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One of the major investment growth sectors is India's dynamic hospitality industry. A quick snap-shot:

Consistent growth in tourist and business travelers to India. Based on the World Travel and Tourism Council report, India is ranked 5th among the world's tourist hot spots - growing at 8.8% annually.

Government is expected to spend some 150 billion US dollars in tourism related infrastructure over the next five years.

Research on Indian hospitality shows some 67,000 new hotel rooms are to be added between 2007-2011 in major markets alone. That includes Delhi, Mumbai, Bangalore, Goa, Chennai, Hyderabad, and Kolkata. Of this, more than 1/3rd is expected in the mid-market segment, approx. 28% in the first class segment, and some 20% in the luxury segment. Despite this several fold increase in new hotel supply, it is expected that total supply of hotels rooms by 2015 will still be lagging behind projected demand.

Occupancy rates for hotels in India are among the highest in the world, with Average room rates doubling in the four year period ending 2007. Average room rates for key Indian cities like Delhi and Mumbai are already approaching the levels of mature markets such as Singapore and Hong Kong.

The growth prospect in other areas of the real estate industry looks equally promising. Industry estimates indicate some 1.5 to 1.8 billion square metres of residential, commercial, and retail real estate are to be developed by 2010, of which around 1.4 billion square meters will be in the residential sector alone.

The other side of the coin?

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Even if an agreement between the two parties was silent on providing the amenities, it will be binding on a builder to give facilities which he had promised in the brochure, observed forum president Pradip Gaikwad and member Sulabha Joshi on July 16.

The order was passed on a complaint filed by senior citizen Parshuram Redij of Vijaya Rashmi Residency at Warje Malwadi.

Redij had filed a complaint against M/s Vijaya Rashmi Developers and its partners comprising Marathi actor Ravindra Mahajani of Paud road, Arun Nikam and Harishchandra Nikam, both from Kothrud, for deficiency in service. The firm had published an advertisement in a Marathi daily for undertaking a project at S.No. 43/5 at Warje Malwadi, where it had assured several facilities. Lured by the promises, Redij booked flat no. 4 in the A wing of the building for Rs 6,14,250.

After Redij took possession of the flat on October 30, 1999, he discovered that the promises made by the builder in the brochure that he would construct an internal road, garden, club house, swimming pool and security cabin after the completion of the project were not fulfilled. On various occasions, the senior citizen took up the issue with the firm and its partners. He appealed to them in vain that the needful should be done. Moreover, the flat owners suo moto registered the society by shelling out Rs 75,000.

Rs. 300 crore will be invested in commercial projects in Pune and Rs. 300 crore will be invested in affordable housing projects (Rs. 10 lakhs - Rs. 25 lakhs per unit) in Maharashtra (in Nagpur, Nasik, Pune and suburban towns/ districts of Mumbai). In addition, Milestone is also actively considering a few investment proposals from Nasik.

Rs. 200 crore is being earmarked for development of Logistics Parks across Maharashtra.

Elaborating on the choice of cities, Ved Prakash Arya, Managing Director of Milestone Capital Advisors said that Pune has emerged as a favored destination for the IT/ITES sector. This has led to an explosive growth in the real estate markets, with prices rising by almost 200 per cent in three years. "We therefore believe that in Maharashtra, Pune presents among the best opportunities for a good return on our investment. We believe Pune is ripe to have low cost (Rs. 10 - 25 lakhs) affordable housing integrated township projects," Mr. Arya said.

Darshan Hiranandani, managing director, Hircon International, told FE, "With the Dubai market being buoyant for real estate growth, we are focusing at setting up properties in Abu Dhabi as well." Damac Properties, which is in the midst of development of residential and commercial projects in Dubai, claims while the UAE's construction industry continues to boom in parallel with rising oil prices, the future is bright for both sectors. Peter Riddoch, CEO, Damac Properties said, "As long as effective forward planning methods are used and innovative ways of sourcing construction materials are adopted the construction industry in general and Damac Properties in particular can continue to benefit from the billions of dollars of capital coming its way."

All signs point to a typical credit crisis. The perceived risk-reward equation for investing in the domestic realty market is turning awry and seems likely to keep foreign investors at bay, at least in the near future. Following the global cash crunch, one of the major causes of concern for established and emerging real estate firms is to organise financing for ongoing, as well as upcoming projects.

