Real Estate

Strong economic growth has led to rising incomes, better availability of attractive home loan options, wide range of supply and growing aspirations. All these factors have made home buying an attractive proposition. In fact, in metropolitan cities, it is not uncommon to see young professionals aspiring to own more residences than the one they reside in, thus leading to a 'second homes wave' in the country.

Second homes in India is a relatively new phenomenon that emerged post the liberalisation of the Indian economy, and gained steam in the mid-1990s as the country went through its first real estate upswing. No single factor can be attributed as the driver of the second home wave; rather, it was a combination of a host of converging factors that led Indian homebuyers to explore second home purchases.

Some of these factors include strong economic growth, emergence of an upwardly mobile consumer class, rising aspirations, real estate as an attractive investment option, improved real estate transparency levels, wider options to choose from, availability of high-quality residential formats, competitive home loan rates, flexible loan financing and increased NRI buyer interests. All of these factors and a few more, led to the initial wave of second homes in India.

In an attempt to understand the parameters that determine the choice for second homes, Homebay Residential conducted a dipstick survey within its client profile to arrive at ten indicative choice determinants for second homebuyers. It is important to note here that these choice parameters are indicators of what buyers typically look for while buying second homes and can change depending on client types, preferences, budgets and locations.

1.Location providing astounding topography and serenity

2.Provision of recreational opportunities like golf course, ski lifts and private yachts, etc.

3.Good accessibility, particularly from the airport

4.En suite maintenance facilities and good property management services

5.Local infrastructure quality

6.Assurance of security

7.High-quality architecture & design

8.New genre of living having exclusive and unusual themes

9.Good investment prospects in terms of rental income and capital value growth

10.Ease of exit

Over the years, the variety of newly built second homes in India has increased quite substantially. Today, one can choose from a host of options, both in terms of geography as well as the format.

• Urban fringe Homes:
  
• Looking Ahead:
  

The 'Investor Survey Sentiment', conducted by global real estate consultancy Jones Lang LaSalle in association Cityscape 2008, the real estate exhibition currently under way here, found that while the UAE will offer the best performing real estate market in the next couple of years, Saudi Arabia will be the next best performer.

The results of the survey were arrived at after taking the views of 350 developers, sovereign wealth funds and high net worth investors, Jones Lang LaSalle said in a statement.

Over 50 percent of the respondents believe the real estate markets in the Middle East will see the strongest performance of any region worldwide over the next two years.

India and China, too, have a strong outlook with 20 percent of the respondents believing these two markets will make the Asia Pacific the best performing market.

"Sentiment is a critical component when considering the health of any market," Blair Hagkull, Jones Lang LaSalle's managing director for the Middle East and North Africa (MENA), said in the statement.

"It is an important barometer, a key assessment criteria for any investor and the ideal gauge for considering future prosperity," he added.

The survey, according to the consultancy, is the most up-to-date as it was conducted after in the aftermath of US investment bank Lehman Brothers' collapse.

According to the survey, investors in the region are least positive towards west European real estate markets, with only 3 percent expecting this to be the strongest performing region.

Most Middle Eastern investors do not believe the US and European markets will witness a major improvement in performance in the short term.

Talking to presspersons at the PBAP exhibition, Jain noted that liquidity is bothering developers as most banks were not lending money to most developers even for construction.

He pointed out that this had severely affected cash flows and the only source remaining was customers.

FDI cash
The rates in the open market were also high as also the FDI, which is at 25 to 35 per cent internal rate of return. The FDI investment in the country is about $7 billion, of which only about $200 million to $300 million had been used up in Pune.

Jain also pointed out that the panic button pressed by the Reserve Bank of India to control inflation and reduce growth seemed farfetched. "The biased approach of the bank towards real estate is unwarranted and unjust. Making home loan costlier is only creating resentment among urban population," he said.

He noted that instead of increasing the supply of residential tenements through proactive policies, the Central and State Governments were making tenements costlier by introducing various taxes (37 per cent cumulative) and levies as well as interest on project loans, pushing developers to borrow from market or costly FDIs, ultimately increasing cost of tenement.

Cost factors
Jain said scarcity of skilled labour and recent developments to discourage outside labourers have also resulted in delays and increase in construction costs, 60 per cent year-on-year on labour cost.

