Realtors shift focus to budget housing

Declining sales, high interest rates, paucity of funds and global economic slowdown have badly impacted the real estate sector which is witnessing not only sudden slump in demand but also is at the receiving end in the stock market.

Freebies in the shape of luxury sedans, offers of foreign trips, 15%-20% discount or deferred payments have failed to attract buyers.

Fears of recession and an overall depressing sentiment have forced the real estate players to re-draw their strategies and curtail their expansion plans in the high-end and premium segment.

The focus has suddenly now shifted to providing budget housing in order to cash in on volumes and target Tier-II and Tier-III cities.

Parsvnath Developers Chairman Pradeep Jain said the Government should help the developers to launch a special scheme to promote affordable housing as costly land was a big hurdle.

Favouring Government’s intervention to give a fillip to affordable housing, Omaxe Chairman and Managing Director Rohtas Goel said: “There is an artificial scarcity of land. No cushion is left in the hands of developers to reduce the prices.” Omaxe has already put in place National Affordable Housing and Infrastructure Limited for developing affordable housing to a bigger section of the society.

Rising demand for affordable homes

Property prices within the metropolitan areas of Delhi, Bombay, Hyderabad and Bangalore have seen massive growth in recent years and prices in some areas are considered

to be excessive. But, outside this golden circle, in cities such as Mohali in the foothills of the Himalayas and in the boom town of Rudrapur, in neighbouring Uttar Pradesh, where 465 factories are being built, construction is booming. In the south, Goa and Chennai are still steadily attracting investment.

In recent times, demand for housing has risen rapidly as income levels have soared, new jobs have been created and people’s aspirations have changed – although this is slowing down due to the credit crunch. A new report on commercial property by the Royal Institution of Chartered Surveyors lists India as one of the countries most vulnerable to the crunch.

Jane Jorgenson of Hamptons says: “The Indian property market is being affected by the credit crunch, as with all countries. Buying has certainly slowed. However, the growth of middle and high income earners continues to supply a steady market of buyers.” The property market has grown from £6.5 billion in 2005 to an estimated £30 billion. Hamptons has opened an office in Delhi, and has an India desk in London for UK-based investors.

Land prices have quadrupled over the past three years as developers rushed to build luxury residential developments, with starting prices at a minimum £125,000 for two bedrooms. But the big boom will be in low-cost affordable housing. The number of people earning more than £2,500 a year is forecast to double to 20 million in the next two years – not least because of the 2.5 million students teeming out of Indian universities each year.

The UK-based agency David Stanley Redfern is selling off-plan apartments in Rudrapur, northern India, costing £28,000 for two bedrooms. Called Mountain View, the scheme quickly sold out, but another is being built nearby which will also offer affordable housing, ready to capitalise on the anticipated demand. Rudrapur, designated a Special Economic Zone, offers tax incentives to companies moving into the area. The city’s new factories are expected to employ 300,000 people, at least 50,000 from outside the area, who will be looking for homes to rent. With only 20,000 new units being built, buy-to-let flat owners are hoping to cash in.

Emaar Properties and MGF are planning to build townships in Delhi, Hyderabad, Punjab, Uttar Pradesh and Chennai, an investment of more than £2 billion.

The potential for growth remains vast. Sebastian Siddiqui, who heads up Hampton’s Delhi office, claims: “With a rising middle class, 400 million people – more than the entire population of the USA – are set to buy their own homes.”

People Prefer Real Estate Companies For Business

India has always been a property oriented market. Irrespective of all the industries that have been booming, money flow into real estate has been steady and consistently increasing. In fact, people make money in their respective professions and most of the profits go back into property in India. That has been the way things have been for a very long time.

However, in the recent years, there has been a paradigm shift, and professional real estate management companies are slowly emerging as the preferred destination for investments of Indians from around the world. A survey states that the organized real estate sector in the country was a mere 2%, and will be counting for 20% by the end of this decade. That is serious growth!
If you look at the size of the country we are talking about, 20% of the market being developed by the organized sector would ensure that the overall quality of property in India would go up big time. And as always, property always reflects on all the other industries around it. So, when the quality of real estate becomes better, all the other indicators in all other associated industries would also become of a better quality.
A lot of people looking to buy residential property in India now prefer to go through established realty companies like Omaxe. Most of those investors are NRIs who’ve settled abroad many years ago. The reason is simple – going through a professional company adds value to your property in India, and is any day a better buy, as there are a lot of risks that are mitigated. The surprising trend is that people are now buy sell property in India in places that they have no direct interest in! All these years, investments were in our own cities. Now, investment happens wherever there is growth, and that is a very positive shift in the thought process of the investor. And many sellers also now prefer to go through organized channels. There are good times ahead – and we’re very happy!!

