't those whose revenues and profits are derived from brick-and-mortar construction fear for their lives?
Not really. Real estate developers and brokers must recognize that the coming of the Internet does not eliminate demand for real estate; it simply changes it, according to academics and industry professionals who met at Wharton recently for the fall members' meeting of the Samuel Zell and Robert Lurie Real Estate Center. Speaker after speaker at the conference — which featured the first Max M. Farash Roundtable on E-Commerce and Real Estate — pointed out that the Internet offers more opportunities than threats to property developers and brokers. As such, real estate professionals would be better off embracing e-commerce rather than ignoring or fearing it.
How does e-commerce change demand for real estate? By way of an example, consider Amazon, the Seattle-based granddaddy of online merchants. The company, which did not exist five years ago and now claims to offer the biggest selection of products on earth, does not occupy a single square foot of space in any mall or shopping center. And yet, as its operations have grown, the company has had to build large stocks of inventory and find warehouses to house them. "Amazon wants to build a fleet of warehouses," says Christopher Peacock, president of Jones Lang LaSalle, a global real estate services firm. In New Jersey alone, Amazon last year was in the market for one million square feet of warehouse space.
That is just one way e-commerce changes demand for real estate. It also changes the skills requirements within real estate companies, which must now increasingly build expertise in technology. "We must help our clients make the right infrastructure decisions," Peacock says. "Our challenge is not just to hire brokers but experts in telecommunications, energy, corporate finance and logistics." Building such skills is crucial as real estate firms seek to redefine their roles for the digital economy. "Success does not begin and end with designing a web page for your company," Peacock adds. "We should use e-commerce to serve our clients."
Jones Lang Lasalle has begun to explore ways of doing that. The company's property management business buys services worth $6 billion from more than 35,000 vendors. In the past, sales orders were typically placed and processed by fax. Recognizing the potential of the Internet to transform the purchasing process, the company decided to move these operations online. Result: Jones Lang Lasalle was able to slash costs by 10% — or $600 million. "That's just one project, so consider the potential," says Peacock. "The future will be even more exciting. I can see a day when the ability to trade in intellectual property relating to real estate will be as valuable as the real estate itself."
Other speakers emphasized that the Internet makes it essential for companies to act fast. One reason is that the web itself has grown — and continues to grow — at an incredible pace. In a presentation on "Forces Shaping the Digital Economy," Gerald Lohse, research director of the Wharton Forum on Electronic Commerce, pointed out that while radio took 38 years and television 13 years to reach 50 million users, the Internet reached that milestone in just five. E-commerce, too, has been exploding. Forrester Research, a consulting firm, estimates that global e-commerce transactions by 2003 will exceed $3.2 trillion. (To put that number in context, Lohse explains, the U.S. economy today is $20 trillion.)
In a panel on e-commerce and retail, Wharton real estate professor Todd Sinai offered another perspective. Discussing whether e-commerce would cannibalize or augment bricks-and-mortar retail, he pointed out that the latter would certainly happen in some markets. "There are places where no one would set up a shopping center, and the Internet can pick up those sales around the edges," he says. In other instances, though, e-commerce sales may not cannibalize traditional retail as much as catalog sales. Time-starved consumers who once browsed through catalogs and ordered products by phone or by mail may now do so over the web. "The Internet is a direct marketing channel," he says.
The Internet also transforms where and how property is built, which means that real estate companies must re-think old assumptions. The maxim that the three most important things in real estate are location, location and location assumes a new meaning in a global, web-based economy. When business is transacted over the web, producers of intellectual products need no longer be physically close to their customers or even their suppliers. Carrie Byles, an architect with the firm Skidmore, Owings & Merrill, says that if one country's regulations are too onerous, Internet-based companies could easily move overseas or to tax havens. Technology, in many ways, makes location less relevant than it used to be. "For companies like Yahoo, the most important consideration is being close to bandwidth," she says.
Technology also makes it possible for architects to design better environments in which people can work. "We can create offices with casual collision spaces, where new ideas spawn," she says. "Our goal is to create environments that support learning, casual interaction, flexibility and speed in a setting where technology is invisible and the buildings and landscape sustain the human soul."
James Young, president of the Jameson Group, points out that the coming of the Internet is not a short-term change, like the typical 10-year real estate cycle. "This is a major socio-economic shift," he says, comparable in world historic terms to the agricultural revolution and the industrial revolution. The implications for real estate companies, Young says, are clear. "If you sold barns at the end of the agricultural age, you might consider something called a factory."
