Akruti City beats market expectations with profits trebled

Despite testing market conditions and dangling results from other real estate developers, Akruti City has posted profitability growth of 284% as more projects hit the market. Akruti reported first-quarter net profit of 1.71 billion rupees, more than trebling from a year ago. Its total income also surged to 2.4 billion rupees from just 715.6 million a year ago.

The company has not bought any land over the last 6 months and has enough land to build and execute projects for the next 4 years. The management believes that as land prices soften in the coming months, it will go and buy land as it does not expect the demand for property to go down drastically in the long term given the demographic and other factors in India.

Focus on execution and the right product mix ensured that Akruti was ahead of the competitors. Forecasting a lack of interest in malls, the company had cut its exposure to retail projects a year back and converted seven malls into commercial space, where demand is booming. Akruti has focused on a low-cost strategy by acquiring cheap land through slum redevelopment projects, and setting up projects on the outskirts of cities it is present. It recently launched a project each at Mira Road near Mumbai, and in Pune.

As already stated in earlier posts, Akruti has outperformed other realty stocks. It is currently quoting at Rs 731 with a PE ratio of 12.1. and a market cap of Rs 48 billion. Given its growth and the ability of management to predict market conditions and take necessary measures, the company is slated to outperform the market and possibly the other Realty stocks.

Monetary Policy - EMI Impact - Floating vs Fixed home loan rate

With banks now readying plans to raise PLR by atleast 50 basis points on the eve of the RBI raising the CRR and Repo rate to 9%, the direct impact will be on home loan takers and their EMI. Home loan EMI will be up by Rs 17 - 34 for every Rs 1 lakh loan. In case of a 20 year loan, a 25 bps hike will mean the EMI going up by Rs 17 for every Rs 1 lakh loan amount; in case of a 50 bps hike, it will be Rs 34 and so on. Similarly, for a 15 year loan, 25 bps will hike EMI by Rs 16 a month and 50 bps by Rs 33. So net net, home loan borrowers with large EMI installments are in for a tough time going forward.

New borrowers would be better off taking a floating home loan rate despite the fact that interest rates are likely to go up in the future. The advantage of a floating rate scheme - where rates move in line with the PLR - is that the borrower will gain once the interest rate cycle turns. As per industry experts, the rate cycle takes a turn every 3-5 years, hence the rates will go down sooner than later.

A fixed rate does not necessarily imply that the rate will remain fixed over the life of the loan. Most banks insert a reset clause in the fixed rate home loan agreement. This means that the bank will have the option to revise the rate upwards even if the borrower had opted for a fixed rate. For instance, SBI resets its interest rate at the end of every two years from the date the loan has been disbursed. For Bank of India, the reset happens every five years. HDFC however, is among the few lenders with an absolute fixed rate.

However, the difference between the floating and fixed rates is very high - as much as 300 bps in case of lenders like ICICI and HDFC Bank. HDFC has a floating rate of 11% whereas its fixed rate is 14%. Similarly, ICICIs floating is 11.25 - 11.50% and its fixed is 14.75%. Understandably, most borrowers are discouraged from taking a fixed rate loan. A borrower should look at a fixed rate only if the loan period is less than 10 years, else go for a floating rate. There is also an option to split the loan amount into floating and fixed rate.

Impact on real estate developers

For now, EMIs are set to rise and demand for real estate is bound to go down at least in the short term. Borrowers are bound to find it difficult to get funds at cheap rates and there is also going to a slowdown in demand. This will hurt the margins of the realty players also resulting in further correction of realty prices. The cost of construction will go up and banks will cut their exposure in the property sector, forcing developers to tap unofficial channels for funds. Black money is going to flood the system as the developers would be liquidity starved.

Interestingly, the bank credit to real estate sector has come down 31% from last year from Rs 19,010 crore to Rs 14,750 crore. Sales for the real estate developers has gone down, hence affecting their ability to service the term loans. Moreover, with a slowdown in the IT space, developers are losing tenants and thereby lease incomes are declining. Real estate developers are adding to their stock of non income generating property. Thus developers with substantial unsold stocks of residential units and office space will be directly taking a hit in their bottom lines with a hike in interest rates.

Rally in rate sensitive real estate segment likely to stagnate

Inflation control at the cost of growth seems to be the message sent by RBI in the Monetary policy first quarter review. RBI has hiked key rates in order to curb credit growth and has simultaneously lowered its expectation of GDP growth rate to 8%. RBI hiked repo rate by 50 bps 8.5 % to 9.00% and CRR by 25 bps to 9.0 per cent with effect from the fortnight beginning August 30, 2008. Both the repo rate and CRR is now at a level of 9 per cent, last seen 8-9 years back.

RBI has given strict instructions to provide only high quality credit and hence real estate developers are going to find it more difficult than before to get credit in this liquidity crunched scenario. Moreover, there is increasing pressure on banks to increase interest rates with the hike in CRR and repo rates. There will be resetting of EMIs on home loans further putting pressure on the demand for real estate .