The bloodbath in the stock market has impacted the Indian real estate sector, as a majority of large developers are now finding it difficult to complete ongoing projects. Their shares have tumbled after the RBI's decision not to cut interest rates. Share prices of most listed real estate firms, for instance, fell by nearly 50% from their 52-week highs and are seeing a bearish trend; I fear a further downslide by the time this article goes to print.

The dismal situation in the real estate market is, in fact, reflected in the Asia-Pacific region as well. Indiabulls Real Estate is performing below expectations, while Unitech has had to put on hold its IPO plans for its real estate investment trust (REIT) in Singapore. With the current situation not likely to change very soon, DLF has also delayed its plans for a Singapore REIT listing.

On the domestic front, the Reserve Bank of India (RBI) has declared the real estate space a sensitive sector under its prudential norms. In tune with the rising cost of funds and the need for additional capital for risky assets, banks in India have increased their lending rates for real estate projects. The prime lending rate (PLR) of most public sector banks is in the 12.25-12.75% band, in comparison with last year's rate of 10%. Since banks have to set aside a comparatively higher amount of capital for real estate exposure, compared to other sectors, the sector attracts higher risk weightages and lending becomes closely monitored. Banks have also begun to ask for higher contributions from promoters and developers as a precautionary measure to safeguard themselves against loans. Given the inflationary squeeze that the current government is facing, it is likely that monetary policies will put more pressure on already-high interest rates. That, by no means, is good news.

According to the sectoral deployment data issued by the RBI in the first quarter, the banking sector lent Rs 53,897 crore to the real estate sector as of February 15, 2008. Year-on-year growth in credit deployment for the current period stood at 26.7% (Rs 17,361 crore) as against 79% (Rs 18,770 crore) a year earlier. Credit deployment in the housing sector too decelerated from 25.8% last year to 12% in the current period.

The rating agency foresees delays in many ongoing and planned real estate projects, thereby leading to the possibility of sale of projects or even enterprises. This will result in some consolidation in the sector. From among the larger developers, those that are not over-leveraged operationally are well placed to tide over the current crisis and even emerge stronger.

Increasing real estate prices over the last three to four years resulted in a large number of developers acquiring land at high rates in anticipation of a further increase in prices, and scaling up their operations multifold. While some developers have managed to finance this growth through a prudent debt-equity mix, most medium-sized and small developers have relied heavily on debt.

The current situation exposes the pitfalls of such a strategy. There has been a slowdown in the sale of real estate projects across India since early 2008, across the residential, commercial, and retail segments. Demand has moderated with the sharp increase in real estate prices, coupled with rising interest rates that have made housing loans progressively expensive. In particular, residential projects, which have been funded largely by customer advances, have been severely hit by the slowdown in bookings.

Jain's predicament is not an isolated one. Several thousands prospective homebuyers and investors across the country too are playing the waiting game. "Over the last two years, the percentage of investors seeking home loans has dipped from 70% to 30%," says an executive in charge of home loans at Reliance Money. "The number of borrowers has reduced by 50-60%," says another executive at ICICI Home Finance.

Bankers have started looking elsewhere for new business. "The home finance segment is getting tight. We are trying to focus on higher-margin businesses such as mortgage loans," says a credit manager at a leading private sector bank. And for many public sector banks, investing in real estate has become a risky proposition, says Ankur Srivastava, a real-estate consultant.

Home loan rates have moved in tandem with the prime lending rates of major banks. The benchmark lending rates at these banks and home finance companies have increased by 50-75 basis points, following hikes in the repo rate and the cash reserve ratio, announced by the Reserve Bank of India recently to stem inflationary pressures. In fact, floating interest rates for home loans are now at 11-12.5%, as against 7.5% in 2005.

These interest rate hikes have fuelled delinquencies or loan defaults, mainly among salaried borrowers, Kamlesh Rao, Executive Vice-President (Personal Finance), Kotak Mahindra Bank points out. Over the last six to eight months, delinquencies have gone up by 15-20% across the industry, Rao says. "It's time to go back to the basics after three good years," he cautions.

