TDR prices will go up as a lot of demand for these rights has been created now by the court’s decision. Ergo, real-estate prices may go up further
The Bombay High Court on Thursday dismissed the Maharashtra government's decision to increase the floor space index (FSI) in Mumbai's suburbs from 1 to 1.33. In 2008, the Maharashtra government, in its State Budget, increased the floor space index (FSI) in Mumbai suburbs from 1 to 1.33. Additional FSI increase of 0.33 could have been purchased by the developers from the government as specified by the State government in its 10th April notification.
A public interest litigation (PIL) was filed by Amit Maru and Arun Gaikwad (both practising engineers and architects) last month alleging that the increase in FSI would lead to more construction and put a heavy burden on the infrastructure in the suburbs.
"The court's decision will force developers to buy transfer of development rights (TDRs). TDR prices might go up in the future as a lot of demand is created in the market now (for these rights)," said Pankaj Kapoor, founder, Liases Foras.
The maximum permissible FSI in the city's suburbs remain the same, i.e. 2. Earlier, developers had to buy 0.67 extra FSI, when an FSI of 1.33 was allowed by the government. The 0.67 FSI was available at a nominal price from the government. But now developers have to buy 1 FSI rather than 0.67 FSI at a higher price through TDR if they want to utilise the maximum developable area.
The 10th April notification stated that the additional FSI was available at a cheaper price than the prevailing TDR prices in the market. Developers were expected to opt for this and hence TDR prices started falling last month. There are a lot of redevelopment projects currently being developed in suburban Mumbai and TDR forms an important part of them.
"The FSI remains same for the suburbs but the TDR prices will go up," said Pranay Vakil, chairman, Knight Frank (India) Pvt Ltd.
Currently TDR prices vary between Rs2,400 per sq ft to Rs2,800 per sq ft. After the High Court decision, TDR prices will shoot up and developers like HDIL and Ackruti City will benefit from it as they generate a lot of revenue through sale of TDRs.
"Developers have to buy TDRs at an incremental price. Extra FSI is no more available at a nominal price. Owners and developers were buying TDRs anyway, but their dependency on TDRs is now increased," said Ashutosh Limaye, associate director-strategic consulting, Jones Lang LaSalle Meghraj.
While the maximum FSI possible for a normal suburban property still remains 2.00, the difference is:
1. To achieve 2.00 FSI, the owner/developer has to buy TDR, as premium FSI is no more available, resulting in increase in demand of TDR and thus a likely increase in prices of TDR. Eventually, it means an increase in cost of projects, meaning increase in real-estate prices.
2. While the premium FSI was decided by the government and was defined and thus known and fixed, the TDR sale and purchase is a market phenomenon. Thus the prices are variable depending on location of TDR generation and location of TDR deployment. Thus, there is a degree of uncertainty in pricing that will be added.
As suggested yesterday, the market rallied. We expect the market to hit 17,100 and possibly 17,300 in this stretch
The market was up in the morning session, taking cues from its Asian counterparts. The Sensex shut at 16,922, up 264 points (1.6%) and the Nifty settled at 5,078, up 78 points (1.6%). The uptrend gained further momentum in the afternoon session on the back of strong European markets, enabling local bourses to notch up gains for the second day in a row.
Asian stocks were up on Chinese export data and assurances from Federal Reserve chairman Ben Bernanke that the US economic recovery was on track. Key benchmark indices in Japan, South Korea, Hong Kong, Taiwan and Singapore rose by 0.06% to 1.56%. Indonesia's Jakarta Composite was down 0.63%. China's Shanghai Composite was down 0.82%. Sentiments were down in the Chinese market on the concern that further tightening measures may emerge after property prices in 70 of the country's large- and medium-sized cities rose for the 12th consecutive month in May 2010, climbing 12.4% from a year earlier.
US stocks were down on Wednesday, led by BP and other energy shares as the US probe of the oil spill in the Gulf of Mexico deepened. The Dow was down 40 points (0.41%) to 9,899. The S&P 500 was down 6.3 points, (0.6%) to 1,055.7. The Nasdaq was down 11.7 points (0.5%) to 2,158.9.
Back home, the government has deferred the decision of selling stake in two mining companies-Coal India and Hindustan Copper. It planned to sell about 10% stake in Coal India, the world's largest coal miner, through an initial public offering to raise roughly $2.7 billion. It also planned to sell about 20% stake in Hindustan Copper to raise up to about Rs50 billion ($1.06 billion).
The food price index rose 16.74% in the year to 29th May, higher than the previous week's annual reading of 16.55%, following a rise in prices of fruits and potato. The fuel price index climbed 14.23%, compared with an annual rise of 14.14% in the previous week.
Foreign institutional investors were net sellers on Wednesday of Rs256 crore. Domestic institutional investors bought stocks worth Rs127 crore.
JSW Energy (up 2.3%) has entered into a memorandum of understanding (MoU) with Osho Venture FZCO, Dubai and Indian Ocean Mining (Pty) Ltd, South Africa, to acquire 70% equity interest in Indian Ocean Mining from Osho. Indian Ocean Mining has certain coal prospecting rights the in northwest region of South Africa. The MoU is part of the strategy to enhance fuel security for which JSW Energy is continuously evaluating various strategies and proposals to secure long-term imported coal linkages.
Tata Communications (Hong Kong), a wholly-owned indirect subsidiary of Tata Communications (up 4%), and China Entercom Communications Ltd have jointly withdrawn their equity joint venture application with the Chinese government. However, the two entities will continue with their existing network services co-operation relationship and have also entered into a new co-operation pact whereby they will work together on a commercial basis to allow Tata Communications to benefit from access to CEC's network and assets in China.