A large part of private equity funds have been going into the real estate space. The new monetary policy tightening would mean fund managers will have to go back to their drawing boards to reassess the risks and calculate the expected rate of return. Whether it translates into further drop in PE deals this year is to be seen, but the monetary tightening would surely mean that fund managers would have to be more cautious in pouring money into real estate.

The real estate sector which had been one of the prime targets of PE firms with large transactions through a SPV route of investment has already seen a moderation. While big budget deals have dried up even smaller deals are taking more time to take place. Valuations in the public marlet has shrunk significantly which has affected the project valuations and hence the deal sizes.

Inflation figures are looking higher than ever and the central bank announced an extremely hawkish policy to control the spiraling prices, and ready to forsake growth in the process. RBI has given clear indications that inflation is not going to come down anytime soon. It has projected a “realistic” inflation rate of 7 per cent by March 2009. However, the GDP growth rate has been revised downwards as well. The expectation now stands at 8 per cent for FY09 as against 8-8.5 per cent as announced in the Annual Policy in April, earlier this year.

After the policy was announced, BSE Realty Index tanked by 5.4%, the highest after the BSE Bankex which fell over 8.4 % while Nifty and Nifty Junior dropped by 5.33 per cent and 3.28 per cent respectively after the rate hike.

Relative valuation of the real estate stocks

While the sensex is currently trading at a P/E multiple of 18.62 (as on 23^rd July) the real estate index is trading at a P/E multiple of 19.72 (as on 23^rd July) and while the sensex is down only 5% since the same time last year, BSE realty index is down 35% down since July 07.

And while the sensex picked 18% in the last week, the BSE Realty index picked up 23% over the same period.

The question to answer is whether there is still a downside to the real estate stocks.

Percentage drop from 52 week high

Ansal properties 84%

Parsvnath developers 78%

Omaxe 77%

Sobha developers 72%

Unitech 66%

DLF 65%

BSE realty Index 64.5%

Akruti as mentioned earlier is the only outperformer among the real estate scrips and yet in the NSE market of 2,175 stocks, the stock has a 6-month relative strength of 34 which means it has underperformed 66.0% of the market

Omaxe indicates real estate slowdown - Impact on results

Omaxe Ltd is projecting a slowdown in its annual net profit for the next three years to about 40%, down from a more than a doubling of profit in the year ended March, citing a relative cooling of the property market and an increase in building material costs.

“There are a lot of cost pressures,” said Vipin Aggarwal, executive director of Omaxe. “Steel and cement prices have gone up in the last quarter and that is affecting our profit margin. The cost of a sq. ft has gone up by Rs70 just because of an increase in steel prices.” For instance, he noted, the price of steel strips has gone up by 29-30% in the past year.

Meanwhile, real estate companies are finding it more expensive to borrow and fund their projects.

“Debt has become expensive. If we were earlier paying Rs7 crore as interest payment for a Rs100 crore loan, today we are paying Rs15 crore,” Aggarwal said. “This is affecting our margins.” In its fourth quarter (Q4), Omaxe registered revenues of Rs574.97 crore and a profit after tax of Rs107.01 crore. It wasn’t a listed company in the year-ago period. But, Aggarwal said the margins in Q4 were down by 200 basis points over the third quarter.“In the last quarter, there was a 30-40% increase in input cost. This has affected our margin in the fourth quarter,” he added.

Like most developers, Omaxe is also looking at raising money through the private equity (PE) route. The company is looking to raise $500 million (Rs2,100 crore) through PE placements either at the company level or by setting up a special purpose vehicle, or a body that will hold some of its properties. The company is looking to dilute as much as 20%, Aggarwal said. Promoters of Omaxe currently hold a 90% stake in the company with the rest held by the public. “We can reduce the stake up to 70%,” he added.

The company said it has raised Rs100 crore by allotting 100 secured non-convertible debentures of Rs1 crore each amounting to Rs100 crore to LIC Mutual Fund on a private placement basis. Omaxe will use this money to fund construction.

Omaxe also plans to enter the real estate market in West Asia because it feels it can get good returns there. The company is in the process of identifying projects for development in the region and it plans to either incorporate or acquire a firm to start operations.

2007 RE performance and the PE opportunity in 2008

After the excesses of investing at dizzying valuations throughout 2007, many in the Indian real estate private equity arena are now taking stock of where we are and where we are going in the year ahead in 2008.

The year 2007 was a banner year, with estimates of more than $5 billion (Rs20,050 crore) of foreign funds flowing into projects sponsored by rapidly growing developers.

Another theme for the year was initial public offerings. With the DLF Ltd listing energizing the market, several developers proceeded to go public in India, creating a robust marketplace for retail investors to participate in the growth story while also offering ability for promoters and investors to project forward into yet another exit strategy. This is expected to be broadened in 2008 with the advent of the Reit (real estate investment trust) structure, which market participants hope will create more tax or structurally efficient structures for yield-oriented investors to participate in the real estate market. In most markets, the Reits offer pass-through vehicles which allow rental incomes to be distributed as dividends and taxed in the hands of the individual investors rather than at the corporate level. The final structure of Reits in India, including ownership structure, portfolio weightage and tax treatment, is still being debated.