The increasing material costs (barring small seasonal corrections) had made construction costs go up almost 40 per cent year-on-year.

This exhibition is expected to draw more buyers because the overheated real estate market has seen a correction.

"The market had heated up by 200 per cent. A correction was overdue. Now investors have exited and end users are buying houses," State Bank of India Deputy General Manager Arun Kumar Agarwal told reporters.

State Bank and MCHI are organising the exhibition. The demand-supply gap is estimated at 25 million houses, which is expected to go up, he said.

At the end of 2007, the Planning Commission in its report had said there is a shortage of 24.71 million homes.

The prices of commodities have come down by 30 per cent, MCHI President Pravin Doshi said. With the lean period of June, July, August, September behind, Doshi expects sales to pick up in the coming months.

Key real estate players like DLF, Ansal API, Omaxe, Unitech, Puravankara, Matheran Realty, Indu Projects, Shriram Properties, Jain Heights & Structures, Shapoorji Pallonji and Hiranandani Constructions are shifting their focus from luxury segment to mid-segment and affordable housing.

Niranjan Hiranandani, MD, Hiranandani Constructions, said, "We are now planning to develop affordable housing projects in Pune and Ahmedabad (between Rs 15 lakh and Rs 30 lakh for two and three BHK flats). Our ongoing construction of affordable housing projects in Thane (Rs 40 lakh-Rs 70 lakh) and Panvel (Rs 40-Rs 55 lakh) is on in full swing and we want to make sure to give possession to buyers as soon as possible.

Said Kunal Banerjee, vice-president (marketing) of Ansal API, "For us the price in the mid-market segment is in the range of Rs 15 lakh to Rs 45 lakh depending on which city we are talking about." He added that about 60% of demand for housing is from this segment. The firms' projects in this segment include New Splendour homes in Jaipur, Celebrity Greens in Greater Noida and Lucknow, Orchard County in Mohali and Green Escape in Kundli. While conforming sector's trend, Vipin Agarwal, executive director of Omaxe Ltd said, "Luxury housing will be few and far between for us. We will concentrate more on affordable housing which will be in the price range of Rs 3 lakh to Rs 10 lakh".

The target customer for mid-segment housing is in the income group of Rs 25 lakh and Rs 45 lakh annually. However, many think that by Indian income standards this segment of houses is slightly more expensive than what the Indian middle class can afford.

"We can broadly categorise families earning in the range of Rs 2 lakh to Rs 10 lakh as the middle class of India", defines, Pronob Sen, secretary, ministry of statistics and programme implementation and chief statistician.

Mahindra Group's real estate arm, Mahindra Lifespaces, is too planning to develop several affordable housing projects, within a year, targeted at middle-income group. Mahindra Lifespaces Managing Director and chief executive officer Pawan Malhotra told FE, "We are looking at opportunities to enter the affordable housing sector for which we are at the discussion stage. We should be able to finalise our plans in a year."

The Indian real estate industry, until recently a booming business, is now struggling for financing from banks, a continued fallout from the Reserve Bank of India's directive to clamp lending to the sector.

Most of the industry relies largely on bank borrowings, though large companies in this business also have access to internal accruals, private equity, venture funds and equity markets. Smaller realty developers typically count on banks for 70-80% of their financing.

But after RBI prohibited banks and housing finance firms from lending for land purchases last year, the regulator also made project commencement certificates from civic authorities mandatory for bank funding, making its tougher for developers to access capital from formal lenders.

Anand Gupta, the honorary general secretary of the Builders Association of India, which has some 10,000 real estate and infrastructure developers as members, said at least 20 builders that he knows of have asked for extension of repayment of their loans.

"From July, many builders have taken loans from private lenders for an annual interest rate of 36% as against banks loans for 12-13% earlier," said Gupta.

"There is a cash crunch for many developers and there is no funding for fresh projects," he added.

Revenues from the sale of developed properties have also slowed, as buyers have deferred their purchases with interest rates having risen to 13-14% for housing loans.

"Developers who are highly leveraged and have bought land at crazy prices are facing the heat," said Vikas Oberoi, managing director, Oberoi Constructions. "Banks are not willing to lend (to) such developers. Overall, they are going slow on real estate lending."

