Realty sector FDI equity inflows drop 45% in Q4 - Hindu Business Line (Online Edition)

MUMBAI, MAY 12:  

The FDI equity inflows in India's realty sector in the fourth quarter of FY14 declined by 45 per cent at $ 3.96 billion against the previous quarter, according to a report on real estate market and private equity Investments in it from Capri Global Capital.

However real estate dominated the private equity landscape in 2013, accounting for 12.70 per cent of deals (value) concluded in 2013 as per the report.

The report also highlighted that the number of investments in the real estate sector concluded in Q4 of FY14 increased to 19 against 8 in the previous quarter.

"Large private equity funds preferred the joint development model for investments in real estate. Post elections higher interest is expected in Grade A office spaces, primarily on the back of renewed sentiment and regulatory reforms such as REITs," the report added.

Recent Trends in PE investments in Real Estate sector in India

The PE investments in real estate was recorded at $276 million (around Rs 1,638 crore) in first half of 2013 as compared to $514 million (around Rs 3,050 crore) in the same period last year. The decline in the quantum of PERE investment was essentially due to less number deals (13 in H1 2013) as the average ticket size of deals remained same.

Consultancy firm Cushman and Wakefield attributed the drop to the volatility in the market, including slower growth of the Indian economy, political stalemates and depreciation of the rupee. While, there is a strong investment sentiment for PERE transactions in India, they display a reflection of the market sentiments, where funds are looking at only embarking on projects with strong fundamentals.

Even though private equity investment in the Indian real realty has fallen nearly 50 per cent to $276 million in the first half of 2013 due to lack of good projects and weak sentiment, foreign investors are still bullish on the sector. PE funds continue to show keen interest in the market with a number of deals in discussion.

“Investors are willing to invest in real estate; however they are exploring the market for right real estate projects. We anticipate that in the next few quarters, after some regulatory and politico-economic environment are regularised, the momentum in real estate will pick up throwing open more investible options for the investors,” said Sanjay Dutt, Executive Managing Director of South Asia operations, C&W. He added, currently, it was estimated that around $2 billion is ready to be deployed in the real estate sector of the Indian market. The fund raising environment (domestic and offshore) has consistently improved with more quality capital available for the sponsors with demonstrated track record.

According to property consulting firm Cushman and Wakefield about $2 billion (Rs 11,854 crore) is available with private equity firms ready to be deployed in real estate in the next one year, but PE funds want to put in money only in those projects with strong fundamentals. According to Sanjay Dutt, despite the slowdown in the construction market and the reduced number of investible projects in India, real estate is still the fourth most-invested sector by private equity funds.

“We anticipate that in the next few quarters, after some regulatory and politico-economic environment are regularised, the momentum in real estate will pick up throwing open more investible options for the investors,” he said.

So far in 2013, the highest value PE investment was $131.6 million in Pune, followed by $67.5 million in Mumbai, $38.8 million in the National Capital Region, and $16.9 million in Bangalore.

Even data from Venture Intelligence shows that private equity-Real Estate firms made 13 investments (amounting to $318 million across 12 deals with disclosed values) during the quarter ended June 2013. The volume of investments perked up significantly from the seven investments in the same period in the previous year (which witnessed $172 million being invested across six transactions with disclosed values) and also the eight investments (worth $569 million) during the Jan-Mar 2013 quarter.

However, there is a strong growing trend towards investments in ready office space. The growing stability of the market is reflected by the continuous growth of the core investors (number and value) with over $1.3 billion (Rs 7,705 crore) invested in ready office space during the last three years.

Some recent marquee deals/developments in PE investments:

•          Pune witnessed transactions such as the Panchshil Realty and Ireo Management Ltd SEZ by Blackstone for $75.9 million (Rs 4.5 billion).

•          Ascendas Trust’s Rs 600 crore (about $110 million) acquisition of 2 million sq. ft of office space in Hyderabad from Phoenix Group was the largest investment during the second quarter of FY13. This was followed by Xander’s Rs 280 crore ($52 million) investment in Supertech’s 125 acre township project in Gurgaon and Clearwater Capital’s (along with Ajay Piramal Group non-banking financial company PHL Finance) Rs 300 crore ($50.2 million) investment to finance VGN Developers’ acquisition of a land parcel for a gated community project in Chennai.

