Observers cite competition from large public sector offerings

Investors are more likely to choke on a glut of India property IPOs set to hit the market this year than gobble them up.

Even though Godrej made a strong debut this month in the first Indian property listing in two years, the initial public offers of other developers could meet more restrained investor buying as they compete with a slew of large public sector offerings.

At least 16 real estate firms have lined up plans for initial public offers to raise about US$6 billion, buoyed by an 81 per cent rise in the Mumbai stock index last year and as property buyers return.

‘If all the IPOs get bunched up, we have a problem. Everybody may not see the light of day,’ said Jayesh Shroff, fund manager at SBI MF, which manages about US$8 billion worth of funds.

What awaits India’s property IPO rush may be exactly what happened to China’s offerings in recent years. The Chinese property sector saw early success from some offerings several years ago, but a dozen or so that followed suffered as investors grew tired of the same old IPO story.

And it could also play out as it did in India in 2007, when DLF and others floated, but are now among the worst market performers, trading way below their IPO prices, with market valuations sliding between 70-90 per cent.

Godrej has already dropped 17 per cent from its Jan 5 debut high after its around US$100 million IPO.

India’s real estate industry, like the sector globally, was hard hit by the 2008 credit crisis after years of booming demand.

Property prices doubled in the two years to 2007, fuelled by interest from foreign investors.

But the sharp rise was followed by interest rate rises to calm inflation and the global financial turmoil, pulling down property sales by more than half. Left with unsold and incomplete projects, developers were forced to restructure spiralling debt obligations.

The equity market rally since March threw a lifeline, and several real estate firms are again dusting off plans to raise public money.

‘Although many developers were able to defer repayments, high interest costs and requirement of funds for project execution are still a concern,’ said Sushanto Roy, chief executive at Sahara Prime City, which plans a US$650 million IPO this year.

A recovery in the property market has also been encouraging.

A series of interest rate cuts and pent-up demand from a large urban middle class have helped push up prices by about 30 per cent from last year’s lows in the first quarter.

Indian companies sold shares worth US$17.5 billion last year, mostly by property and power sector firms. IPOs made a comeback in July after an 18-month drought, with 21 companies raising a total of US$4.1 billion since then.

These numbers should be dwarfed this year, mainly by a government roadmap to raise funds through stake sales in state-run firms, as it strives to speed up reforms and cover a widening fiscal deficit in Asia’s third-largest economy.

So all eyes will be on the next property IPO, which could be DB Realty, which set a price for its US$325 million IPO, sources said this week.

Others in the likely line-up include a US$650 million IPO by Lodha Developers, an US$830 million offering by Emaar MGF, an Indian joint venture of Dubai’s Emaar Properties, and a US$650 million IPO by Sahara Prime City.

Investors, still scarred by the sub-prime crisis, remain cautious of investing in a property market that is beset with red-tape, land disputes and difficulty in valuations due to the huge quality difference among India’s developers.

‘If greed overtakes you and you price it very high, the IPO might fail,’ Pranay Vakil, chairman of property services firm Knight Frank India, told Reuters Insider.

Mr Vakil is adviser to several of the upcoming offers.

Source: Business Times, 28 Jan 2010

MORE than a dozen Indian real estate firms have lined up plans for initial public offers to raise about US$6 billion, buoyed by an 81 per cent rise in the Mumbai stock index last year and as property buyers return. Following are key facts about India’s property market.

# The property market contributes 5 to 6 per cent of India’s gross domestic product, or about US$50 billion annually to the US$1 trillion economy.

# Total foreign direct investment in housing and real estate in India, since investment norms were first eased in 2005, stands at US$7.7 billion, including US$2.2 billion in April-November 2009.

# The Bombay realty index underperformed the main index last year, rising 70 per cent after a slump in the first quarter, versus the market’s 81 per cent gain.

# The major cities of Mumbai, New Delhi and Bangalore have the most expensive residential property in India, with rates comparable to New York, London and Tokyo, due to limited land and the government’s push to develop the services industry.