Monday, August 05, 2013
Why Indian Real Estate Is In Need Of Foreign Funding?
While banks have aided most real estate development in the past, the cost of debt is getting higher by the day. The strict guidelines introduced by the RBI have made real estate lending even more expensive and cumbersome.
Currently, the costs of key inputs for real estate development are up by at least 7%. This is over and above a rise of about 25% last year. Labour cost is up 10-15% and the costs of steel and cement by about 7%. To add to this, funding costs have headed north. If we look at a city like Mumbai, the recent DCR amendments would add to developers’ costs by about 15%, which includes the fungible premium payable if the builder opts to take the additional 35% (floor space index) FSI option.
Saturday, May 18, 2013
WHY IS BRANDING IMPORTANT IN 'REALITY' BUSINESS?
INN analyses the importance of being brand conscious in real estate. Prompt delivery, financial discipline, customized spaces is key. Both investors and buyers need to see builders walk the talk.
Sandeep Sadh, the CEO of a property portal, shariing branding nuances states, "The developers could be having a project in certain pockets of the city or he might have his presence in other cities as well. However, as compared to a consumer durable brand, there can't be a clear-cut market leader in the real estate sector.” A builders differentiating factor is vital, but that is based on his ability to deliver and also financially manage the project first.
Wednesday, April 10, 2013
Celebrity Endorsements: Poster Boys & Divas Of Real Estate
What is so common among cricketing icons like Sachin Tendulkar, M S Dhoni, Yuvraj Singh, and Bollywood beauties like Deepika Padukone, Sonam Kapoor, Kajol and their male counterparts like Akshay Kumar, Ajay Devgan, Mohanlal and Mammootty?
Well, these — and many more — celebrities from sports, Bollywood and glamour world are today the poster boys and divas of different realty firms, which are keen to encash upon their pan-Indian appeal and familiarity. From selling fast moving consumer goods to dream homes, the concept of brand ambassadors has become a rage in the country. It has emerged as a lowest common denominator item in advertising, to act as a kind of warrantor as well as differentiator in an uncertain and ‘me-too’ market.
So much so that real estate companies are roping in brand ambassadors to improve their brand connect, even if celebrities have no brand fit. For, the immediate objective of these developers is celeb-linked awareness building. They feel the endorsement news reaches the customers at a much faster pace than any other communication modes and creates an instant impact.
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While film actress Sushmita Sen happens to be the brand icon of Assotech Ltd, it is Mahendra Singh Dhoni in the case of Amrapali Group. Former actress Twinkle Khanna aka Tina, has joined the Supertech bandwagon to endorse their ORB project — a circular shaped 40-storeyed luxury homes development at Sector 74, Noida. After quitting her film career more than a decade ago, Twinkle has taken upon herself the design of this 50-acre property.
The reigning diva of Hindi film industry, Kangna Ranaut, has been roped in by Ajnara India to endorse its projects and in the case of Prateek Group, not one but two celebs are enhancing its brand image — Rajeev Khandelwal and Prachi Desai. Another real estate entity, Krrish Group has roped in dusky damsel Bipasha Basu to endorse its recently launched first project — Provence Estate in Gurgaon with apartments of an average area of 5,800 sq ft.
Some developers have chosen to pick regional celebrities for adding zing to their advertisement campaigns. Of late, two Kolkata-based real estate companies have roped in Bong celebrities — Konkona Sen Sharma in the case of the Eden Group projects and celebrated musician Bickram Ghosh and his actor wife Jaya Seal for Paharpur Pragnya Realty to endorse its upcoming project in Barrackpore. Significantly, the Ghosh couple happens to have also invested in a property in the company’s first project, Genxx Valley in Behala, located on the southern fringes of Kolkata. Well, the list of popular icons endorsing real estate companies is long-drawn, with newer faces being added to it, frequently.
It seems to have become difficult to market a real estate project without the endorsement of celebrities these days. With property prices touching the roof, real estate developers are pulling out all stops to lure customers. However, is selling a property costing `1 crore, as easy as selling a beauty product costing `50? Aren’t the basic parameters of transparency, credibility and honest delivery getting undermined in this process?