"The RBI has always asked banks to be cautious in real estate lending," noted M.V. Nair, chairman and managing director, Union Bank of India. "The tough market and liquidity conditions have affected the flow of credit to this sector further."

Alternative funding sources, such as private equity, are also shying away from realty because of the global economic uncertainty, leaving developers with few choices for borrowings, said Pranay Vakil, chairman, Knight Frank India Pvt. Ltd, a property consultant. "Developers are just left with one source of capital, which is private money lenders. However, they do not lend money at reasonable levels of interest rates."

The ongoing PBAP exhibition at the SSPMS grounds, which has 90 developers participating, is offering buyers interest rates at 9.55 and 10 percent for two years, in the hope that the interest rates will go down in the coming years. With the interest rates going up by 40 per cent in the last three years, the special schemes are offered at the exhibition on booking at the venue itself.

Announcing the scheme at the exhibition, PBAP president Lalitkumar Jain said that these tie-ups are with the ICICI bank, HDFC and State Bank of India (SBI). "With most banks not lending any money to most developers even for construction purposes, affecting the cash flow, the source remains the customers. Though the construction cost and land cost have not come down the developers will compromise on their profits and are willing to take some burden,''he said at a press meet highlighing the cash crunch faced by developers in Pune.

With the present rate of interest escalating upto 11.75, Jain said that on consultation with economists, it is understood that the rate of interests will go down in future. "After elections the rate of interest will definitely go down,''he said. Jain said Pune has never been an inverstors market and is surely isolated from underwriters. The only investment attributed can be to second home buying by IT professionals or NRIs for rentals.

The report says that the pan-India demand for real estate across office, retail, residential and hospitality sectors is expected to cross 1,000 million sq ft by 2012. A major portion of the demand, at around 876 million sq ft, however, will come from the seven major cities as shown in the chart. A dynamic workforce, liberalized economy, robust demand for real estate across sectors are key factors that will make the Indian market in the coming times more reliable for investment especially in the real estate sector, the report says. The residential segment will continue to drive real estate demand with 687 million sq ft, contributing 63% throughout the term under consideration. Despite the expected slowdown in the office market, the report says the demand for commercial office space is projected to be 243 million sq ft, which is around 22% of the total demand projections for the next five years. The retail and hospitality segments are expected to constitute 95 million sq ft, which will be 9% of the total demand and 73 million sq ft, or 6% of the projected demand, respectively.

In the seven cities, the total demand for office space is likely to be 202 million sq ft. During the boom period of 2007, the demand for office space in all these seven cities was around 50 million sq ft. Therefore, the expected demand of 202 million sq ft, despite global slowdown, will augur well for the sector.

Similarly, in the case of residential real estate, the projected demand of 528 million sq ft in the seven top cities can considered to be very high. The 528 million sq ft residential space could be visualized as 5.28 lakh apartments, each 1,000 sq ft, which by any standards is a huge addition to the demand. Such a strong demand, in the next four years, will make the sector attractive for investment. Anurag Mathur and Sanjay Dutt, joint managing directors, India of Cushman & Wakefield say: "The world-wide economic slowdown is definitely impacting the real estate sector - both across the world and India as well. Fortunately, this slowdown is unlikely to last beyond the next 2- 3 years. In the long-term, strong demand for real estate in India will remain intact and will probably see us through another real estate cycle once the market finds its own level by responding to these short- to mid-term global and domestic factors."

According to the C&W report, the NCR has emerged as a clear preference for sectors like retail, residential and hospitality, while it comes a close second in the office sector. The growing importance of the city can be gauged by the quantum of demand that it is likely to see. While the commercial office sector will see a demand of 48 million sq ft, residential demand would be around 114 million sq ft by 2012.

Pune is also gradually gaining prominence set to be the third fastest growing city with favourable demographics resulting in IT/ ITES companies increasing their presence here.

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

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

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

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

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

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

While property segment has been facing its dose of volatility, many have been confused about their property investment strategy. It has been tough to take a call on the timing of the investment as there are indications that property market is likely to be depressed in the next few quarters. While no one can predict the perfect scenario for an investment, it helps a great deal if you are aware of the situation. For instance, should you wait for a few more months or years for your property purchase or is it the right time for buying property?