Source: Business Times, 28 Jan 2010

Bids, with a floor of 300,000 rupees per square metre, open on March 3

India’s financial capital plans to sell office space in an emerging business district at a minimum price of 4.35 billion rupees (S$132 million) in a deal that may test demand for property amid an economic recovery.

The Mumbai Metropolitan Region Development Authority, or MMRDA, proposes to sell 14,500 square metres of built-up area on 3,162.5 sq m of land in Bandra-Kurla, where Citigroup Inc and the nation’s capital markets regulator are located.

The reserve price is 300,000 rupees per sq m, the authority said in an advertisement, unchanged from the last such offer in 2008.

The sale aims ‘to cater to the growing demand for business area’ in the north-central neighbourhood that was reclaimed from marshland, MMRDA said.

Indian and overseas companies in financial services, insurance, fund management, information technology, telecommunications, among others, can bid for the land, the advertisement said yesterday. Bids open on March 3.

Standard Chartered Plc and Nomura Holdings Inc are among companies expanding their India operations as consumer spending fuels growth in Asia’s third-biggest economy.

An 81 per cent rally in the benchmark stock index in 2009 has also revived developers’ interest, with Lodha Developers Ltd and Sahara Prime City Ltd among at least nine property companies planning to raise about 164 billion rupees in initial sale of shares.

Bandra-Kurla is centrally located in the Manhattan-shaped island-city and the authorities are increasing its access with a new Metro rail, in addition to the existing commuter train and road networks. The existing main business district in South Mumbai at the tip of the city lacks expansion space and stretches daily commuting to up to four hours for some.

The new business district is closer to the city’s two airports, compared with Nariman Point in South Mumbai, which is about 25 km from the closest domestic airport.

The last sale of land in 2008 attracted buyers for only three of the five plots on offer as the global economic slowdown dried up funds and demand for property. Jet Airways India Ltd then bidded 344,448 rupees per sq m for a land parcel with a maximum 24,000 sq m of development area.

India’s gross domestic product grew 7.9 per cent in the three months ended Sept 30, making it the fastest-growing major economy after China.

Finance Minister Pranab Mukherjee on Jan 8 forecast growth of as much as 7.75 per cent for the year ending March.

The Reserve Bank of India has slashed interest rates to a record low to shield India’s US$1.2 trillion economy from the global recession, fuelling demand.

Source: Business Times, 26 Jan 2010

ASCENDAS India Trust has recorded distributable income of $14.1 million for its third financial quarter ended Dec 31, 2009, down 8 per cent from a year ago.

Distribution per unit (DPU) for Q3 was 1.85 cents, also lower by 8 per cent.

Total property income for the quarter was $29.9 million, which was 4 per cent higher than the corresponding quarter last year. Net property income was $19.3 million, up 13 per cent.

The trust’s portfolio of 4.8 million sq ft of completed space is fairly evenly distributed among Bangalore, Chennai and Hyderabad. The properties house 248 tenants operating in various IT sub-sectors such as software development, business process offshoring, research and development, and data centres.

Portfolio occupancy remained high at 97 per cent as at Dec 31, 2009, while tenant retention rate over the last nine months was 79 per cent, the trust said.

Jonathan Yap, chief executive officer of Ascendas Property Fund Trustee Pte Ltd, the trustee-manager, said: ‘We are pleased to report another strong portfolio performance in the third quarter. Indicators are suggesting that an economic recovery is well underway.’ The Indian economy grew 7.9 per cent year-on-year in the quarter ended September 2009.

‘We will focus on positioning the trust to benefit from further improvements in the general operating environment,’ he said.

The trust will continue to focus on growing the operating earnings of its assets by actively managing the portfolio, optimising its capital structure, and further growing the portfolio through developing the land it owns and pursuing yield accretive acquisitions.

Source: Business Times, 23 Jan 2010

ASCENDAS India Trust has reported an 8 per cent drop in distributable income to $14.1 million in its third quarter.

