Real estate: A year of apprehension ahead

Debt, regulatory issues and customer service are the three big concerns

2011 was an eventful year on the realty front. The discomfort was already underway, with Unitech landing up in the second generation (2G) spectrum allocation mess, and if 2010 saw sales slowing down, in 2011, the industry was hit harder. The economy was already struggling, and inflation was high. Following a succession of mishaps, an embarrassing non-performance by the government and overall confusion, 2011 was the year when the customer, finally, ran out of patience— and the realty sector; at least vocally; had to promise amends or at least trying.

This year, the realty sector is to see some major changes. The most important among them being setting up of a real estate regulator. The draft Real Estate (Regulation and Development) Bill is going to be the most keenly watched piece of regulation. It was scheduled to be tabled in the Winter Session, but with the Lokpal Bill not being cleared in the Rajya Sabha, the real estate regulation bill has been deferred. Also most builders have expressed their unwillingness on the issue.

However, Maharashtra is reportedly thinking of setting up its own regulator—which is less stringent than what the Centre is envisioning. Ministers and government officials have admitted that they had left out certain provisions like depositing 70% of payments received to stop diversion of money for buying more land instead of developing existing projects—which leads to delay and raises price.

The other ‘big’ Bill is going to be the Land Acquisition, Resettlement and Rehabilitation Bill, which is aimed at providing fair compensation to displaced land owners. The move came after the Supreme Court quashed Greater Noida Industrial Development Authority’s attempt to acquire more than 150 hectares of land from poor farmers for prominent developers like Supertech and Amrapali.
The Bill on ‘Benami’ properties is also crucial. Benami Transactions (Prohibition) Bill will empower government to seize properties which are proved to be ‘benami’; i.e. properties that are owned by someone but are registered under a different person’s name, mainly to avoid taxes.

These developments are laudable and most optimists have said that ushering in transparency will only change things for the better. However, the industry has reacted testily. Bodies like CREDAI, FICCI and individual developers have accused the rehabilitation and regulator bills of being ‘biased’ against developers; and have even hinted at the possibility of price rise once they are passed.

The penalising of DLF by the Competition Commission of India was an unprecedented event. The news gave hope to property buyers, who are often helpless to counter the realtors on issues like delay in delivery or lack of services. Reportedly, many other complaints have been registered against builders with the CCI, but it is yet to be seen how the body reacts—since it could take on DLF only because it was the market leader.

While everyone is hoping that the economy achieves equilibrium and the rupee appreciates once again, many experts believe that the bleak streak of 2011 will continue. Media reports claim that the realty industry is sitting on a Rs45,000 crore debt. In November, Knight Frank India reported that even in Navi Mumbai and Thane, flats have no takers and 70% of flats costing above Rs75 lakh remain unsold.  

According to statistics, gross bank lending to the real estate sector grew 11.6% between October 2010, and October 2011, compared to 15.7% during the year-ago period. Similarly, foreign direct investment (FDI) flows into the sector witnessed a 26% decline on an annual basis.

With banks limiting lending to realtors, the latter have turned to private equity for funding which comes with interest rates as high as 18%-20%. With residential sales showing no signs of improvement and commercial properties going through a crisis, the industry will no doubt support FDI in retail which they hope will provide them with some much-needed relief. Many retailers are struggling with cost, staff and inventory management and have also accumulated huge amounts of debt (Pantaloons has a debt of Rs 4200 crore), yet show no signs of slowing down on their expansion plans.

Jones Lang LaSalle India says that another 15-17 million sq ft of retail space is expected to get operational by end-2012. The major contributor is likely to be Delhi, followed by Mumbai. A total 146 malls opened in seven cities of Mumbai, Delhi, Bangalore, Chennai, Pune, Hyderabad and Kolkata. FDI will definitely allow for a growth in space, but it remains to be seen how that will help the retailers. “We have seen customer sentiment slump,” says an analyst. “For the last two quarters, apart from food and some FMCG products, customers haven’t really been enthusiastic about purchasing even during festive seasons. If customers remain reluctant, malls and retailers will find it very difficult to recover their costs,” he added.

On the residential front, experts don’t see much corrections happening. Ganesh Vasudevan, vice president, Indiaproperty.com says, “I would rather say that prices will have an upward bias. Correction may only happen in luxury segment, depending on additional services and features. However, in 2012, the pent up demand from the last year may play out in the first two quarters.”