Says Ambi M G Parameswaran, executive director & CEO, Draftfcb+Ulka, “Real estate companies are trying the last trick in the book. In a parity market with a lot of clutter, a well-known celebrity can, of course, help a brand get recall and recognition. FMCG brands have been resorting to this trickery for many years. The big difference is the fact that FMCG products are, by and large, low involvement purchases. Apartments, on the other hand, are very high involvement purchases, so using celebrities for selling homes is at best a risky exercise.”
India being a celebrity-obsessed nation, celebrities can work in the realty sector just like in any other space. The main reason for more realty players to opt for celebrities is the expected rise in real estate prices. While an educated or savvy buyer may not be influenced by such exercises, but even in that circle, a buyer inclined towards films or sports wouldn’t mind getting swayed away by the star power.
Anil Kumar Sharma, CMD, Amrapali Group disagrees that that real estate firms bank more on celebrity endorsement than the important parameters of good quality, value for money and timely delivery. “I strongly believe that brand ambassador and company’s goodwill are intertwined. As Dhoni has to keep performing well as the captain of Indian cricket team, in the same way, we have to keep alive our customers’ trust by providing them properties in a given time-frame, fulfilling all parameters,” says Sharma.
So, do consumers really get influenced by the presence of brand ambassadors, while finalising their property purchase decision? “Frankly, we won’t buy a flat simply by seeing a celebrity as its ambassador. Of course, homes are a lifetime investment and there are many other factors that one has to look into before investing one’s hard earned money. We would want to invest with a credible developer who has a clean balance sheet and track-record. We adore Sachin Tendulkar, but that doesn’t mean that we will blindly buy a home endorsed by him,” say Hanoosh Kodakkat and Fariha H, an NRI couple living in UAE.
Likewise, Realty Plus quizzed over 50 customers looking to invest in real estate across India. Majority of them said that it would make little impact if a project is endorsed by a celebrity or not. They said that real estate is purely a different ball game and it is not advisable to invest lakhs or crores of rupees, simply charmed by brand ambassadors, when it is a known fact that they are paid for their job.
Disregarding Brand Fit
At another level, more often than not, the celebrity is remembered, while the brand is forgotten. “One must find out whether the brand positioning fits the usage of a celebrity or is it a forced affair? Sometimes, the credibility factor also is diminished by using an incongruous star. If the project has many USPs and salient features, spend the budget to communicate these features rather than wasting it on paying some star,” says Kunal Banerji, president marketing at M3M.
But, celebrity endorsement has started to fit in, as far as real estate industry is concerned, claims RK Arora, CMD, Supertech Ltd. “In my view, such endorsements help you gain the required attention of customers in the face of cut-throat competition, but still, the desired credibility comes from quality construction, good value for money and timely delivery of the project. We were more than satisfied with the response we received for ORB, which was endorsed by Twinkle Khanna.” Ananta Singh Raghuvanshi, director, DLF Homes strikes a balanced view, saying, “Irrespective of the industry, the power of celebrities in influencing the consumer’s purchase decision cannot be underestimated. It is an accepted fact that celebrity endorsement can bestow special attributes upon a product. However, if a celebrity can enhance the merits of a brand, in changing times, a reverse has been seen too. Moreover, the aspirational PR coverage and instant brand recall can invest a developer with a temporary credibility only.”
It is a moot question whether in today’s real estate market, cluttered with celebrity brand ambassadors, the buzz created by them ultimately helps clear up piling inventories and boosting sales.
Says Prashant Tiwari, MD, Prateek Group, “The so-called marketing mania works only for a new company which is little, or not at all, recognised. For creating a buzz about themselves or any new project which they might be planning to launch, these kinds of players suddenly hire the services of a brand ambassador. But the growth in sales can never be achieved by simply hiring famous faces.”
Agrees Pranav Ansal, chairman, Ansal API, “Roping in a celeb can help a company to grab the initial attention but ultimately it’s the 4P’s (price, product, place, positioning) that help to boost property sales. When a buyer makes a decision to invest in a project — quality, price and delivery top his list and if the product doesn’t meet these yardsticks, no amount of celeb value can influence the buyer’s decision.”
Good Strategy For Expansion
Once a nascent concept, celebrity endorsement has today become the trendsetter in the country’s real estate market. In Delhi-NCR alone, there are over 20 firms which rely upon celebrities to market their properties. While the trend is quite prevalent in Western and Northern parts of the country, Southern and Eastern regions have just a few celebrity-endorsed real estate firms and projects.