As a result, its distribution per unit for the three months ended Dec 31 fell to 1.85 cents from 2.02 cents in the previous corresponding period.

Net property income was up 13 per cent at $19.3 million.

For the nine months to end-December, distribution per unit rose 5 per cent to 5.76 cents on the back of a 17 per cent jump in net property income to $56.8 million.

On an annualised basis, the distribution works out to a yield of 7.4 per cent against a closing price of $1.03 on the Singapore Exchange on Thursday.

Ascendas India, the first listed Indian property trust in Asia, manages four IT parks in Bangalore, Chennai and Hyderabad.

The occupancy rate of its portfolio of properties remains high, well above the rates of other similar properties in the vicinity.

Lauding its strong showing, Mr Jonathan Yap, chief executive of the trustee manager of Ascendas India, said: ‘Portfolio occupancy remained high at 97 per cent as at Dec 31, 2009, while tenant retention rate over the last nine months was 79 per cent.’

Those who did not renew gave Ascendas India an opportunity to introduce new tenants and refresh its tenant profile.

Low gearing, or debt to equity, level of 18.7 per cent also means that the trust has the flexibility of taking additional debts to fund future expansion.

Ascendas India said it may make acquisitions from the market or through two right-of-first-refusal arrangements.

Already on its drawing board are plans to develop new space on land that it owns totalling about 1.7 million sq ft, of which about 1.2 million sq ft are due for completion this year.

When fully completed, the 1.7 million sq ft of new space will increase its current 4.8 million sq ft of income-producing space by about 35 per cent.

As payouts to unit holders are made twice yearly, the third quarter’s distribution will be made at the same time as that in the fourth quarter.

Ascendas India units yesterday ended three cents higher at $1.06.

Source: Straits Times, 23 Jan 2010

It sees share of sales from redevelopment to triple in 3 years

Unitech Ltd, India’s second-biggest developer, expects its share of sales from redeveloping Mumbai slums into luxury apartments to triple in three years and boost profit, managing director Sanjay Chandra said.

Unitech, based in New Delhi, is developing 100 acres of land in north Mumbai’s Santacruz area, near the city’s airport, by knocking down shacks typically built with tin, asbestos and plastic sheets, and building apartments in towers serviced by high-speed elevators. Slum dwellers will be resettled in smaller apartments in separate buildings on part of the cleared land.

The world’s second-fastest pace of economic growth is boosting incomes for India’s urban population and spurring demand for houses that cost at least 2.5 million rupees (S$76,420) in a Mumbai suburb. About eight million people live in slums in India’s financial capital and surrounding areas, more than the population of Switzerland.

‘Mumbai is a lucrative market and prices tend to go up firmly and demand is usually strong,’ said Jigar Shah, head of research at Kim Eng Securities India Pvt in Mumbai.

The measures to develop slum areas and build affordable homes ‘will help lift return on equity and profit’. Mumbai properties may account for 40 per cent of revenue in three years, up from the current 12 per cent, Mr Chandra said in an interview in Mumbai.

The government’s plan to redevelop larger shanty towns such as the 535-acre Dharavi slum near the new Bandra-Kurla business district has been delayed because of political indecision and disagreements, said Jockin Arputham, founder and president of the National Slum Dwellers Federation. Set up in 1975, the federation, spread over 70 towns, has 15 million slum dwellers as members through their respective local associations.

‘It’s not easy to do redevelopment as moving people is a complex task,’ said Anshuman Magazine, New Delhi-based managing director of CB Richard Ellis for South Asia. ‘Not everyone may want to be relocated for economic reasons, not to mention legal and other regulatory issues, and the state of the real estate market.’

Shares of Unitech gained 0.2 per cent to 88.7 rupees at the close of Mumbai trading. They more than doubled last year compared with an 81 per cent increase in the benchmark index.

Unitech, which posted a 51 per cent drop in profit in the three months ended Sept 30, is also building budget homes. It has cut the time to build low-cost housing by 40 per cent as it tries to boost revenue in a nation facing a shortage of 24.7 million homes.