Several challenges also emerged throughout 2007— rapidly rising prices of commodities, currency fluctuations, interest rates rising by 250 basis points over the year (in India) and the global spectre of the credit crisis all managed to put fund managers on defensive footing towards the end of the year.

Now, as we stand in 2008, the picture has never been murkier. With fears of a looming (if not already in place) US recession putting the brakes on a long period of global growth and its resultant liquidity, a choppy market seems to be ahead. In recent weeks, several high-profile IPOs have been put on hold, creating concerns of pricing and the ability to list for several developers with private equity-backing which had anticipated public offerings in 2008. Among fund managers, some will view the turbulence as an indication to restrain investing in historically volatile emerging markets. Others will view it as an opportunity to deploy equity into Indian markets, which still show some resilience.

In any case, as international real estate investors determine their strategy for 2008, it seems that four key trends are emerging that will help shape the strategy for many fund managers.

One, there is an increasing amount of attention to execution risk and physical underwriting. In the flurry of deals that occurred in the trailing 12-18 months, the velocity for decision-making created an environment that encouraged cutting corners. Sometimes, timelines and costs were plugged into Excel models, and the numbers being generated were viewed as sacrosanct. Excel is a wonderful tool, but that is all it is—a tool. But now funds are taking greater care to analyse the execution risks of a proposed project with careful input from in-house civil engineers, architects, quantity surveyors and research professionals. This is increasingly important as projects are being delayed due to a dearth of qualified project management companies to provide oversight in the development process.

Two, funds are looking to blend the risk profile of their investments by coupling execution and timing risk with price and valuation risk. Funds may look at investing in a suburban township, in which case the basis on the land is low and therefore the pricing risk is mitigated. However, such a project is typically larger in terms of square footage and requirement of new infrastructure, and would require phasing and more diligent project management. Such an investment might be coupled with a core investment in a city centre, where although there is greater price risk in terms of concentration of value (high floor space index or FSI cost; FSI defines the area of building that can be developed on a particular piece of land), the ability and time to build are greatly reduced.

Three, funds are increasingly looking to invest in mixed-use development projects, whether in townships or in integrated high-rise buildings in CBD (central business district) locations. Investors have found that there are synergistic benefits to having different asset types co-located. For example, proximity of retail and office can drive revenues in a hotel while also boosting residential pricing.

Finally, funds have begun to syndicate large transactions and partner, rather than compete. Much of this is driven by a pragmatic approach towards underwriting—the old adage of “two sets of eyes are better than one” has become a mantra as firms realize that the amount of due diligence needed in Indian development deals can require the efforts of multiple teams. Another significant benefit is that such sharing of deals allows collaborative fund managers to diversify risk among several transactions while also avoiding valuation escalations, which are sure to arise from competition. It helps that the real estate fund community is fairly tight-knit, with long-standing friendships among many members of various deal teams.

Rising interest in the Hospitality sector

Suffering from low margins, Indian developers are entering new businesses such as retail and hotel to diversify revenue stream and offset slowing demand for real estate projects due to 6 yr high lending rates and stringent financing norm. Below are a few recent investments in the hospitality sector

Yatra Capital, a Jersey-based private equity firm, will invest 4.4 million euros in an upcoming Taj hotel in Calcutta. Yatra Capital will acquire a 40 per cent stake in Jalan Intercontinental Hotels Private Limited, the company which is building the 200-room property. The hotel will be managed by Indian Hotels Limited under the Taj Gateway brand.

Warburg Pincus-Casino Group: The Kochi-based Casino Group of Hotels (CGH) is in the market to raise capital. According to The Economic Times, private equity fund Warburg Pincus is in talks with the company to invest upto Rs 325 crore. CGH is a leading hospitality group in Kerala, and is wholly owned by the the Dominic family. The report adds that they may divest upto 20 per cent, which would value the enterprise at around Rs 1600 crore. The company needs funds for their domestic as well as overseas expansion.

Rakindo Developers has raised Rs 4,000 crore ($1 billion) from Lotus Investment fund to develop hotel properties across India under the brand name Millennium and Copthorne Hotels. It has begun construction in Hyderabad and Bangalore, and plans to set up hotels in Vizag, Kochi and other south Indian cities.

Rakindo, which is looking for multiple options in this sector, has also formed a JV with with the UK-headquartered Lotus hotel investment fund, a private equity fund, to form Lotus Rakindo Hospitality. This JV will invest in three- and four-star hotel properties in the country and Asia.

Delhi's DLF and Parsvnath have also planned 75 and 100 hotels, respectively. DLF is collaborating with Hilton Hotels and Parsvanth with Royal Orchid Hotel.