•          In September ‘13, Kotak Real Estate fund said it had raised $200 million (Rs 1,200 crore) from select group of investors and has firmed commitments to raise $200 million more to close its $400 million eight-year tenure fund to invest in only residential properties in India’s six metros.  The fund will invest an average of $15-20 million in each project and will put in money from the first close in 10-12 projects. It is looking to generate a return of 20 percent for investors of the new fund.

•          PE Firm, Indian Property Advisors Pvt Ltd. (IPAL) is planning two funds – a Rs 300 Cr domestic fund and $250 – 300 million offshore fund, which would be raised in the second quarter of 2014. IPAL would be investing in small redevelopment projects with a turnaround of three years and will only fund for the growth capital.

The company plans to have plain vanilla equity investment rather than a structured deal.

•          Even Tata Realty has put its 780,000 sq ft IT park in Mumbai’s Goregaon suburb on the block and aims to raise Rs 800 crore through the sale of the park, while Oman’s State General Reserve Fund and the Government of Singapore Investment Corp (GIC), investment firm Temasek committed to invest $200 million in HDFC Real Estate Fund.

•          DLF, India’s largest real estate company, had initiated talks with four buyers, including leading private equity (PE) funds, for the sale of Aman Resorts, its luxury hotels chain, said a source involved in the deal. In December 2012, DLF had announced it had sold the entire stake in Aman Resorts for $300 million to Adrian Zecha, the hotel chain’s founder. Sources said Zecha had missed two payment deadlines in March and June, adding he wasn’t able to raise funds for the deal. “Adrian is still in the fray. Being a management buy-out, it is taking time to close. In the meantime, they (DLF) are also in discussions with four other buyers, including some global PE funds that are in various stages of evaluation and diligence,” the sources said. “They are not banking on one buyer for the sale. That is why they’re talking to three-four companies.”

•          The real estate fund of Morgan Stanley has abandoned plans to invest nearly $200 million (about Rs 1,240 crore) in an upcoming commercial real estate project in Mumbai after the rupees recent plunge against the dollar made the deal unrewarding, three people familiar with the development said. Morgan Stanley Real Estate Fund was working on the structured finance deal with Mumbai based Wadhwa Group since January to invest in the latter’s 1.6 million square feet office project in Bandra-Kurla Complex. Construction on the project, called ONE BKC, is due to be completed in the next 12-15 months. The fund has invested about $780 million in Indian real estate so far and the investment in ONE BKC would have been its first in a commercial property in Mumbai. Returns that were arrived at in earlier negotiations between Morgan Stanley and Wadhwa were shrinking even before concluding the deal, one of the people quoted earlier said. The hedging cost for the entire deal would have been huge. Morgan Stanley declined to comment, but Wadhwa Groups chief financial officer Srinivasan Gopalan confirmed that the proposed deal has fallen through. Wadhwa Group is now in process of raising domestic debt of over Rs 1,100 crore from Standard Chartered Bank for the project.

(Sources: First Post 1st August 2;013, Economic Times-26-Sep-2013, Live Mint 19th Sep ’13, Business Standard 28th Sep ’13, 27th July ’13)

Real Estate Regulatory Bill

Real Estate Regulatory and Development Bill – Step in right direction, but just 1st hurdle cleared

Union Cabinet of India passes the Real Estate Regulatory and Development Bill which intends to project consumers of house space in the country by implementing best practices. The Bill proposes a regulator in each state / union territory which will address the industry issue and a tribunal for fasten the process of the disputes.

The bill would next be tabled in both the house of Parliament and then to standing committee before it becomes an Act. The Bill has just cleared the first hurdle and may take longer to be implemented at ground level.

Reasons for delay in project completion are addressed, but amending the ‘70% customer advance’ clause will lead to low uniformity

The Bill main intention is consumer protection in real estate space wherein project delay is major area of concern. The Bill addresses this concern by two proposed clauses – 1) the developer cannot launch a project before all approvals in place and 2) 70% & lower Customer advances, as stipulated by the state regulator, would be utilised only for development of project which is monetized. The second point here is been diluted from 70% to 70% & lower and also has given power to decide the share in the hands of state regulator. This amendment has diluted the effect of the point and would lead to higher red tapism in the sector.