Fresh buyers: the first property is always special to most of us and we wouldn't like to be caught on the wrong side with the dream home. Those who are still looking at their first property may be feeling happy that prices are stagnant but they have bad news on the loan front. The interest rate is no more in single digit and home loan rates have moved up to 12% level. While that is still lower than the 15-18% seen during 1995-1997, the loan is a burden because of the huge rise in property prices. Hence, fresh investors need to keep in mind the interest rate scenario and with the rates likely to remain high, buyers need higher negotiating skills.  That should not be challenging since property builders are in greater need of liquidity. While bigger developers are still unwilling to lower their prices by a huge margin, the mid-prized segment has already seen enough correction. For instance, old properties and investors who booked property with the hope of earning higher returns have been off-loading their investments in the last few months. Hence, those who have the patience will surely stand to land with a good deal as the supply side is likely to increase in the next one year. So keep your options open for the right property but make sure that your loan size is minimal as interest rate is likely to remain high at least for the next few months.

Investment buyers: till 2007, investments in property yielded annualised returns of over 50% and in some cases, returns were in three digits. The potential of higher returns, expectedly, brought more investors into the stream. Not only has this increased the supply but has also pushed down the prospects of rental income. The present financial crisis in global markets and high interest rates, have begun to make investors cough up more for their property investment. The falling rental incomes have only complicated matters. Hence, those who look at property as an investment option will have to have the patience to wait out the present crisis. Since supply has begun to exceed demand in certain pockets, wait for a good deal for your property investment. While choosing the property, go for the one which can give you good rental yield as this can take care of a portion of the repayment burden.  In fact, those looking at investing in second property can afford to buy more time as the yield from property has come down drastically in the last 6-9 months. Those who invest in their second property will have to take a long term call of at least five years to make handsome gains. Such investors should keep their loan component considerably small as it would not be financially viable because of high interest rates.

A day after the US House of Representatives withheld its consent to the $700-bn bailout prepared by the Bush administration, the BJP maintained that its effects had already reached India's markets.

"It was mystifying, therefore, to learnt, from FM P Chidambaram that the consequences of American economic crisis cannot touch India. Besides being confusing, it is also a misleading statement that misdirects us in the face of the obvious,'' leader of the Opposition in the Rajya Sabha Jaswant Singh told newspersons here on Tuesday.

The BJP leader cited two areas which could bear the brunt of the global economic crisis -- real estate and consumer retail credit, both of which went through an artificially-created and sustained boom, but which were under severe stress now. The former finance minister first referred to the developments in the real estate market.

"The artificially-created and sustained real estate bubble is now collapsing and with very serious consequences: For one, by eroding the confidence of savings and investment cycle in India. Real estate prices, during the last three years, have grown by factors of 300% to 1000% in about 50 metropolitan cities across the country,'' Mr Singh said.

The boom in the real estate sector, he maintained, was accompanied by a multiplication of housing companies, and industrialists , even states, political leaders and a variety of operators entered this market to manipulate and to exploit.

Beset by falling sales, delivery delays and whittled liquidity this year, realtors are readying to launch a slew of projects in the festive season starting October, hoping that sentiment would turn buoyant and boost demand for homes.

"Despite low sentiments, we are hoping that people will be in a mood to buy," said Pujit Agarwal, managing director of Mumbai-based Orbit Corp Ltd. "Developers have been trying hard to offload existing stock in the past few months, postponing all launches till Diwali."

Orbit is gearing up for an October launch of a gated beachfront property in Alibaug, a holiday destination on the coast close to Mumbai. The luxury project, which has US-based Turner Construction Co. as consultant, will cost between Rs2.5 crore and Rs20 crore for a villa.

Many developers--who have not offered new projects due to the real estate downturn that started this year--have lined up residential projects for launch in the next one month.

Also See Focus on Homebuyers (Graphic)
Analysts estimate home sales in the National Capital Region alone have slumped in the last six months by at least 30-40% and launches have been few.

Although bigger firms such as Unitech Ltd, India's second biggest real estate developer, have been launching projects at regular intervals, mid-sized companies have burnt their fingers whenever they have launched projects this year.

The Project Parsvnath Pratishtha is located at Pimpri Chinchwad, is just 10 kms away from the Mumbai-Pune expressway and 25Kms from the upcoming New International Airport at Chakan. The project, situated amidst a major industrial hub, is surrounded by a number of large multinational companies. Also, Dow Chemical is setting up its state of the art R&D centre in the region nearby. The construction for the project has already started after performing the Bhoomi Pujan and is scheduled to be completed by 2010.