Sahil Group, Pune-based property developer has tied up Carlson Hotels Worldwide-Asia Pacific for a project under the Radisson Resort and Spa brand at Alibaug and Pune

Nirmal Lifestyle has formed a JV with Accor Hotel for development in Mumbai and Goa.

But even as builders set aside huge funds for hospitality projects, they are aware of the risks that come long with them. With residential and commercial projects, once you have sold the properties, you wash your hands off them. In case of a hotel project, there is a long gestation (breakeven) period. The hospitality industry is also cyclical.

Quarterly earnings announcement. Margins take a dip.

Driven by the IPO money DLF showed a 5.5 fold increase in revenues however the profit margins dipping to 54.2% from 73.4%.

Unitech’s consolidated results, operating margin dropped to 41.5% in the March quarter, down from 64.3% in the December quarter. In the preceding three quarters, operating margin averaged 56.7%.

Parsvnath Developers Ltd saw a 32% increase in net sales however it posted a 17% decline in fiscal fourth-quarter net profit as it paid more taxes and construction costs rose. Margins fell from 32% to 20%

Sobha developers saw their PAT margins dropping to 14.7% from 17.3% even though it witnessed a revenue growth of 32.7%

Other than Akruti city which saw a PAT margin increase from 13.3% to 20.8% all the other real estate players saw their Q4 08 margins below their Q4 07 margins. The main reason attributed to this is the rising price of raw materials i.e. cements.

Indian developers are entering new businesses such as retail and hotel to diversify revenue stream and offset slowing demand for real estate projects due to 6 yr high lending rates and stringent financing norm companies are also launching mid-income housing projects and offering customized loan schemes to attract customers (Read affordable housing to know more about investments in the Affordable housing segment)

Smart ways being adopted by developers to acquire land

Real Estate developers acquire land through tens or hunderds of subsidiaries or independent entities promoted by their subsidiaries or promoters to acquire such holdings cheap, although the Urban Land Ceiling Act, the original reason for this practice, has been repealed in most states including Delhi and Maharashtra. Emaar MGF has 360 so called entities that account for almost half, or 6,600 acres of Emaar’s land bank. Emaar’s subsidiaries have minority stakes in these entities, but collectively own them. Omaxe Ltd, a company that sold shares to the public last year, has 31 subsidiaries and 169 entities floated by its promoters.

Companies floating multiple subsidiaries is not a new phenomenon in India. In the case of business groups or conglomerates, the holding company itself remains unlisted while some or all of the other firms are publicly listed. The Tata group is a case in point. Holding company Tata Sons Ltd is unlisted while some of the main companies in the group, such as Tata Steel Ltd, Tata Motors Ltd, and Tata Consultancy Services Ltd, are listed. In real estate sector, promoters have listed their holding companies, said Ganesh Raj, head, real estate practice, Ernst and Young.

What is Urban Land Ceiling Act?

The Urban Land Ceiling Act limited the amount of land that could be held by one firm, and while it has been repealed in most states, real estate firms continue to hold land through subsidiaries and entities. That is because, individuals and companies selling land usually demand and expect a bigger price from large developers.

Advantages of Subsidiaries or independent entities

1. Cheaper land acquisition : Bigger price is demanded from large developers. When a well-known developer acquires a piece of land, the value of the surrounding land increases, making it more expensive for the same developer to acquire more land in the area. Acquiring the land through an entity that isn’t immediately associated with the developer addresses both problems
2. Get funding at SPV level :
   Real estate developers claim that holding land under subsidiaries or SPV (Special Purpose Vehicles) helps them compartmentalize different phases in a single project or to float a project as an independent entity. It allows them to tap foreign and local funds. PE funding is available at entity level and in this way promoters do not need to dilute their stake in the parent company
3. Removes stamp duty :
   
   From the accounting perspective, having subsidiaries helps companies avoid stamp duty on the sale of land. Once a subsidiary acquires land, any transfer of land thereafter involves a transfer of shares in the company hence avoiding stamp duty

Difficulties faced by having large number of subsidiaries

1. Under the Companies Act, firms have to make an application for incorporating the company. Thereafter, Registrar of Companies issues a certificate of incorporation. A company cannot start functioning unless it receives Certificate of Commencement of Business. With so many procedures to form a company, Baweja of Emaar said they usually register companies even before they begin acquiring land. Time taken to start a subsidiary is very high and involves large regulatory hurdles.
   
2. Once the company is operational, each entity has to have at least two directors, get its account audited and conduct one annual general meeting (AGM). With 200 or 400 subsidiaries, it might sound a logistical nightmare to have so many board meetings and AGMs in a given year.

But, it is not so. Companies say all they require is a good legal team. “Every subsidiary normally has two directors, so the AGMs are more of a routine process,” said Parekh. By law no individual can be a director in more than 20 companies. It helps if the promoter has a large extended family. In most cases, directorships are filled by employees or relatives.

Fitch says outlook for India's Real estate negative

Fitch Ratings said the short-term outlook for India’s real estate sector is negative with slowing demand and growing liquidity concerns, coupled with the tightening bias of monetary policy, leading to a possible negative impact on the credit profiles of real estate companies.