These variations apart, big real estate players have deep pockets and a face with pan-India appeal may help them when they expand their footprints.
Says Honey Katiyal, CEO, Investors Clinic, “Delhi–NCR based real estate developers are enrolling celebrities as their brand ambassadors for encashing their national status. With the expansion of real estate sector, the customer base has grown manifold, which has underlined the need to reach out to customers in a way that they become confident enough to buy houses, which normally cost a lifetime’s savings.” Katiyal’s company has ace cricketer Yuvraj Singh, now also an epitome of a courageous battle against disease, as its brand ambassador.
Pune-based company Amit Housing has recently signed master blaster Sachin Tendulkar as brand ambassador in a high-ticket deal, reportedly running into several crores. Does the company — with projects mostly in Pune or surrounding areas — really need Sachin’s iconic stature to sell projects regionally?
Reasons out Katiyal, “Celebrities choose the brand they promote very carefully. They bring in their rapport and goodwill to the company and help in giving initial boost to its services/products. Beyond that, however, what matters is the strength and performance of the company.”
Though high net worth individuals (HNIs) love to flaunt the luxury status of their homes, buying a home is an important investment that a middle-class family makes, which hinges upon value for money, appreciation potential and location of the property. While the concept of brand ambassadors does enjoy a degree of traction in ultra-luxury residential projects, there has been a “lack of success” when it comes to promoting mid-income housing projects through brand ambassadors in regional markets.
In southern India, where there is a greater fan following for film stars than other regions, there are just a few companies which have roped in a celebrity to sell their projects.
Bengaluru-based Oceanus Group has Mollywood star Mohanlal to endorse its projects. The company, which has several projects in Kerala, recently offered special discounts to celebrate the star’s birthday. Another Mollywood star Mammootty endorses Kochi-based real estate firm Pearl Infra, while cricketer S Sreesanth is the face of Mather Projects.
Avers Dr JMA Bruno-Mascarenhas, author of medical books, based in Chennai, “Here, I don’t think the trend is so prevalent. If I see a celebrity endorsing a project I would think that it will be overpriced because of the endorsement and may not further consider it. In South, people are more concerned about the basic parameters of realty development.”
Says Jim Phillip, assistant regional manager, ICICI Prudential Insurance, Kochi, looking to invest in residential real estate in the city, “Celebrity endorsement would definitely enhance the brand recall of a project. But when it comes to buying it, celebrity factor will have little influence over buyers like me.”
In the Eastern region of the country too, the market is extremely conservative where purchases are made by common sense, irrespective of brand ambassadors.
Glamour’s Grey Spots
Recently, well-known singer Yesudas was in a soup for allegedly promoting a Kochi-based real estate company called ‘Apple A Day Properties’ whose promoters are presently evading the arm of law after misappropriating investors’ money.
This is one of the grey areas of celebrity endorsement: fraudulent advertisements endorsed by celebrities. Shouldn’t the so-called brand ambassadors be held liable for issues like cheating in real estate or financial products?
This is what Bollywood actress Genelia D’Souza had to face when she was recently summoned by the Andhra Pradesh High Court to explain her role as brand ambassador in the controversial real estate project called ‘Anjaniputra.’
The episode points to the vexatious issue of dealing with cases of cheating involving a real estate project endorsed by a brand ambassador. While there are no easy answers to these questions, consumers must tread a cautious path while firming up their property purchase decisions.
While the celebs are fuelling a new trend in the realty space, their endorsements — be it at project level or company level — won’t come for cheap. Is the huge endorsement fee again a burden on the customer’s pocket? What will a customer get, if the project has or not been endorsed by a celebrity? Of course, only a home to live!
“Be it realty or any other segment, the fees charged by brand icons generally do not vary much. The cost depends on the type of celeb a company chooses. An SRK, Amitabh or Dhoni will cost more than someone like Neil Nitin Mukesh or Kailash Kher. One may get a reasonable rate from brand ambassadors for good, recognised national brands as compared to brands that aren’t very popular where the celeb may charge a premium,” says Das Blah, managing director, KWAN Entertainment. At times, says he, compensations are made in terms of property packages. “If an icon that has charged `5 crore, is offered a property worth `2 crore, I don’t think he will decline, given the ever-rising real estate prices.”