The cracks are beginning to show, and the three-year boom story in the real estate graph may just be on its way down. A spiky inflation scenario, creeping interest rates and rising construction costs brought on by sky-rocketing prices of inputs are preying on cash-strapped developers who have to contend with sluggish demand. Projects and payments to suppliers are both getting delayed--a sure shot sign of troubled times.

"If sales do not pick up in the last three months of the year--the festive months--another round of price correction could be in the offing in the first quarter of next year," says a senior executive at a Delhi-based mid-sized real estate firm. Secondary markets are beginning to feel the heat of sluggish sales. They have seen prices drop by at least 15% in residential projects. The story in major metros is only slightly different, although it varies only in degrees.

Although most large developers have retained their pricelines in the primary markets, their margins have come under pressure. Small developers are driving the price correction as they usually bring more mid-segment housing projects to the table. Recently-announced residential projects in Gurgaon, Noida and Chennai have witnessed price corrections. Where the asking rate was Rs 4,000-5,000 per square feet, it has now fallen to Rs 2,200-3,500 per sq ft. "Developers may have to cut prices, but in specific pockets," says Mayur Shah, Managing Director of the Mumbai-based Marathon Group.

The retail juggernaut sweeping the country is also in for some hard knocks. As retail tenants scream out for more realistic rentals, fresh supply--with 350 new malls on the drawing board--is expected to ease the pressure on demand. Developers say high rentals mean most tenants are not making money, and this model is unsustainable in the long run. Pranay Sinha, who specialises in the shopping centre business, feels fresh supply will bring rentals in malls crashing down by as much as 50% over the next two years. Already, some malls in Gurgaon are getting converted to commercial office complexes, he says.

Metro story
The downward spiral in residential prices, however, has not been uniform across the country, analysts say. For instance, real estate prices in South Mumbai have increased by 8-10% in the last six months owing to short supply.

The economy may be slowing down but real estate rentals in Mumbai are showing no such signs. A lack of quality office space in the city continues to push rentals up. Developers in Mumbai are increasing lease values.

The office space at Lower Parel in Mumbai is set to add another 1.4 million square feet over the next 6-9 months. The project by Indiabulls, which was launched last year is expected to be completed by then. The company is also building 2 lakh square feet of retail development here.

Sources say that while Reliance Capital and India Info line have taken up 1,60,000 sq ft and 1,50,000 sq ft of office space each, the Aditya Birla Group has absorbed 1,20,000 sq ft of space here. Some other companies are believed to have taken up over 1-lakh square feet in this project, taking the total leased out space to 7 lakh square feet.

Till about a month ago, Indiabulls was leasing out space in this project for less than Rs 300 a square feet a month. But, sources say, the company is now commanding rentals between Rs 350-400 a square feet.

At the end of May, the Magarpatta Township Development and Construction Company announced a spanking new housing project on Sinhagad Road, an area that, till not so long ago, was referred to as `city outskirts'.

A month on, the first phase of 5,800 apartments, of 20,000 planned, is fully sold out. Ditto the case with other several other projects, including the Blue Ridge Township at Hinjewadi from Paranjape Schemes that has seen robust sales in the last few months.

Even as industry experts across the country are forecasting an imminent steep decline in the capital values of residential properties, Pune seems to be defying the trend. Leading builders and developers in the city dismiss suggestions that the prices of apartments are heading for a sharp drop, maintaining that the demand is steady, and still outstrips supply.

Not hot, for speculators

"Yes, there was a drop in volumes of sales around March 2007," concedes Mr Lalit Kumar Jain, Chairman and Managing Director, Kumar Builders, and President, Promoters and Builders Association of Pune (PBAP).

Therefore, the need to be careful while investing in real estate is important. Now, you could choose the direct method or a via media through several private funds available in India and overseas. But the critical factor to remember is that transparency in India, for real estate deals, is still dismal.

Tread carefully
In a country where archaic laws, land banks, disappearing builders, high interest rates, ridiculous taxes, and swinging prices rule the roost, treading carefully in the world of real estate is advisable.