But in Fitch’s opinion, this 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.

The rating agency, however, warned that the liquidity risks on account of significant bullet repayments falling due during the course of 2008 remain a key challenge across the board.

Larger, established and well-capitalised companies with access to banks/financial institutions would remain better positioned to manage this risk, while smaller players may end up either refinancing these at materially high rates of interest, or could default on their obligations, it said.

International Real Estate transactions dip 46%

Credit crunch and economic uncertainty have taken their toll on the global property market, with transaction volumes falling by 46 per cent in the first quarter, according to a property report.

Property sales figures of may and June show a fall in the sales in Asia indicating a slowdown. Drop in sales in US and Europe has become more severe.

Since September, the initial yield on acquisitions of commercial property has increased by more than 25 basis points in the Americas and by almost 40 basis points in Europe.

Cap rates in Asia have continued to fall, reflecting both the growing wave of capital and expected upside for its emerging markets.

Nearly $56bn of major commercial property sales were completed throughout Europe, Africa and the Middle East in the first quarter. In a significant turn of events, Europe surpassed North America as the most active marketplace for property transactions. However, since this status was achieved while suffering a 40 per cent drop in sales compared to the 70 per cent decline experienced in North America, this victory could be considered pyrrhic. It may also be short-lived, as property sales in Asia are not far behind and are growing fast. Additionally, property sales in Europe are off to a very weak start in second quarter by plunging 71 per cent in April when compared to a year earlier.

ASIAThe region, which includes Australia and New Zealand, posted largely positive trends in the first quarter but is starting to lose some of its momentum. Sales of major commercial properties in Asia totalled $48.3bn in the first quarter, a 27 per cent increase from a year earlier.

The Asia investment market is also being weighed down by the economic uncertainties and adverse credit markets that have caused property sales to plummet in other regions of the globe.

The gains in the first quarter mask a gradual slowing in activity that has become evident. In 2007 the average monthly volume was about $19bn; in the first four months of 2008 it was about $14bn. Volume reported in March represented a 25 per cent decline from a year ago and April’s totals were even weaker. Less than $10bn of property sales were reported in April throughout Asia, a decline of 42 per cent.

Global market factors are certainly contributing to the slowing market, but new regulations on land deals instituted by China are also partly responsible, the report said. From October through January, auctions of major land parcels in China totalled more than $10bn each month, but since the new regulation, the monthly volume has sunk to $3bn.

There are still several dazzling growth stories in the first quarter of 2008. Property acquisitions in India and Vietnam in the first quarter were multiples of levels posted a year ago. Activity doubled in Malaysia and grew by 50 per cent in Japan. The office sector in Japan was very active in the first quarter culminating with the $1.55bn.

Despite the recent fall in land sales, total volume in China was still up 70 per cent in first quarter to equal $21bn. Sales in Hong Kong were flat in the first quarter, but a strong April has caused its market to be up 21 per cent year-to-date.

On the contrary, the sales volume in Australia and New Zealand has seriously decreased, by 47 per cent and 24 per cent, respectively. Both countries did poorly in almost every sector as a number of major listed property companies struggled with the high debt levels incurred from a binge on property in the United States, the United Kingdom and Japan in 2007.

The total volume in Singapore was down 36 per cent in the first quarter mainly due to the 85 per cent volume decline in the apartment sector as investors expect further weakness in housing; volume in the office sector still grew 18 per cent to reveal the strong demand of Class-A office.

Developed countries have seen property transactions fall by 25 per cent this year while acquisitions in the emerging markets are up a healthy 68 per cent. Emerging countries accounted for $102bn of property sales, representing 45 per cent of total volume in Asia.

Donald Trump Jr Plans $1 Billion India Property Fund

Donald Trump Jr, the executive vice-president of the Trump Organization setting up a $1 billion fund to buy property in India. Trump Jr is betting on the fast growing Indian economy and may create a privately held fund, whose investors could include an Indian family. Trump Jr is the son of United States property mogul Donald Trump. Other details such as closing of the fund or when the first investment will be made is not known.

Trump was quoted as saying that the fund will primarily be for acquisitions of real estate in the high end, though it will also look at other opportunities. Another area he is looking at is resorts and plans to make his first investment in Mumbai. Trump Jr has been looking at the real estate market in India for some time now, and now plans to make the best of the downturn in the real estate market. The report added that Trump Jr is also planning a hotel and residential project in Mumbai with a local partner.

Trump Jr, who looks after development and acquisitions, is after the global expansion of the Trump Organisation. Last year the company entered the Dubai property market with the Palm Trump International Hotel and Tower through a local joint venture. Trump Jr is managing several marquee hotels, resorts, casinos and building complexes in New York, including the Trump Casino, Trump International Hotel, Trump Marina Hotel and Casino, Trump Taj Mahal Casino Resort and Trump Tower.