Interestingly, few listed companies are keen about doing promotional activities using celebrities.
Behind The Veil
While having celebrities to endorse a product might lead to an increase in property costs, another debatable issue pertains to the use of real estate endorsements by celebrities as a channel to route and park their unaccounted wealth.
“Today, many real estate companies are associated with people who have black money and other benami operations. Unlike Swiss Banks these days, properties are the best place to park your unaccounted wealth away from the glare of income tax sleuths. Yes, when a celebrity is roped in, there is obviously a brand connect but more than it, there are other hidden aspects to the deal as well,” explains a Delhi-based police official, who did not wish to be named. But, none of the developers we interviewed shared any financial details regarding their particular deal with their celebrity icon.
Anil Kumar Sharma of the Amrapali Group strongly denies the possibility of any behind-the-scenes transactions. “It’s an irrelevant question, there is nothing dubious involved in any of our deals with a celebrity. We spend money on marketing where these costs are included. The price of property remains the same and there are less chances of price appreciation because of brand ambassador.” “The ambassadors are chosen at the company level to boost its brand equity rather than selling just one project. It is done because a brand has to be associated with the overall vision of the company, which is always kept in mind in all the projects,” observes Katiyal, declining to share his company’s deal size with Yuvraj Singh.
Rakesh Mahajan, director, Nirala Developers, voices a similar view, “We are using our brand ambassador at the corporate level as we want to register ourselves in the mind of consumer as a brand rather than promoting a single project. Brand endorsement at the company level works better because once you have registered your brand then it becomes comparatively easier to promote respective projects.”
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Rounding Off
As for the overall efficacy of celebrity endorsement as a marketing strategy, no amount of it can help resolve a credibility issue like a negative image on delivery, quality and consistency of a real estate offering. The developer community has to steadfastly follow the basic rule of transparency, credibility and honest delivery as branding helps only when these parameters are ensured. In the ultimate analysis, a real estate entity’s brand name plays the most significant role, besides other aspects. The consumers have come of age and no amount of celebrity endorsement can woo them if the product lacks substance.
Tuesday, April 28, 2015
Real Estate Blues: What If The 'Builder' Disappears? The Biggest Risk Of Investing In 'Real Estate'!
In real estate we doesn't know how the situation becomes worst? Or when the economy plunges and investors goes in dark? When somebody dupes or when the fraud happens? We doesn't know. But how to combat the situation. INNLIVE takes you to get informed on preventive measures, techniques and more related information.Wednesday, January 07, 2009
Trends in the Indian Real Estate Market
By M H Ahssan
When Ram Kumar, a Non-Resident Indian brought a 1000 sq feet flat in Delhi, India for Rs 30 Lakhs in 2004, he thought he was over-paying for it. Today, not only has the value of the flat more than doubled, but Ram, who is based in Austin, Texas, is truly estatic, that for the first time, his real estate investments are giving him such a return. He has not only brought into upcoming projects but is also scouting for more. Says Ram “ This market have not even reached 20% of it’s potential. Any investment in real estate here is bound to be profitable.” That statement clearly sums up the Indian Real Estate Market. Going by recent trends the India properties market, is not only booming, but growing by leaps and bounds. Research data estimates that the Indian Real Estate Market is expected to grow from the current 14 billion dollars to a whopping 102 billion dollars in the next 10 years.
Since the September 11th attack in the US, investments in Indian markets have gathered pace. India has encouraged Non Resident Indians (NRIs) and Foreign Investors with tax incentives and relaxation of foreign direct investments (FDI) rules. The dramatic change in sentiments is clearly visible in India’s bulging foreign exchange reserves, which are at a record high of over 120 billion US dollars. And the Reserve bank of India has further relaxed the rules for NRIs with respect to repatriation of foreign exchange on real estate investments. Besides being a safe destination, India offers 15 to 25 per cent returns, perhaps the highest in the world. 30 per cent of all high major real estate transactions in Mumbai are accounted by NRIs.
Moreover, with increasing volatility in stock markets and falling interest rates, many investors have started considering investment in commercial and residential properties. The bottom-line is that this is the time to go shopping for property; as the market has started firming up already. As the organised market develops, real estate as an investment is one of the better options available today. In fact the main growth thrust is happening due to faourable demographics, increasing purchasing power, existence of customer friendly banks and housing finance companies, professionalism in real estate and favourable reforms initiated by government to attract global investors.