Amongst the many laws that have been steadily ruining this nation, the 1976 'Urban Land Ceiling Regulation Act' is one amongst them. This act, which is still applicable in many states, was originally designed  to ensure a more equitable distribution of land. However, this hampered the process of sale and reuse of urban land that they ended up helping in raising land prices. One of the Act's main provisions includes setting a limit on the ownership of vacant land, so as to provide cheaper land to poor communities. As such, the Act gives power to state governments to acquire any excess vacant land above the limits set by the Act, to regulate the transfer of ownership of the vacant land, and distribute it according to the common good. Under the Act, individual states are authorised to grant exemptions depending on the category of land. However, all this act ended up doing was to give too much power to state governments, lock up large portions of land in never-ending legal battles resulting in an unduly low supply of land for housing and development, and boosting land prices, particularly in the larger cities.

Then there is the stamp duty of 5-14%. This is high when compared to most countries around the world have a duty of barely 1-2%. High stamp duty coupled with property taxes, have caused many buyers from shying away to register their property deals, says experts.

So the need to be careful while transacting becomes important. Transfers through the 'power of attorney' route are increasingly common, and is another used trick by investors. This too only adds to the already opaque nature of our real estate markets since even tracking deals has become a challenge.

Most builders still have a very high cash transaction ratio. This not only undermines the paper value of the property you buy, but also puts you through the trouble of having to come up with large amounts in cash, sometimes as high as 50-70%. These cash-based transactions are typically routed through various shell companies.

In India, one never knows till the fat lady sings, if a property deal is finalised or not, says a real estate guru, not wanting to be named. Buyers very often invest money on undeveloped and developing projects of builders, as they are able to acquire the property at a cheaper rate, then when the project is complete. While this is essentially a punt taken by many investors, in the current scenario doing so is ill-advised.

A multitude of approving agencies for planning permission also boosts costs and adds time  to development. While this is one of the reasons to be careful, more importantly in today's real estate scenario, there are major changes taking place. With these changes, most of the smaller and medium-sized developers will be sidelined and may all together be eliminated.

• Transparency factor
  
• Falling prices

This has been a miserable year for Indian property stocks. Rising inflation and interest rates have delivered a double whammy: Capital is more expensive, and consumers are scaling back spending.

"The real-estate sector has been witnessing a cash crunch," says Shaleen Silori, a real-estate associate at ICICI Securities in Mumbai. As a result, real-estate stocks have taken a bashing. So far in 2008, shares of key players DLF and Unitech have skidded 58% and 61%, respectively. In compari- son, India's benchmark index, the Bombay Stock Exchange's Sensex, is down 33%.

Property firms have been hit hard because they are vulnerable to a downturn from two directions. Borrowing is becoming more expensive as interest rates rise. At the same time, raising fresh funds in equity markets isn't easy either: India's market for initial public offerings is lackluster and both Unitech and DLF have delayed plans to raise money through real estate investment trust issues in Singapore.

More expensive credit can be a particular problem for property companies, because they often borrow a large portion of their land development outlays upfront and depend on advance sales to repay their loans. But on the demand side, rising inflation--running at an annual rate of 11.89% for the week ended June 28--and higher interest rates, which have jumped to 11% from 7.5%-8% three years ago, mean many consumers are putting real estate purchases on the back burner. A rise in mortgage rates would affect residential property off-take and lead to delay in some project launches, say analysts at Macquarie in Mumbai.

Meanwhile, costs for steel and cement, two key building materials, have been rising.

Given that gloomy environment, some sector watchers say that investors should stick with India's biggest real estate companies, whose shareperformance they expect to improve over the longer term.

"DLF is a real estate company with relatively greater stability," says Deven Choksey, managing director of K.R.

Choksey Securities in Mumbai.

Delhi-based DLF is well diversified, selling property in the housing, commercial, multiplex and retail sectors, he notes. DLF is also adequately capitalized, Mr. Choksey says, and "provides a robust business model." Last week, DLF's board approved an 11 billion rupee ($255 million) share-buyback plan aimed at boosting investor confidence after the stock price fell below its initial public offering level. The plan involves a buyback of 22 million shares at a maximum price of 600 rupees each. Prior to the board's approval, some investors reacted negatively when Macquarie said in a report that it felt the proposed buyback was negative for DLF's cash flow. On July 3, DLF shares tumbled 9.9%.