The company is trying to emulate the success developers including Cyrela Brazil Realty SA Empreendimentos e Participacoes have had in boosting profit from selling budget homes, Mr Chandra said. Cyrela, Brazil’s biggest developer, tripled profit in the third quarter and plans to sell 19,000 homes this year, according to a company presentation.

‘We are looking at it as an assembly-line kind of business model,’ Mr Chandra, 37, said. ‘If you make an affordable product, the margins will be lower, but the capital will churn much faster, so your return on equity will be much faster.’

Success for Unitech will depend on government laws, Mr Chandra noted. The company, which began selling its Unihomes brand of budget housing in Bhopal, hasn’t built such properties in its biggest market near New Delhi because of rules restricting the number of residents in its housing complexes, he added.

The Unihome brand sells property for about two million rupees, according to the company’s website.

Source: Business Times, 14 Jan 2010

India’s largest listed developer, DLF Ltd, is set to acquire a property trust owned by its founders K P Singh and family for around 100 billion rupees (S$3 billion), The Economic Times reported yesterday.

The transaction will be done through DLF Cyber City, a wholly-owned unit of DLF, the paper said citing two unidentified executives involved in the transaction. According to the proposed deal, DLF Cyber City will acquire Caraf, an investment firm owned by K P Singh and family, which owns DLF Assets, the news report said citing an unidentified senior DLF executive.

The move is aimed at repaying some of DLF Assets’ debt and bring the commercial properties of the group under DLF, the Financial Express newspaper said. The deal will be a combination of cash and equity, it said.

DLF said in a notice to the stock exchanges yesterday that its board would meet today to consider integration of Caraf Builders & Constructions Pvt Ltd and its subsidiaries with DLF Cyber City.

The Economic Times report said that DLF Cyber City will issue fresh shares to the founders, who will own 38 per cent in this unit after the transaction, while DLF’s holding will go down to 62 per cent. The equity value of the deal is around 25 billion rupees, it said.

A spokesman for DLF told Reuters he would not be able to provide comments other than what was already in the company’s notice to the stock exchanges. ‘The full details will be known on Tuesday,’ he said.

Last week Indian newspapers reported that hedge fund DE Shaw had sold a 36 per cent stake in DLF Assets to its founders for US$500 million. Earlier this month, The Economic Times had reported that the property trust would be listed in Singapore by June next year to raise US$1.2 billion.

Source: Business Times, 15 Dec 2009

Starwood Hotels & Resorts plans to add another 15 hotels in India by 2012 and the hotel operator’s chief executive said that untapped demand in the country could spell swift returns for the new properties.

Starwood on Sunday opened its 25th hotel in India, the Westin Pune Koregaon Park, which falls under the upper-upscale category of hotels. The No 8 hotel operator also operates Le Meridian and Four Points by Sheraton hotels in India.

Typically, hotels begin to deliver a return on their investments in their third or fourth year, but Starwood’s chief executive Frits van Paasschen said in an interview last Friday that he expects Indian hotels to fare better.

‘Because India is relatively underserved and business is so strong, these hotels will ramp up more quickly,’ Mr van Paasschen said, adding it could take only two years.

The majority of the costs associated with building the properties are borne by the developers, he added.

Hotel experts have been discussing India’s merits as an investment ground for years, but India (the world’s second biggest country with 1.2 billion people) remains underserved.

By contrast, Starwood has more than 500 hotels in North America.

‘The major thing for all non-Indian companies to focus on is how to compete with homegrown chains such as Taj, Oberoi and Welcomgroup,’ said FBR Capital Markets analyst Patrick Scholes.

‘For these companies to grow meaningfully, they will have to expand beyond the major three or four cities.’

Among the 15 hotels Starwood is expected to roll out are six Aloft-branded hotels, Mr van Paasschen said. Given the size of the market, Starwood is likely to exceed that target over the next 2-3 years, he said.