So which would be the potential growth areas to look for? The main growth sectors include residential real estate, commercial real estate, retail sector, industrial sector hospitality and healthcare sectors. The commercial real estate sector is led by the booming information technology and information technology enabled services industry. Estimated demand from this sector alone is estimated to be 150 million sq feet of space in cities throughout India by 2010.
In residential real estate there is a shortage of almost 20 million units, of which 7 million are in urban India. The increasingly organized retail sector is also a magnet for growth. With Mukesh Ambani controlled Reliance Industries and many other top industrial houses entering into organized retail in a big way, the growth potential is enormous. There has been a mushrooming of retail projects all over the country. The real estate investment sector has never had it so good. But it was not always like this.
Ever since India started liberalizing its economy, the international property investors' refrain has been that though the country opened up its most crucial infrastructure sectors to foreign investments, it is still reluctant to allow FDI in the property market. The government justified this by citing political and security compulsions. However, realizing the huge investment potential in India, Chesterton Meghraj estimates that the country will require investments of $24 billion over the next five years and that development of the real estate segment is crucial for its economic growth. The same belief led the erstwhile National Democratic Alliance government to permit as a part of the budget proposal, FDI in township development, information technology parks, special economic zones and hospitality sectors.
But many feel the liberalization was half-hearted. For instance, though the new policy allows a 100% FDI stake in a venture - which, incidentally, is allowed in few sectors - there are stumbling blocks in the form of clauses, such as a minimum lock-in period of three years before original investment can be repatriated, and a project completion mandate that a minimum of 50% must be completed within five years of possession of land. This is why there were few proposals in the initial years. But over the last six months, a slew of foreign construction groups have been seeking government clearance to invest in the country. A few major FDI proposals that have taken place include :
• Dubai-based Emaar Group has invested $100 million in a township project in Hyderabad that includes a hotel and a golf course.
• Jakarta-based Salim Group is to invest over $100 million in a 309-acre (124 hectares) township project in Kolkata. This Rs500 million ($11 million) project will be developed as a joint venture between Salim Group and the Kolkata Municipal Development Authority.
• High Point Rendel of UK, US-Based Edaw Ltd and Kikken Sekkel of Tokyo have teamed up to work on a township development project in Jharkhand.
• Canada-based Royal Indian Raj International Corporation is coming up with $791 million for Royal Garden City, a fully integrated township in Bangalore. The total development will include 35,000 residential units with an investment of approximately $2.9 billion and is scheduled to be completed by 2015 in various phases. This is the highest FDI investment till date.
• CESMA International Pvt Ltd, a subsidiary of the Singapore government's housing agency, along with the Andhra Pradesh state government, is promoting a township in Hyderabad.
• Lee Kim Tah Holdings (a Singapore-based company) with an investment of $115 million is developing a 100-acre mega township along with commercial complex and related social infrastructure near Mumbai.
• The Andhra Pradesh Housing Board has approved a 50-acre township in Vijaywada. CESMA International will construct houses and apartment blocks here.
• Malaysian developer IJM is working on a township spread across 35 acres in Hyderabad near Hi-tech City.
• Ho-Hup Construction Company Berhad is coming up with a 125-acre development project at Shamshabad in Hyderabad along with the Andhra Pradesh Housing Board.
• SembCorp Engineers and Constructors Pte Ltd, Singapore, is working on eight projects in Mumbai, Pune and Bangalore. The company has invested $50 million.
• Universal Success Enterprise Limited of Indonesia has signed a memorandum with Delhi-based developer Unitech Ltd for a $155-million information technology park and housing project in Kolkata.
• Singapore's fifth-biggest property group, Keppel Land Ltd, made its first foray into India after buying land in India's software capital Bangalore for $13 million. Keppel Land, which is partnering Puravankara Projects Ltd, is developing the first phase of a condominium project located in an area known for high-tech campuses. It will be launched in early 2006.
• Singapore-based Evan Lim & Co Pte Ltd is associated with a township development project in Visakhapatnam, Andhra Pradesh.
More over, land in India is mostly freehold land. In fact certain important markets like Mumbai in Maharashtra are seeing a dramatic increase in land availability as textile mills lands in the heart of the city are opened up to redevelopment.