What are the challenges facing the real estate sector? Also, what opportunities and trends do you see in the property market?
The biggest challenge today is the interest rate on home loans. It has gone up from 7.5% to 10:75% and this has obvi-ously shocked the home buyers whose budgets have gone haywire. As a result,ments or waiting for interest rates to fall.There had been a slowdown for a while.But with the inflation going up, interest rates are not coming down and hence people have started buying again. Neither the land prices nor the construction costs are showing signs of any decline costs are showing signs of any decline and so there is no question of price correction. Building costs are high and there can be no lowering of prices. People are realizing this and are buying. I have noticed in the last two months that transactions have picked momentum.

The opportunities in the real estate sector are infinite. There is a huge growth potential and those who are worthy should take up the challenge.

With soaring real estate prices,there is much talk of affordable housing. You said you will consider yourself to be a professionally successful in true sense only when you are able to deliver houses with an EMt of Rs 750- toRs 4,000. Is this possible and practical?
It has to happen. Market needs have to be met. With support from the government along with right effort, right strategy and right research, this will hopefully be soon possible. Mass affordable housing is indeed very challenging. One has to work within the budget cost and deliver to the market what market wants. For all that,weneed to tightenour belts.

What is the USP and growth strategy of your group?
We have four verticals IT!retail, residential'townships and the mass affordable
housing. We are fully nurturing all the four and want to do better every year. I hope that my delivery exceeds the market expectations. We have been firmly grounded and have an excellent reputation of delivery. People have immense
trust in us.

What are the current projects that you're focusing on?
We are quite active in commercial real estate. We are coming up with a huge children's mall titled Kidopia near Saras Baug, Pune. Also in the pipeline is a large mall (1.6 million sq ft) on Karve Road. An ITSEZin the heart ofHinjewadi has been planned too.

On the residential front, we are launching three major townships near Hinjewadi and Kharadi and that is what is hot and happening for us this year. Also our existing projects like Kumar Kruti,
Kumar Shantiniketan and Sublime are doing well, along with our other projects in Mumbai.

Kumar Shantiniketan is a mega town- ship on Baner Pashan link road housing 375 luxury flats, Shantiniketan is built on the ethos of Rabindranath Tagore's world renowned Shantiniketan. A veritable green paradise with an abundance of water bodies, this modem edifice enjoys the best comforts in natural environs.

Kumar Kruti in Kalyani Nagar offers homes that have been culled from 39 years of our home building experience and Sublime has spacious three-side open terrace apartments in Kondhwa.

VC Circle: How are you reading the macro situation right now? Are you nervous as a real estate investor?

Dalmia: I am a bottom up investor, and not a top down investor. That said, if the macro environment is a little slower, the projects will be slower. For instance, if the rupee appreciates, there will be a slowdown in IT and there will be a slowdown in IT related employment and therefore housing catering to that sector. That's a macro view. So, now we need to have a bet on the rupee because it affects housing demand indirectly. So, we try to blend the top down view with the bottom up view, but an 80% of our thinking is based on a bottom up view.

VC Circle: The Reserve Bank of India recently raised borrowing rates to the highest in more than six years. How do you see high interest rates affecting housing demand?

Dalmia: Interest rates will affect demand. It will also affect our margins because our interest costs will go up. I think that is a reasonably big variable, which means we look at higher margin projects and if we don't get higher margin ones, we simply don't do it.

VC Circle: What are your other concerns in the current macro environment? Isn't inflation a threat?

Dalmia: Inflation, buying power of the consumer, interest rates, change of government, upcoming elections, and therefore, the macro management of the economy, all remain concerns. Even though the demand is real, there is too much supply. A lot of them have gone into the hands of speculators. So the problem lies on the supply side. The demand is growing reasonably. The projects, which have been conceived well, are doing well and will continue to do so.

VC Circle: Do you think the Indian real estate market has corrected?

Dalmia: The stock valuations of the real estate companies have corrected by 40-50%. I think real estate market is seeing a correction now. The key word is quality. There are 200 developers, and 70% of them will disappear. Players who are not serious will disappear. In 1985, believe it or not, there were 200 petrochemical players in India and only some 20 petro chemical players have survived since then. A similar shakeout will happen (in real estate).

The slowdown would mainly affect the smaller real-estate companies while increasing the relative strength of some large players, the report said.

"The slowdown will also aid the process of weeding out some of the weaker entities within the sector and increasing the relative strength of some of the larger, more established developers," Fitch said.

Besides, high liquidity risks on account of significant repayments falling due in the present year would remain as a key challenge across the board, the rating agency said.