Indian real estate market is becoming a favourite with foriegn funds. Lehman Brothers Real Estate Partners recently invested $175 million in Unitech’s project in Mumbai and is also reported to be in Talks to to invest $525 million more. Deutsche Bank has also launched RREEF Alternative Investments which will invest more than $1 billion over the next three years in the growing Indian real estate. JPMorgan Chase & Co. has also recently invested $60 million in BPTP Ltd, a Delhi-based real estate company. It has also previously invested in Lodha Group.
Gulf-based investment firms have also shown a lot of interest in Indian real estate.

Khaleeji Commercial Bank has recently announced its latest investment fund, Global Logistix Navi Mumbai Investment Company, with a target capital of $430 million. In March this year, Abu Dhabi Investment House (ADIH) also announced the launch of India Entertainment City (IEC) fund, which would be financed through a $400 million Sharia-compliant fund. In October 2007 Gulf Finance House committed $630 million for Energy City India, an infrastructure project being set up in Navi Mumbai, Maharashtra.

LIC Housing to raise Rs 500 crore real estate fund

LIC Housing Finance, the mortgage arm of Life Insurance Corporation of India (LIC), is set to foray into the venture capital arena and intends to start a Rs 500 crore real estate fund by the end of this financial year.

LIC Housing Finance is reportedly scouting for a banking partner for raising capital and will soon approach the SEBI to set up an asset management company. To invest in listed companies, companies usually register with Sebi. LIC Housing Finance is currently talking to to three banks and may sign an agreement soon.

“This is an opportune time to enter, considering the demand. We will form a separate asset management company to manage this fund,” a senior LIC Housing Finance executive told Business Standard.

Based on the response to the real estate fund, the company will decide on whether it will expand its presence in the venture capital space.

“We are yet to finalise the deal structure, but will definitely be the majority shareholder in the fund. We want to launch the fund in this financial year. But we have to shortlist a banking partner,” the executive added.

Sources said there are at least three major banks in the fray for a tie-up and a memorandum of understanding will be signed soon. While LIC Housing Finance would be the promoter of the real estate venture fund, LIC could also be one of the internal contributors of the fund.

In a recent interview to Business Standard, LIC Managing Director Thomas Mathew said the insurer has no plans to directly enter the private equity or venture capital businesses.

The fund proposed by LIC Housing Finance will be used to finance real estate development and 50-60 projects are likely to be funded over 12-18 months.

The Mumbai-based company posted first-quarter net profit of Rs.104.66 crores, which is a 124 per cent spike from Rs.46.69 crores reported in the previous year quarter.

LIC Housing Finance shares rose up by 8.61 per cent to Rs 257.35 at close of trading on BSE yesterday. The company is also planning to float a subsidiary in Mumbai to sell all the financial products which include home loans, mutual funds, LIC’s insurance policies, credit cards and other third party products.

Ranchi Real Estate : Boom Time - Industrial Rush

Sourced from India Realty Forum

Ranchi, once the summer capital of unified Bihar, is still a favourite destination of many people, especially those in search of peace of mind. The city, with a population of over 15 lakh, still attracts people because of its comparatively pleasant climate and good schools. It has all the indicators of a modern city but it has not lost its traditional flavour, and that is where lies its charm.

The city has seen a phenomenal growth in real estate sector ever since it became the capital of Jharkhand in 2000. There is huge gap in demand and supply, primarily because of unavailability of land in the city area. “Ranchi witnessed huge influx of people from outside after becoming the capital. Many big companies started setting up offices here. All this resulted in a boom in the real estate sector — both residential and commercial,” says S N Singh, president of Jharkhand unit of Confederation of Real Estate Developers Association of India (CREDAI).

The city is also witnessing a retail boom. Big companies like Spencer, Reliance Fresh, Big Bazaar have already opened outlets. Reliance Hypermart will also be ready soon. Besides there are offices of most of the big companies and multinational banks. One multiplex has opened and another four are in the pipeline. This has resulted in a sudden growth in the sector. A few five-star hotels are also coming up in the city.

However, the basic demand comes from sectors like banking, insurance, finance, telecom, coaching institutes etc. According to an estimate, more than 10 million sq ft structure is being created to meet the demand. Also, there is not much scope for speculators as the buyers are those who want to purchase for self use or want to settle in future.

According to a government official, a new capital township — Greater Ranchi — is to be developed for which a global tender ha been invited. “Ranchi has also been selected as one of the Millennium cities, to be developed under the Jawaharlal Nehru National Urban Renewable Mission (JNNURM). All this is expected to give a fillip to the real estate,” he added.

With the state government announcing its rehabilitation and resettlement (R&R) policy, Jharkhand is poised for a big industrial boom. More than 60 companies, including ArcelorMittal, Tata Steel, Jindal Steel, Ispat Industries and Hindalco, have signed MoUs with the state government for setting up steel and power plants. Most of them have set up their offices in Ranchi while the rest are in the process of doing so. This has brightened the hope of developers.

