In your interest.
Online Personal Finance Magazine
No beating about the bush.
Vested interests in the real estate market are falsely spiking property prices. Developers and broking firms are creating a false bubble by exaggerating the improved market sentiment
The convergence of vested interests of a few developers, media houses and broking firms is creating an exaggerated bullish atmosphere in the real estate market. While realty prices have indeed moved up, builders themselves are shocked at the extent of rise claimed by the media.
“Some newspapers have been reporting that our rates for the‘Global City’ residential project at Virar have gone up from Rs 1900 per sq ft to Rs 2700 per sq ft but actually our rates have only risen from Rs 1900 per sq ft to Rs 2100 per sq ft because the building is in the process of completion,” said Boman R Irani, chairman and managing director, Rustomjee Builders.
He also added, “There is no steep spike in the rates especially by credible developers who have got a brand name and brand image to protect.”
Our sources say that property prices have only increased in South Mumbai by 10% - 25%; elsewhere in Mumbai the prices have just started moving up. According to bankers, prices of residential properties across the country are still down by 15%- 25% from their 2008 peak.
M D Mallya, chairman, Bank of Baroda said, “There is a brisk sale of flats in the Rs22 lakh-Rs25 lakh range.”
KV Kamath, Chairman, ICICI Bank, said, “People have curtailed the size of home loans and the 20%-30% drop in price has certainly made 800 sq ft-1000 sq ft apartments more popular. That seems to be the new mantra.” He also added, “People are not buying today on the basis of future income.”
Since the past four months, real estate developers have been raising funds through Qualified Institutional Placements (QIPs) and through Initial Public Offerings (IPOs) or follow-on issues so that they can complete old projects which were stuck since November 2008.
Companies like Unitech Ltd, Indiabulls Real Estate Ltd, Housing Development and Infrastructure Ltd, Sobha Developers Ltd and Orbit Corp Ltd have raised funds through the QIP route. Developers such as Emaar MGF Land Ltd, Nitesh Estates, Lodha Developers Ltd and Sahara Prime City are planning to raise a total sum of around Rs9,800 crore through IPOs—Sahara Prime City has filed its draft prospectus for Rs3,450 crore, Emaar MGF Land Ltd for Rs3,850 crore (down from the Rs6,400 crore it planned to collect last year). Ambience Ltd, a Gurgaon-based developer has filed a draft prospectus with BSE to raise approximately Rs1,125 crore.
Brokerage firms and investment bankers want to create a scenario which depicts a booming market. Angel Broking in a recent real estate analyst report said that some of the developers have increased their prices by 30%. Industry sources say this is exaggerated.
“Speculative buying is not taking place but a pent up buying (demand) is coming back to the market,” said Pranay Vakil, Chairman Knight Frank (India), a property consultancy firm.
He also explained, “Since the past eight months people had resisted from buying, thinking that prices may go down further. But now they have realised that there will be no fall in prices or interest rates, so we are seeing a demand in the market. The demand is one year old.”
Renu Sud Karnad, joint managing director, HDFC Ltd, said, “There is a lot of demand from first-time house buyers. There is a good demand for house prices in the range of Rs30 lakh-Rs50 lakh in metros and about Rs20 lakh to Rs25 lakh in smaller towns.”
She also added, “In India the housing shortage is huge. Therefore in the long run it is important for the developers to focus on affordable housing and see that the property prices do not rise sharply resulting in customers being priced out of the market.”
Many developers believe that fake hype about prices will hurt buyer sentiments. In the long run if the prices keep rising, a lot of customers will be priced out of the market.
–Pallabika Ganguly [email protected]
Developers like Neptune and Rustomjee plan more redevelopment projects in Mumbai
The Maharashtra government’s efforts to give a boost to redevelopment in Mumbai by increasing the floor space index (FSI) up to 4, has started showing results. While developers like Rustomjee and Neptune plan more redevelopment projects, developers like the Marathon Group do not deny the possibility of venturing into one.
Ashok Chavan, chief minister, Maharashtra, had announced an increase in the FSI for redevelopment projects in February 2009. Cessed buildings, which are those built before 1960, will be allowed an FSI of 4 under cluster development of more than one acre plots.
“We are already into some of the largest redevelopment projects in Mumbai. We are also working on two more redevelopment projects in the city, but it is in the initial stages,” said Boman Irani, chairman and managing director, Rustomjee Group. Mr Irani refused to divulge any further details on the new projects.