The new hotels will be in New Delhi, India’s capital, as well as Mumbai, Hyderabad and Chennai.

Source: Business Times, 8 Dec 2009

RESIDENTIAL real estate will lead the recovery of India’s wounded property market in 2010 thanks to accelerating economic growth, lower interest rates and improved liquidity, Indian ratings and research agency CRISIL said Wednesday.

Prices for commercial and retail space will likely remain weak through 2010 because of oversupply and slack demand, CRISIL said in a new study of 10 cities across India.

‘Residential real estate is where we think by 2010 we can look for some kind of recovery,’ head of research Sudhir Nair said in a conference call with reporters. ‘There is a significant overhang of supply in commercial projects. … You can’t see a lease rental increase for a couple of years in this market.’

India’s property market, like many around the globe, boomed from 2005 to mid-2008. Average prices of both commercial and residential space more than doubled during that period, according to CRISIL.

In some high-demand places, like Mumbai, the nation’s financial capital, commercial prices went up 231 per cent, while residential prices rose 121 per cent.

Since July, prices have softened. CRISIL predicts commercial lease and rental rates will fall by 38 per cent from early 2008 peaks. Residential prices have already fallen by an average of about 20 per cent, and will likely correct another 10 per cent, CRISIL said.

But falling prices have done little to redress fundamental mismatches of supply and demand in the residential market, Nair said.

From 2009 to 2011, an additional 110 million square meters of residential real estate has been planned – far more than predicted demand of 47 million square meters – but most of that has been targeted at high-end luxury properties, where demand has withered.

What India needs is affordable housing close to jobs. Developers who snapped up pricey land in urban centers during the boom, however, can’t afford to build cheap housing there and instead are sitting on the land, Nair said.

Source: Straits Times, 24 June 2009

(NEW DELHI) As New Delhi prepares for the Commonwealth Games in 2010, a shortage of hotel rooms has left organisers scrambling to house the 100,000 spectators expected to descend on the Indian capital.

Planners insist that the 39 planned hotels will be finished by the time the Games are due, but the numbers tell a different story. Only 19 of the hotels have begun construction work, according to a parliamentary report, which predicted a shortfall of 14,000 hotel rooms. The situation has forced the government and tourism officials to look elsewhere for accommodation, and private homes are topping the list as part of a bed-and-breakfast scheme that has proved popular with homeowners who have room to spare.

More than 300 houses and 800 rooms have been registered as bed-and-breakfasts in the year and a half since the plan was launched, according to the Delhi Tourism and Transport Development Corporation (DTTDC), which is responsible for the programme.

Most applicants live in the posh southern and central parts of the city, where large, landscaped houses in gated communities are nestled among plenty of green space and upmarket shopping areas. Many are older couples or retirees who have extra space and time because their children have left home.

Tourism officials also hope promoting the more personal homestay option rather than costly luxury hotels will boost flagging tourism numbers, which have declined steadily in recent months due to the global financial meltdown and November’s Mumbai attacks.

The bed-and-breakfast concept, while popular in Europe and North America, has taken time to catch on in India, and tourism officials say the Commonwealth Games present an opportunity.
‘Necessity is the mother of invention. In India we had never thought these kinds of schemes can work,’ said Vijay Thakur, president of the Indian Association of Tour Operators (IATO), which suggested the bed-and-breakfast plan to the government.

While the focus is on the Commonwealth Games, Mr Thakur said there was wider potential for attracting tourists ‘who want to see India on their own and experience Indian hospitality’. Various government promotions mean the concept is ’slowly and steadily picking up’, despite some initial teething problems, said Pervez Hameed, who runs the three-room Delhi Bed and Breakfast with his wife and mother.

Mr Hameed registered his three-storey home in south New Delhi in 2005 under a previous government tourism programme after stumbling upon another bed-and-breakfast in the city. ‘I didn’t understand much about it. I thought it was like a hotel,’ he said. ‘But then I did a Google search on it and it appealed to me.’ – AFP

Source: Business Times, 10 Mar 2009