The other big opportunity, say industry sources, is the involvement of state governments in large-scale government projects like development of the surplus land of Mumbai Port Trust or that of sick public sector firms. State governments have realized that they can make more money if they get into joint ventures with private developers than just selling the land. This is an ideal opportunity for foreign investors because such arrangements reduce entry-level costs.
But not all real estate investments are so easy. In India, it is very difficult to find large plots near big cities. Foreign investors prefer to stick to larger cities because returns there are more lucrative.
Moreover, a minimum lock-in period of three years from completion of a project is mandated, which nullifies an investor's flexibility to play around with the time frame or phasing the project when circumstances get beyond control. The other problem that acts as a dampener for foreign investors is the insistence of local financial institutions on a personal guarantee from property developers over and above the land as collateral. Another problem is that local banks and financial institutions also tend to loosen their purse strings when property prices are rising because that raises the value of their collateral, but when prices fall, they pull out, triggering a bust.
Still, all agree that the potential of India's real estate sector is huge. It is one of the most attractive markets for two reasons. One, with a billion-plus population, the opportunity is huge; no other market is going to witness this kind of growth both in commercial as well as residential and retail markets. Two, the industry has an average rate of return on capital in excess of 30% and it is not unusual for local developers to achieve IRR of as much as 50%. Clearly, India rocks in real estate. You cannot disagree.
When Ram Kumar, a Non-Resident Indian brought a 1000 sq feet flat in Delhi, India for Rs 30 Lakhs in 2004, he thought he was over-paying for it. Today, not only has the value of the flat more than doubled, but Ram, who is based in Austin, Texas, is truly estatic, that for the first time, his real estate investments are giving him such a return. He has not only brought into upcoming projects but is also scouting for more. Says Ram “ This market have not even reached 20% of it’s potential. Any investment in real estate here is bound to be profitable.” That statement clearly sums up the Indian Real Estate Market. Going by recent trends the India properties market, is not only booming, but growing by leaps and bounds. Research data estimates that the Indian Real Estate Market is expected to grow from the current 14 billion dollars to a whopping 102 billion dollars in the next 10 years.
Since the September 11th attack in the US, investments in Indian markets have gathered pace. India has encouraged Non Resident Indians (NRIs) and Foreign Investors with tax incentives and relaxation of foreign direct investments (FDI) rules. The dramatic change in sentiments is clearly visible in India’s bulging foreign exchange reserves, which are at a record high of over 120 billion US dollars. And the Reserve bank of India has further relaxed the rules for NRIs with respect to repatriation of foreign exchange on real estate investments. Besides being a safe destination, India offers 15 to 25 per cent returns, perhaps the highest in the world. 30 per cent of all high major real estate transactions in Mumbai are accounted by NRIs.
Moreover, with increasing volatility in stock markets and falling interest rates, many investors have started considering investment in commercial and residential properties. The bottom-line is that this is the time to go shopping for property; as the market has started firming up already. As the organised market develops, real estate as an investment is one of the better options available today. In fact the main growth thrust is happening due to faourable demographics, increasing purchasing power, existence of customer friendly banks and housing finance companies, professionalism in real estate and favourable reforms initiated by government to attract global investors.
So which would be the potential growth areas to look for? The main growth sectors include residential real estate, commercial real estate, retail sector, industrial sector hospitality and healthcare sectors. The commercial real estate sector is led by the booming information technology and information technology enabled services industry. Estimated demand from this sector alone is estimated to be 150 million sq feet of space in cities throughout India by 2010.
In residential real estate there is a shortage of almost 20 million units, of which 7 million are in urban India. The increasingly organized retail sector is also a magnet for growth. With Mukesh Ambani controlled Reliance Industries and many other top industrial houses entering into organized retail in a big way, the growth potential is enormous. There has been a mushrooming of retail projects all over the country. The real estate investment sector has never had it so good. But it was not always like this.
Ever since India started liberalizing its economy, the international property investors' refrain has been that though the country opened up its most crucial infrastructure sectors to foreign investments, it is still reluctant to allow FDI in the property market. The government justified this by citing political and security compulsions. However, realizing the huge investment potential in India, Chesterton Meghraj estimates that the country will require investments of $24 billion over the next five years and that development of the real estate segment is crucial for its economic growth. The same belief led the erstwhile National Democratic Alliance government to permit as a part of the budget proposal, FDI in township development, information technology parks, special economic zones and hospitality sectors.