Experts are optimistic that sales will pick up in 2012, not only because of robust demand; but other enabling factors. The Reserve Bank of India (RBI) does not seem to be enthusiastic about another rate hike and banks have waived erstwhile pre-payment charges—which will make it easy for the home loan taker.

2012, some industry experts say, will also see the launch of many affordable housing projects—both in the metros and other regional commercial centres. With gap widening between affordability and prices, and increased migration, affordable housing projects have become a must.

The small towns and other urban centres, however, have not suffered so heavily—as the prices have not heated up so much. While completed projects by big builders are unlikely to reduce prices, projects under construction or recently delivered are seeing some reduction. Small builders are also offering discounts and other freebies to offload inventory.

Bangalore is now being touted as the next favourite—thanks to the new metro project. Motilal Oswal, in a brokerage report has said that Bangalore has significantly outperformed other markets with a good absorption rate, reasonable pricing, low speculation and a competitive market. Chennai, too, has put up a stable performance, while Hyderabad, the other favourite, looks likely to stabilise once again as the Telengana issue settles down.

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    COMMENTS

    Piyush Chamedia

    8 years ago

    The real estate regulator will never be a reality in India since all politicians and builders are in nexus.More than 50% black money flows through this system, and they don't want to shoot in their own foot by bringing this bill. This will meet the same fate as Lokpal, I guess 2020 is a good timeline to see some transparency in the sector - 2 decades after we thought we should have some !

    What is the value of a ‘brand’, lately, anyway?

    The ‘market’ has a way of factoring in the brand value, so to include an add-on component in the books is in effect taking a charge on the same asset twice, and that is dishonesty in any language

    If the accounting firms of the world are to be believed, then the value of a ‘brand’ cannot only be estimated in terms of cash values, but can also be entered on bottomlines and in balance sheets. Taking this one logical step forward, this bit of magic can then be sold as close to the hard fact to otherwise sceptical bankers, That these are more or less, with some changes in their own brand names, the same accounting firms responsible for wonderful valuations like the ones on Enron or closer home Satyam, is not missed out by most.
     
    But regardless, the juggernaut of “brand value” rolls on, regardless.
     
    For example, the “brand value” of Coca-Cola used to top the charts till 3-4 years ago, but has recently seen the rankings notch down to the higher teens, while the ‘value’ itself appears to have lost about 20% of its bubble in that time period. These are in scores of billions of dollars, by the way, and separate from valuations on ‘goodwill’, and both of these find their way on to balance sheets of listed companies, Seldom, however, will you see them discussed by analysts or at the meetings which make or break markets.
     
    Here in India, Kingfisher’s brand value was estimated to be at around Rs4,000 crore, as estimated by Grant Thornton—which value was acceptable to banks in India led by State Bank of India (SBI)—and that was then used as collateral for, you guessed it right, a loan of a higher amount. The same valuation is, however, not applied when a successful public sector undertaking is hived off in the name of liberalisation or privatisation. How much, for example, would the brand value of Maruti have been, and why was it not applied over and above the numbers then achieved?
     
    The ‘market’ has a way of factoring in the brand value, so to include an add-on component in the books is in effect taking a charge on the same asset twice, and that is dishonesty in any language. Investors are advised to look at balance sheets carefully for tell-tale signs like this on the asset side.

    (Veeresh Malik started and sold a couple of companies, is now back to his first love—writing. He is also involved actively in helping small and midsize family-run businesses re-invent themselves. Mr Malik had a career in the Merchant Navy which he left in 1983, has qualifications in ship-broking and chartering, a love for travel, and an active participation in print and electronic media as an alternate core competency, all these and more.)

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    Auto Expo 2012: A curtain raiser and visitor’s advisory

    This year’s Auto Expo promises to be one interesting experience. The theme for Auto Expo 2012 is ‘green’, which is all very good, considering the smog and haze-laden Delhi

    A few hours ago I booked my ticket for the Auto Expo 2012 online, all of Rs200 worth which will hopefully entitle me to entry at Pragati Maidan in Delhi on Saturday the 7 January 2012, without much fuss and demur. I say ‘hopefully’, because the experiences people had in the 2010 version of the Auto Expo make the Gurgaon New Year’s riots look tame.