"Presence of educational institutes, universities, IT and major automobile companies has resulted in influx of population in Pune. This increase in population has lead to burgeoning demand for qualitative residential properties in close vicinity of their work places. Parsvnath Pratishtha apart from other state of the art facilities offers earthquake resistant RCC framed structure with brick-filler walls and making it one of the safest houses to reside in.", said Mr. Pradeep Jain, Parsvnath Developers Limited.

Parsvnath Pratishtha spread over an area of approx. 11, 000 sq mtr. is having a built up area of approx. 1.23 lac sq.ft. The project comprisingof 96 apartments having basement parking plus four floors would be equipped with two and three BHK apartments with an offering of forty eight houses each for two and three BHK apartments with a lucrative price tag of approx. 30 lacs and 42 lacs respectively.

Strange but true, this requirement for a huge deposit shakes up a person coming from places like Hyderabad, Delhi, Noida and Gurgaon, where the deposit amount is about two to three months of rent. Students getting admission in colleges in Chennai tend to stay in a flock wherein they divide the rent as well as the deposit, finally easing it a bit on their parents. The people who are really affected are those who are newly weds or a family which relocates due to the job of the man of the house. They have to shell out a lump sum for the deposit to take a house on rent, which for most is not easy.

Suresh Joshua Arokyaraj from Pallikarunai in Chennai says, "For a two bedroom flat the rent is Rs 6,000 and I am expected to deposit a sum of Rs.60, 000 for this.
If can afford such an amount, won't I be able to pay the down payment for a new flat?"

The argument is true for a person who is able to pay such a large sum can make a down payment for a new house which he can own. Residents of Chennai blame college students and the BPO. workers, who share the premises as well as the rent and the deposit, which make it easier for them to pay it. This, however, makes the landlord greedy for such high deposits which are interest free. Seeing it from the point of view of the landlord, the deposit comes handy if a tenant refuses to vacate the premises at the expiry of the agreement or if there is any damage done to the property, it can be cut from the deposit money.

One such landlord Mr. B. Arumugam says, " Tenants with children destroy the walls, their children scribble on the walls and it is hard for us to find a tenant if the walls are not clean. We have to pay from our pockets to repaint the house, but if we have the deposit with us the repairs can be done with the deposit money." Another major concern is of the tenants leaving without paying the current bills; in a case such as this the deposit money is a life saver for the landlords whose tenants vacate without a word.

Over the week, almost all real estate company stocks have taken a hammering, dovetailing the Sensex's fall with the negative market sentiment at an all-time high, which this week is compounded by the wait for the US congressional nod for the $700-billion bailout package for bankrupt investment firms there.

Delhi-based DLF Ltd stock closed at Rs 350. 60, 5.12 per cent lower than its previous close. The DLF issue was priced at Rs 525. (52-week high - Rs 1,225, low Rs 329)

Buyback
In July, the company announced its buyback intention of up to Rs 600 a share for Rs 1,100 crore.

On September 18, it informed BSE that its board of directors would meet on September 30 to consider and approve a public announcement with the proposed buyback of equity of the company.

Sobha Developers' stock suffered a 9.59 per cent drop, closing at Rs 171.55. The issue price was Rs 640 (Rs 1,060, Rs 164.50). Puravankara Projects traded at Rs 154.05 at close, down 3.14 per cent. The IPO price was Rs 400 (Rs 535, Rs 132.05). At close, Omaxe stock traded at Rs 96.05, down 4.38 per cent, far below its issue price of Rs 310 (Rs 613, Rs 93.60). Housing Development and Infrastructure Ltd was at Rs 166.05, down 13.72 per cent lower than its previous close (Rs 1,432, Rs 160.20). Parsvnath Developers was down 7.04 per cent at Rs 89.85 (Rs 598, Rs 86.60).

Among the marginal declines, was Ansal Infrastructure at Rs 77.30, down 4.13 per cent, and Unitech, which lost 1.98 per cent at Rs 108.85, but recovered from day's of low Rs 97.5, which is its 52-week low. Of the many investments Lehman Brothers made in India, Delhi-based Unitech received about $175 million (Rs 740 crore).