Similarly, Neptune Group, a Mumbai-based developer, also plans redevelopment projects. Neptune has earlier worked on redevelopment projects for plot areas like that of factories and industries. Given the increased FSI for cluster development of cessed buildings, the group is keen on this arena. “We will plan redevelopment projects in Mumbai after six months,” said Nayan Bheda, chairman and managing director, Neptune Group.
Developers like the Marathon Group too are open to this new option. “Marathon Group is open to look at the possibility of such constructions but there are no immediate plans. However, our core business will remain redevelopment of open plots of land, be it industrial or textile mills closing down or shifting out of Mumbai,” said Chetan Shah, vice chairman, Marathon Realty Pvt. Ltd.
Most developers are looking at the FSI increase as a welcome change. Mr Shah further explains how the FSI increase will in turn help redevelopment and benefit developers. “The scheme for reconstruction of dilapidated buildings provides for existing area being reconstructed and to cover the cost of such construction, an incentive construction area for sale in the form of 50% of such reconstruction area is given to the owner/developer/society. The total area thus becomes very high for smaller plots of land and when this total construction area is divided by the available land area it becomes higher than the maximum FSI (earlier 2.5 or 3) permitted on the plot. In such a scenario, these plots become undevelopable, which is the case with most of the buildings in the city’s congested areas where already four-storied buildings without much open land area exist. So, increase of FSI to 4 is a welcome change for such buildings. Such high density will invariably result in newer developments being vertical and high-rise buildings.”
“What is good for the people is good for the industry. This additional FSI will only make for the development of infrastructure and that will benefit the residents of the city and will open up a lot more green spaces. By this the developers will get a better opportunity to do a better job and eventually keep a healthy profit line,” added Mr Irani.
Old areas like, Bhendi Bazar, Masjid, Kalbadevi and Bhuleshwar in Mumbai where dense development already exists are most likely to benefit by these projects. Given that the availability of open space in the main city of Mumbai is scarce, redevelopment projects would provide developers with more opportunities.
–Amritha Pillay ([email protected])
In a study, the ratings agency, however, cautioned that the recovery in credit quality will at best be gradual and may not necessarily be smooth.
“There are signs that both the monetary and fiscal easing and the lower commodity prices are temporary. Additionally, unlike in the late 1990s, we see no prospect of a sudden and sustained upturn in economic conditions to lift corporate performance. We can therefore rule out a sudden jump in modified credit ratio (MCR) of the kind we saw in 1999-2000, when MCR rose to 0.92 from 0.61,” said Raman Uberoi, senior director, CRISIL.
In India, fiscal and monetary authorities have begun to explore an exit from the present supportive stance and the timing and extent of these measures is likely to have a significant bearing on the pace and extent of economic recovery after the current phase of stabilisation, the ratings agency said.
In a research note, Standard Chartered Bank said although signs of recovery are apparent, most importantly in the industrial sector, the disappointing monsoon could impact private consumption expenditure which is a major contributor to overall gross domestic product (GDP) and remains weak.
Echoing the same, credit information company Dun & Bradstreet (D&B) said that a confluence of factors such as sustained improvement in index of industrial production (IIP), increase in direct tax collections and improving business sentiment indicate that the process of economic recovery has set in. Despite these developments, the pace of economic recovery is expected to be slow due to the emergence of certain downside risks such as a potentially lower agriculture growth and surging primary food articles inflation, D&B said.
CRISIL, the unit of Standard & Poor's further added, the return of stability to the global economy has also meant that commodity prices in India have retraced 25% to 35% of their decline from the peak levels of mid-2008.
“Access to funds has eased considerably, but there is significant uncertainty with respect to exchange rates and consumer demand. Large exchange rate movements can hit export-dependent sectors hard, and domestic demand can be affected by rising prices in general and food prices in particular," said Ajay Dwivedi, director, CRISIL Ratings.
"We also note that the Reserve Bank of India’s window for restructuring of bank assets helped many companies avoid distress over the last 12 months. Looking ahead, we see a long and bumpy road for recovery in corporate credit quality,” Dwivedi added.
Kaushal Sampat, chief operating officer, Dun & Bradstreet India said, “A sustained growth in industrial production will primarily be driven by the consistently improving business sentiment and recuperating demand conditions. Given the emergence of certain downside risks to growth and the limited scope for further fiscal stimulus, the timing of 'exit' strategies in terms of accommodative monetary policy becomes even more critical."
D&B said it expects that while RBI might consider increasing the cash reserve ratio (CRR) for draining of excess liquidity from the system anytime till the end of the current fiscal, it may maintain a status quo in terms of other policy interest rates. However, these changes to CRR are unlikely to happen in the policy review of October 2009.
-Yogesh Sapkale [email protected]