    The organisers at Auto Expo 2012, along with the authorities, appear to be trying to take no chances this time around, by restricting entry to the first 1 lakh people every day, which is about half the number that officially entered the fair grounds last time around—the actual number by way of unofficial entries, hanger-ons, VIPs, and more, would easily be more. In addition, the 1 lakh cap appears to be an arbitrary number, includes participants and officials, so there is no idea on how this will relate to visitors.

    I have been visiting the Auto Expo on ‘PRESS’ passes since the inception, and therefore been spared most of the issues faced by visitors, but this time around, due to the rather complicated and time-consuming process as well as fairly blatant expectations of what reportage should be like, I choose to visit it on my own steam. Let us see how it pans out. In any case, the ‘PRESS’ experience is increasingly like a PR sponsored guided tour, lately.

    Even with tickets bought in advance, if indications are to be believed, entry is not guaranteed. In addition, the fine print in the “terms and conditions” for the booking service online makes it clear that they are not responsible for any damages or any loss resulting from “inability to use the services”. In other words, if the organisers decide to shut the gates, that’s it—regardless of whether you have a ticket or pass or not. Safety is supreme—and rightly so.

    So, if you want to visit the Auto Expo 2012, you need to get your entry formalities in place early—and then land up there even earlier before they put a cap on entries. In addition, most of the launch functions and special events are being held starting the 4th of January onwards, while public entry starts on the 7th.

    The theme for this year’s Auto Expo is ‘green’, which is all very good, the display of new generation alternate fuel vehicles like the Audi-3 E-Tron, the Mahindra Reva NXR, the Nissan Leaf and others are surely welcome in smog and haze laden Delhi. But the larger buzz, as always, appears to be reserved for the usual smorgasbord of big engine supercars, superbikes and SUVs. Of which there are far too many to list out—but one honourable mention needs go to the home-grown supercar from DC in Mumbai. That will be essential viewing.

    Likewise, the smaller component and accessory stalls, as well as speciality displays of customisation and more, hold an appeal which is often missed out in the glamour and hype of the larger pavilions from manufacturers. They are also less crowded, the exhibitors are mostly genuinely pleased to greet and show visitors their wares, and the atmosphere is more, how do we put it, Indian?

    By contrast, the larger pavilions are certainly eminent displays of brilliance and new technology, on wheels and otherwise, but the often surly and condescending attitude towards visitors during public hours can be a put off. My take here to the exhibitors is this—you have come to India to sell your motor vehicles to people, not to a market. Our buyers like to touch, feel, squeeze and analyse the product thoroughly. They will therefore expect to be permitted to do the same. Live with it.

    For me, the most interesting and lately most important part of this exhibition has always been the one pertaining to public transport and goods vehicles, especially in view of the extremely high growth envisaged in both these sectors in the coming years. In addition to the new buses and trucks on display, there are going to be some even more interesting displays and discussion on issues like toll collection, inter-state movement of trucks, inter-modal movement of unitised and break-bulk cargo, and long-distance buses.

    But the really important part, if trends are to be believed, will be the further emergence of the mini and micro-mini trucks and people movers—and in this, the Chinese influence is to be seen to be believed—silently but inexorably making progress while the media focus and bright arc lights are on the luxury sector.

    All in all, this year’s Auto Expo promises to be one interesting experience, like the ones before—but what a long way we’ve come since people came there in their lakhs to gawk at the early Marutis!!

    However, do buy your tickets in advance, and be at the gates early.

    More details, including on how to book tickets in advance online, are available at:
    http://www.autoexpo.in/

    (Veeresh Malik started and sold a couple of companies, is now back to his first love—writing. He is also involved actively in helping small and midsize family-run businesses re-invent themselves. Mr Malik had a career in the Merchant Navy which he left in 1983, qualifications in ship-broking and chartering, a love for travel, and an active participation in print and electronic media as an alternate core competency, all these and more.)

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    COMMENTS

    Siddharth

    8 years ago

    Hi Veeresh,
    I am interested in the yamaha BWs. Please provide your take on the bike and its availabitlity.

    malq

    8 years ago

    Quick update - Bajaj Auto have launched their 4-wheeled quadricycle, the RE-60, a short while ago. Looks like an ungainly ugly duckling, therefore it may sell (!!), and is loosely based on their RE-3wheeler, with a similar 200cc 4-stroke petrol engine.

    In addition, both HM/Ambassador and Fiat are not taking part at AutoExpo 2012, so that signals curtains at this break in tradition from two of the oldest manufacturers in India . . .

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