The current Bill requires a lot of Clarity and doesn’t address many Loopholes in the proposals

The amended RE Bill has many points which needs clarifications or which has loopholes. Firstly, it doesn’t state that the state regulator will have to follow whose law when it comes to the State Bill and Centre’s Bill are at crossroads. The bill doesn’t provide clear demarcation in definition of a project and its phases as well as common amenities for assigning customer advances lock-in.

The bill implemented in the current form affects marginally to developers; lowering the churn of capital is the only concern

The current form of the Bill is diluted from the draft published in 2012. No pre-launches officially & registration of real estate agent would curb investor money in the sector when combined with 1% TDS clause introduced in Union Budget. But there are means to these issues which may lower the impact of the intent of the Bill. Hence, there would be some impact on the churn of capital as usage of customer advances would be restricted. Also, some cost of the company would increase in getting stipulated approvals from the state regulatory.

Interpretation of Key Clauses which may affect Real Estate Companies Clause Intent Current Practice Impact Clarity / Loophole

Clause:

A Real Estate Regulator in each state who will implement and address set regulations in that particular state

Intent:

To streamline best practices in the industry which is reeling under lot of issues pertaining to consumer

Current Practice

There is no single body who regulates the industry and its growing issues

Impact:

A lot of developers would have to streamline their operations to best of industry practices

Clarity/loophole:

Will the state regulator adhere to state level bill or this bill overwrites it

Clause:

The developer cannot launch the projects till all the approvals are in place and the project is registered with the regulator along with project plan

Intent:

To ensure timely completion of projects by making capital available

Current Practice:

A lot of developers would pre-launch the project and utilise the advance from sale towards getting approvals as well as other means

Impact:

The developer cannot do any pre-launch before getting project approvals and registering the same with the government authority. Hence they will have to deploy capital from other source then customer advances

Clarity/loophole:

The Company can always pre-launch and take advances and show it as short term debt. Later convert the same in customer advances at the time of launch. All the pre launches are done on understanding and trust between the parties

Clause:

Compulsory deposit 70% or lower funds received from allotees in a separate bank account. (The same was changed from 70% in 2012 bill to 70% or Lower in 2013 bill)

Intent:

To ensure timely completion of projects by making capital available

Current Practice:

A lot of projects completions are delayed because the developer utilise the customer advances for other means and assign approvals delayed as the reason.

Impact:

The developer cannot utilise the capital generated from one project, unless it is completed, to finance the capital requirement of other projects. This will lead to lower availability of the liquidity.

Clarity/loophole:

There is missing clarity on the definition of the project, as the industry phases out a single project. Can the developer utilise advances of phase 1 towards approvals of phase 2 and not deliver the common amenities, is not clear.

Clause:

Mandatory registration of real estate agents with the regulator

Intent:

To infuse professionalism in the intermediary role To curb money laundering

Current Practice:

With absence of any regulatory authority, there is no registration. Also, with no registration the agents launder the money through their account for a client.

Impact:

This clause along with TDS clause introduces in Union Budget 2013-14 will lead to curbing the transactions routed through multiple parties.

May curb investors from using RE as a medium for money laundering

Clarity/loophole:

The bill states the role of the agent but fails to address the repercussion of the falsification of information by him / her Also, there is no differentiation between a role of agent or a consumer played by the same person.

Charges for putting out misleading advertisements related to the projects carrying photographs of actual site.

Removed in 2013 Bill.  Was part of 2012 Bill

Written Agreement with the buyer needs to be registered before taking more than 10% of advances

Removed in 2013 Bill. Was part of 2012 Bill

Source: Emkay Research, Housing Ministry 

Interest rates unlikely to come down in near future

P H Ravikumar has recently taken charge as managing director at Money Matters Financial Services. At a time when the Indian economy is in the throes of a slowdown and credit demand is tepid, NBFCs such as Money Matters has to watch out for delinquencies. However, Ravikumar, who has been a banking and financial sector veteran with over four decades of experience with stints at the Bank of India, ICICI Bank and NCDEX is unfazed. In an interview, Ravikumar says that loan demand from small and medium enterprises (SME) will continue to be strong and the sector is poised for robust growth once economy picks up. Ravikumar talks to Sanjeev Sharma about launching a real estate AMC, Money Matters’ name change and expansion plans for Punjab and Haryana.

Q: How do you see the market for SME portfolio in the current financial year? How has been the demand for loans so far in the current fiscal year?