United Bank of India (up 0.9%) has said that the government of India has sanctioned the payment of Rs250 crore for the perpetual non-cumulative preference shares (PNCPS) of the bank. This will be a part of the Tier-I capital of the bank and carry an annual floating coupon to be benchmarked to the repo rate with a spread of 100 basis points to be readjusted annually. This capital infusion is part of the government's initial sanction to the proposal to infuse a total of Rs800 crore in the bank through PNCPS.
Possibility of major US hurricanes, hotter-than-normal US summer weather and robust core demand v/s supply will impact natural gas prices over the next six months
Natural gas has seen some violent moves in the past few weeks. It rose by 30% in five weeks, but has declined by 5% in the last couple of days. Traded on the Multi Commodity Exchange, natural gas price increased from Rs175 per MMBtu on 30th April, to Rs235 per MMBtu on 5th June this year. What are the reasons for this and will prices keep rising?
This kind of volatility is natural in natural gas. For instance, from 5 July 2008, its price crashed from Rs591.80/MMBtu all the way to Rs118.60/MMBtu on 5 September 2009, a fall of 80%. Gas price has been trading within a range for the next eight months before the recent volatile move. What are the reasons for such sudden price movements and what does the future look for this commodity?
There are three reasons: possibility of major US hurricanes, hotter-than-normal US summer weather and robust core demand v/s supply. We explore the three major variables that will impact the natural gas price in the next four-six months.
Natural gas prices rose last week after the US government forecast up to 14 hurricanes, second only to a record 15 storms in 2005 when hurricanes Katrina and Rita had shut offshore oil platforms for weeks and some refineries for months.
Analysts say high US inventories and industry preparation should temper energy price swings even if storm-related disruptions to oil and natural gas facilities on the level of those seen in 2005 and 2008 would cut the supply overhang.
"From a supply standpoint, we're probably better prepared for an active hurricane season than we have been in the last 20 years. The surplus in inventory has already decreased the hurricane premium in the market, estimating that without high inventories, crude, product and natural gas prices would all be slightly higher," said a Reuters report.
The hurricane season runs from 1st June through 30th November and often affects the Gulf of Mexico, home to about 30% of US oil production, 12% of natural gas production, and 40% of US refinery capacity. Storms may hit a larger overall portion of the US refining sector as more capacity is concentrated on the Gulf Coast after economic shutdowns on the East and West Coasts. "We have a few more eggs in one basket. The amount of crude, natural gas, and product inventories could prove irrelevant if a significant amount of energy demand is knocked out by severe storms," said the report.
Colorado State University researchers said on 2nd June that there is a 76% chance that a major hurricane, with winds of 111 mph (178 kph) or greater, will strike the US this year. The past-century average is 52 percent. "A hurricane could disrupt industrial activity and power generation in the south, throwing a stronger punch to demand than to supply," said the report.
The second reason natural gas prices rose last week was that forecasts showed hotter-than-normal weather across much of the US next week, boosting demand for the power-plant fuel. High temperatures will stretch from the Southwest to New England according to MDA Federal Inc's EarthSat Energy Weather. About 21% of electricity is generated using natural gas, according to the US Energy Department. Natural gas fell almost 5% over the past couple of days after revised forecasts showed cooler weather for the US Midwest and Northeast, reducing demand for gas-powered electricity for air-conditioning. Temperatures next week will "fall to at least normal, if not below" average, according to MDA Federal Inc's EarthSat Energy Weather.
The third reason is robust core demand as opposed to supply. Manufacturing in the US has expanded for the 10th straight month. According to a US Labor Department report, factories across the US added about 101,000 to their payroll during the first quarter of 2010. Don't be surprised to see the supply-demand picture start to brighten next year... And if that's the case, we'll easily see natural gas prices rebound.
On the supply side, the energy production landscape has shifted in recent years. A greater percentage to onshore sources and better industry preparations should soften the impact of hurricanes, experts said. Back in 2005, the US was not producing gas from shale at the current level. There's been a boom in onshore natural gas production since 2005. Thanks to the rise in unconventional shale deposits during the past few years, the US finally overtook Russia as the world's largest gas producer-and that's to be expected after US shale gas production jumped 71% between 2007 and 2008.
According to Bloomberg, the number of US oil and gas rigs operating in the Gulf of Mexico dropped by half last week to a 16-year low. The number of natural-gas rigs dropped by 20 to 947. The US government started to curtail offshore drilling and it is going to impact gas supply and prices. The halt in deepwater drilling in the wake of the BP oil spill took the Gulf rig count to 23 last week, the lowest level since August 1993, from 46 a week earlier. About 11% of US gas is pumped on federal leases in the Gulf. According to the US EIA short-term energy outlook, sustained low natural gas prices this summer are expected to contribute to a decline in natural gas drilling activity over the next several months. As a result, the current 2011 forecast of higher prices comes as production begins to decline later this year and the next. The projected Henry Hub spot price averages $4.49 per MMBtu in 2010 and $5.06 per MMBtu in 2011.
Natural gas has gained prominence in India too as in the rest of the world over the last decade. India has consumed around 41.4 billion cubic metres (bcm) of natural gas in 2008, of which domestic production is 30.6bcm and imports as LNG have been 10.79bcm. The share of imports is expected to increase in the coming years and cross 30% from the current level of around 25%. Fertiliser (41%) and power (37%) are the major users of natural gas in India. The fertiliser sector in India is highly subsidised by the government and it fixes the rate at which natural gas is provided to the fertiliser-manufacturing units. So, as all these factors collide, expect more volatility.