“A majority of the development is taking place within the city. Unlike other cities, people here generally tend to avoid satellite areas because of poor connectivity in terms or road and public transport,” says Mr Singh. At present the concentration of development is in areas like Mahatma Gandhi Road, Circular Road, Ashok Nagar, Bariatu, Ratu Road and Kanke Road, where it is really difficult to get land. A majority of the projects are being carried out in joint venture or collaboration. “But we hope that once the Ring Road project, which is in the execution stage, is complete, the city will have a more defined area. In that scenario, connectivity of peripheral areas will also improve leading to further boom in the sector,” he adds.

According to Singh, the Chotanagpur Tenancy Act which prohibits sale of tribal land to non-tribals has been a major hurdle in the growth of real estate sector. “Due to the Act, we often find it hard to buy land for a project, despite being available in the municipal area. As a result, land prices are high but plots are less. The government must abolish this Act, at least in the urban areas, to facilitate real estate growth,” he adds.

PE investments up 3% in real estate in H12008

Real estate and infrastructure management sector saw private equity deals worth $2.32 billion in the first half of 2008. This figure is nearly three percent higher than the comparable period last year.

Average deal size fell over nine percent, however, reflecting the sluggishness in the market.

According to accountancy firm Grant Thornton, 33 deals were signed in the first six months of the 2008 compared to 29 deals in the January-June period in 2007.

PE deals, during the month of June, stood at about $247.5 million, almost half the level seen in May 2008 when about $ 478 million of PE money was infused into various projects.

in June, Lehman Brothers Real Estate Partners had announced an investment of Rs 740 crore ($185 million) for 50 per cent stake in the initial phase of a Unitech project, located on the Western Expressway of Mumbai.

During the same month, Axis Bank too invested Rs 250 crore in Lavasa Corporation, a subsidiary of Hindustan Construction Company, in the form of convertible preference shares and convertible debentures.

An industry official pointed out that while investors were still interested in the real estate market, they had adopted a selective approach towards projects. “With more projects on the negation table now, and given the current market sentiments, PE players will pick and choose. Only those projects which have the required approvals in place would hold their interest,” the officials said.

Rising raw material prices hit developers' margins

With the cost of basic raw materials like cement and steel going up in the past few months by over 60%- 80%, the cost of construction for developers have increased by over 50% - 60% of the budgeted costs. This rise in raw materials is hurting the operating margins of the real estate developers.

The cost of cement has risen from Rs 150 per bag in 2006 to Rs 250 per bag now whereas the cost of steel has risen from Rs 22-28 per kg to Rs 45 - 50 per kg now. This is a steep increase of almost 80%. In the case of steel, the past three to four months have been especially bad. From around Rs 35 per kg in March, steel prices have risen to around Rs 47 per kg in July.

In 2001, the cost of construction was Rs 500 per square feet which has risen to over Rs 1,200 per square feet, largely attributed to the rise in the prices of raw materials. Clients are now asking developers to provide low cost solutions.

However, with the price of steel set to increase even further as indicated by the Union Minster of steel Ram Vilas Paswan and steel manufacturers like TISCO and SAIL, building that dream home is only set to get more expensive.

Unitech Update

The current rising interest rate environment is softening the demand for residential and commercial units. The prices of real estate properties in some major metropolitan areas are already 10-15% off their peaks.

Furthermore, with inflation rates hovering around 12%, Unitech’s construction costs are likely to increase significantly, thereby pressuring its margins.

To limit the exposure to a possible decline in real estate prices, while securing financing for its projects without increasing its already significant leverage, it is looking to monetize several of its upcoming projects through private equity deals.

Unitech’s current land bank is approximately 14,000 acres, consisting of 750 mn sq. ft. of salable area, which is expected to be developed over the next 10 years.

It also plans to acquire more land at strategic locations, but for now, is focusing on the development of the Mumbai market and on building its hospitality business.

The company has also announced plans to sell a 26% stake of its telecom arm to a yet-to-be-identified strategic foreign partner. It is considering raising up to Rs80 billion of debt over the next five years to fund its telecom operations.

DLF Buyback - How it is shaping up

Sourced from VCCircle

KP Singh (pictured), the chairman of the country’s biggest real estate developer DLF, is trying to do an Anil Ambani (remember Reliance Power?) for its shareholders. The firm, which went public last year and is currently trading at one third of its January highs of Rs 1,225 (before markets crashed) and about 20 per cent below its IPO price of Rs 525, has announced a share buyback to prop up its price.
Earlier this year Anil Ambani’s Reliance Power had announced a bonus issue for its shareholders to bring down the cost of acquisition for investors who put money in its IPO. However, the gamble has not worked for Ambani as poor market scenario and the power sector stock bubble has ensured the shareholders have not gained much even after the bonus issue.
Will it be the same story for DLF? Analysts have unanimously termed it a ‘desperate action’. One of the key reasons for the decision is to quell market rumours that the firm is facing cash crunch (there is also an unconfirmed murmur that DLF has defaulted on some scheduled payments).