A: Small and medium enterprises have been the bulwark of both services and industrial sectors. They are the largest exporters, largest providers of employment, but have the least funding from the organised financial sector. While the overall credit growth has been around 15 per cent for the banking sector, the latent demand from small and medium enterprises for funds from the organised sector will be manifold this figure. Even within the SME segment, the small and micro industries have the least support from organised financial sector. At Money Matters, the demand for loans has been strong in the first quarter of fiscal 2014. Our total loan book currently stands at around Rs 475 crore.

Q: How do you see the growth of the SME market in North India, especially Punjab and Haryana?

A: Both these states have been the drivers of the SME growth in the country. We see a steady growth at a compounded annual growth rate (CAGR) of over 18 per cent-20 per cent in this sector notwithstanding what is happening in the other parts of the economy currently. As the growth in the economy picks up over the next few years, the SME sector will grow at a compounded annual growth rate of well above 25 per cent. It is exactly for this reason that we are expanding our footprint in these geographies. We plan to open more offices in the two states based on our business growth and need to tap this potential opportunity.

Q: What is your view on interest rates? Do you see room for more rate cuts and by what extent?

A: Current macro trends —food inflation, current account deficit and the consequent pressure on value of rupee vis-à-vis major international currencies — seem to indicate that there is little room for interest rates to come down. The pressure on the operating profit levels of banks, particularly owing to level of stressed assets, also indicates that banks are unlikely to reduce their rates of interest in the near future. Unless there is dramatic improvement in the overall macroeconomic scenario, I do not see perceptible reduction in interest rates in the near future.

Q: What are the new sectors you are looking to tap for lending?

A: Residential home loans, particularly in tier II and tier III cities, revival of SMEs which are facing financial stress and specific structured corporate loans are the major segments where there is a strong latent demand for funds and can be tapped for lending.

Our current growth plans for the current calendar year can be adequately met from our own net funds. We have no borrowings at present. However, towards the end of the calendar year, we would raise funds of about Rs 250 crore to Rs 300 crore.

Q: Recently, Money Matters has entered into a strategic tie up with Capri Capital Partners LLC. (CCPL). Can you share details of this partnership?

A: CCPL is among the top one per cent of the funds - by performance in the US in their segment. They have strong skills in raising resources from various international markets and managing risks in the realty sector. We have strong knowledge of the domestic real estate market. The partnership envisages setting up of a real estate AMC which will manage projects end to end subject to various approvals. The chairperson of CCPL will also be joining the board of our company. We believe their skill sets strengthen our growth in India. Besides, we are in the process of changing our name to Capri Global Capital that will reflect our tie-up. While the Reserve Bank of India nod has come as also the shareholders’ approval, we expect the ROC approval for the name change over next two or three weeks.

Source: http://www.tribuneindia.com/2013/20130722/biz.htm#2

Mumbai Property Market

We had carried out survey of Mumbai property market and the take away points are:

Price rise despite weak property market:

This has been the case despite weak demand, the main reasons being: a) rising input cost b) delay in approvals and increase in incidental cost due to revision in plans due to change in regulation. C) Leveraged developers covering their finance cost. D) Very few developers are offering on spot discounts.

Limited near term supply to keep price high:

Only 9% properties are in ready possession. More than 60 % of projects are scheduled for delivery post 2015. Delay in possession dates of projects. Delay in projects is due to delay in approval process. Projects announced by renowned brands such as L&T, Lodha witnessed robust sales in 1QCY13.

Rates quoted on carpet area basis and 20:80 schemes offered by developers:

Most of the developers have started quoting rates on carpet area basis for better transparency. Efficiency in Mumbai apartment range between 60-70 % and super area built up is calculated as 143-150 %. No developer has officially cut base prices as yet. However, many developers project 20:80 scheme whereby buyer pays 20 % upfront while booking and 80 % on possession. Further freebies like stamp duty waivers, floor rise waivers are offered to attract buyers.

Not much rate cut benefits passed to end consumer:

Even though RBI has cut interest rates by 100 bps in last 1 year, not much benefit has been passed to end consumer. Average loan rate currently is 10.5% vis a vis 11 % in Nov 11.

1% change in interest rate result in 6-7% change in EMI for a 20 year loan.

Sales registration have shown YoY a degrowth in 19 out of 25 months ending Feb 13.

Steady growth in leave and license registration indicated more people prefer to stay in rented apartments than buying homes.

(Source: Prop Equity)