But many feel the liberalization was half-hearted. For instance, though the new policy allows a 100% FDI stake in a venture - which, incidentally, is allowed in few sectors - there are stumbling blocks in the form of clauses, such as a minimum lock-in period of three years before original investment can be repatriated, and a project completion mandate that a minimum of 50% must be completed within five years of possession of land. This is why there were few proposals in the initial years. But over the last six months, a slew of foreign construction groups have been seeking government clearance to invest in the country. A few major FDI proposals that have taken place include :
• Dubai-based Emaar Group has invested $100 million in a township project in Hyderabad that includes a hotel and a golf course.
• Jakarta-based Salim Group is to invest over $100 million in a 309-acre (124 hectares) township project in Kolkata. This Rs500 million ($11 million) project will be developed as a joint venture between Salim Group and the Kolkata Municipal Development Authority.
• High Point Rendel of UK, US-Based Edaw Ltd and Kikken Sekkel of Tokyo have teamed up to work on a township development project in Jharkhand.
• Canada-based Royal Indian Raj International Corporation is coming up with $791 million for Royal Garden City, a fully integrated township in Bangalore. The total development will include 35,000 residential units with an investment of approximately $2.9 billion and is scheduled to be completed by 2015 in various phases. This is the highest FDI investment till date.
• CESMA International Pvt Ltd, a subsidiary of the Singapore government's housing agency, along with the Andhra Pradesh state government, is promoting a township in Hyderabad.
• Lee Kim Tah Holdings (a Singapore-based company) with an investment of $115 million is developing a 100-acre mega township along with commercial complex and related social infrastructure near Mumbai.
• The Andhra Pradesh Housing Board has approved a 50-acre township in Vijaywada. CESMA International will construct houses and apartment blocks here.
• Malaysian developer IJM is working on a township spread across 35 acres in Hyderabad near Hi-tech City.
• Ho-Hup Construction Company Berhad is coming up with a 125-acre development project at Shamshabad in Hyderabad along with the Andhra Pradesh Housing Board.
• SembCorp Engineers and Constructors Pte Ltd, Singapore, is working on eight projects in Mumbai, Pune and Bangalore. The company has invested $50 million.
• Universal Success Enterprise Limited of Indonesia has signed a memorandum with Delhi-based developer Unitech Ltd for a $155-million information technology park and housing project in Kolkata.
• Singapore's fifth-biggest property group, Keppel Land Ltd, made its first foray into India after buying land in India's software capital Bangalore for $13 million. Keppel Land, which is partnering Puravankara Projects Ltd, is developing the first phase of a condominium project located in an area known for high-tech campuses. It will be launched in early 2006.
• Singapore-based Evan Lim & Co Pte Ltd is associated with a township development project in Visakhapatnam, Andhra Pradesh.
More over, land in India is mostly freehold land. In fact certain important markets like Mumbai in Maharashtra are seeing a dramatic increase in land availability as textile mills lands in the heart of the city are opened up to redevelopment.
The other big opportunity, say industry sources, is the involvement of state governments in large-scale government projects like development of the surplus land of Mumbai Port Trust or that of sick public sector firms. State governments have realized that they can make more money if they get into joint ventures with private developers than just selling the land. This is an ideal opportunity for foreign investors because such arrangements reduce entry-level costs.
But not all real estate investments are so easy. In India, it is very difficult to find large plots near big cities. Foreign investors prefer to stick to larger cities because returns there are more lucrative.
Moreover, a minimum lock-in period of three years from completion of a project is mandated, which nullifies an investor's flexibility to play around with the time frame or phasing the project when circumstances get beyond control. The other problem that acts as a dampener for foreign investors is the insistence of local financial institutions on a personal guarantee from property developers over and above the land as collateral. Another problem is that local banks and financial institutions also tend to loosen their purse strings when property prices are rising because that raises the value of their collateral, but when prices fall, they pull out, triggering a bust.
Still, all agree that the potential of India's real estate sector is huge. It is one of the most attractive markets for two reasons. One, with a billion-plus population, the opportunity is huge; no other market is going to witness this kind of growth both in commercial as well as residential and retail markets. Two, the industry has an average rate of return on capital in excess of 30% and it is not unusual for local developers to achieve IRR of as much as 50%. Clearly, India rocks in real estate. You cannot disagree.
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