The Buyback
According to the announcement, DLF will buyback a maximum of 22 million equity shares (around 1.1 per cent to 1.3 per cent of the total equity base) at a maximum price of Rs 600 per share. The catchword is ‘maximum’ price and is not a fixed price buyback which can benefit shareholders directly. The company has earmarked Rs 1,100 crore for the buyback which means right at the beginning it is clear that it would not buyback the whole of 2.2 crore shares at Rs 600 as that would mean outgo of Rs 1,320 crore.
After the buy-back, the promoters’ shareholding in the company will go up to 89.3 per cent from 88.1 per cent. This would be marginally short of the 90 per cent limit after which the company would cross the minimum public shareholding limit of 10 per cent which calls for delisting.

What It Means
But does this serve its purpose? One view is that at best the buyback has managed to confuse the market further. However, some analysts VCCircle spoke to said that is has managed to lift sentiments about the stock even though just marginally.
First of all it means the stock could have bottomed out and there is less risk to further slides downward. The stock is already up 10 per cent over a week, though it is till 10 per cent below its price one month back. The stock is trading at Rs 462 level as against the buyback price of Rs 600.
Secondly, it has managed to instill confidence in gullible investors who are not aware of buyback dynamics and feel Rs 600 is the right price and the price would atleast touch that level in sometime.
However, it means that the cash flows would be that much strained by this decision. The management seems to have factored the fact that a large part of the buyback wont be done at all.
The firm’s core operations is not generating additional cash and DLF is managing its operations though the IPO money raised last year besides banking on fresh borrowing and raising capital by selling equity in various special purpose vehicles. For the year ending March’08, the company had negative cash flow from operations of more than Rs 2,000 crore. The total debt had hit Rs 12,600 crore mark in March.
Analysts say such a situation calls for conservative cash management rather than appeasing shareholders with share buyback. If the last attempt by Anil Ambani to come out with such a face saving measure for Reliance Power is any indication it may not help much if the market goes into another tailspin!

DLF prices buyback at Rs 600 per share

In its board meeting today, DLF has announced a buy back of Rs 1,100 crore equity at a maximum price of Rs 600 per share. The volume of the buyback would be 2.2 crore shares , i.e, 1.1 - 1.29% equity. The promoters stake will go up from 88.1% to 89.3%, in case the buyback is completed.

The board has decided on buying back more shares than it had initially planned and the share price has also been upped. The promoters are desperate to increase the dangling share prices which have already recovered almost 15% since July 2, after the announcement of a board meeting was made.

DLF's buyback desperate attempt to floor share price

After losing more than 71% of its market cap in the past six months, DLF has announced a share buyback, planning to spend Rs 500 crore equivalent to 0.6% equity stake or 1 crore shares getting extinguished.

It can be inferred that the average acquisition price would be Rs500 per share (Rs 500 crore divided by 1 crore shares). which is lower than DLF's issue price of Rs 525.

As per SEBI norms, promoter holding beyond 90% could trigger delisting proceedings. DLF promoters hold 88.17% in DLF. So it can acquire a maximum of 1.7%.

However, a company announces a buyback only when it has excess capital which cannot be reinvested in the business and the company does not have better growth opportunities. We have been hearing reports of a number of projects being delayed because of a lack of funds from the developers. In this liquidity crunch situation, it would be a better strategy to preserve the cash and use it for development of projects. However, the buyback is suggestive of the fact that the company is trying the salvage the dangling share prices of DLF much below the IPO price.

DLF stock has slid 71% off its January peak of Rs 1,225 to reach an all-time low of Rs 350 on Wednesday. Following the buyback announcement, scrips rose 14.7% to close at Rs 423 on the NSE on Thursday. Mostly, companies use surplus cash reserves to buy back shares in order to shrink capital base and enhance earnings per share. But in the case of DLF, as also in the case of a few other Indian companies earlier, a buyback is being resorted to put up a brave front before investors, which may not necessarily work.

Other real estate company stocks have also fallen by over 75% this year. Unitech has lost 75%, while Parsvnath and Omaxe have slid over 80% each. Given the changed economic scenario, most brokerage firms have been revising downwards the net asset value (NAV) as well as target price of real estate firms.

Global Retailers stay away due to India's realty

India presents a huge opportunity to global retailers due to its huge and growing population, burgeoning middle class, increasing purchasing power and hundreds of other reasons. A lot of these retailers such as Walmart, Carrefour, Debenhams, Next, Tesco have been actively looking at the Indian market. However, one thing that scares the global retailers is the Indian real estate market.


In India, shopping malls are very expensive and rentals are very steep in most of the markets. Service charges are double that of common maintenance area and rentals are 50 per cent more than what is charged on the carpet area.

Lack of funds has made it very difficult for developers to complete their malls on time. Most of the malls are being delayed by over 6 months to 2 years. This derails the plans of the retailers.

Indian real estate needs to get friendly to tap these foreign retailers who can be a huge contributor to the growth and development of the country.