Realty Sector demands ‘stimulus package’

National Real Estate Development Council (Naredco) and the Confederation of Real Estate Developers’ Associations of India (Credai) has petitioned the Government to ease foreign direct investment and external commercial borrowing norms and formulate a policy for rescheduling of term or construction loans to facilitate the roll-over of existing debt.

The request has also to be seen in the context of the recent announcement by China that it would invest about $586 billion on boosting infrastructure and consumption including low-cost housing.

In a letter to the Prime Minister recently, Credai said that the high credit squeeze was forcing ongoing projects to a virtual halt, amid an “extremely negative sentiment in the market”.

“Capital of both developers and funds have significantly eroded with crashing valuations. Developers and funds are unable to raise loans from external sources to finance completion of ongoing projects due to ECB and other restrictions on real estate development,” Credai said.

Stressing on the need to define ‘affordable housing’, Credai said that the FDI and ECB rules need to be modified to encourage investment in affordable housing. The norms currently allow 100% FDI in construction development projects including housing, commercial premises and resorts subject to conditions minimum capitalization, and area for development. “The limits of 50,000 square metres or 25 acres could be relaxed for this sector,” it said.

It further said that ECBs should be permitted for the real estate particularly for completion of all ongoing projects where there is already equity in form of FDI. Currently, the ECB is prohibited for real estate development.

“The monetary policies of the RBI for real estate projects and home loans by Indian banks, closure of ECBs and rise in interest rates together with stock market crash have lead to a situation where credit has dried up and buyers are hesitant to invest despite a strong demand,” said the Naredco Director-General, Brig. (Retd.) R.R. Singh.

Naredco has said that in cases where the land is purchased from Government agencies, banks should be allowed to finance the land cost in addition to construction costs.

The RBI, since October, has reduced several benchmark rates including mandatory deposit that banks keep with the central bank (cash reserve ratio), the amount which banks have to park in government securities (statutory liquidity ratio) and repo rate to unlock bank funds and trigger a low interest rate regime. However, the spate of negative news from the real estate sector shows no signs of waning. A report released by Cushman & Wakefield yesterday had pointed out that retail rentals fell by up to 20% in the third quarter ended September 2008, as retailers moved cautiously on expansion plans.

Barwa enters Indian real estate market

The Barwa Real Estate and Sun Group, a leading investor and private equity fund manager in India have entered into a joint venture agreement to explore the Indian real estate market.

Sun Group and Barwa have proposed to form a 50:50 joint venture company to be named as Sun-Barwa Land. The new company will seek approval from the Foreign Investment Promotion Board (FIPB) in India to aggregate, acquire, hold and develop land banks in high growth areas in the country. Sun Group and Barwa together will raise capital from Qatari and Middle Eastern investors.

Ghanim Bin Saad Al Saad, Barwa’s chairman and managing director said: “It was part of our strategy to enter the Indian market that has strong fundamentals and solid growth parameters. Barwa looks forward to its partnership with Sun Group due to its extensive experience in the Indian market.”

Nand Khemka, chairman of Sun Group said: “ We are proud to be partnering with Barwa which brings significant expertise from Qatar and the region to India with potential for major growth for years to come.”

Prudential, DLF get in-principle nod for fund unit

India’s most valuable real estate firm, DLF Ltd, and American life insurer Prudential Financial Inc (PFI) said they have an in-principle regulatory approval for a mutual fund venture formed in December.

“We look forward to a successful launch once we receive the remaining regulatory approvals, which should take place sometime in 2009,” Rajeev Talwar, group executive director of DLF, said in a joint statement with Christopher Cooper, chairman of PFI’s international investments unit on Tuesday.

The fund venture, DLF Pramerica Asset Managers Pvt Ltd, is headed by Vijay Mantri, who joined in April from the Indian fund unit of Deutsche Bank.

DLF Pramerica joins more than 20 firms looking to break into the Indian fund industry, which saw its assets grow more than four-fold to Rs 5.5 trillion in five year ending 2007.

Assets have shrunk 28% to Rs 3.9 trillion this year due to a stunning 51.5% slump in India’s benchmark index and outflows from fixed income fund

Foreign Insurers Set to Invest Heavily in a Cash-Starved India Market

India’s latest move to liberalize its insurance sector may create the long-hoped-for opening for foreign insurance companies to advance into the under-developed market. But while business is thriving, foreign insurers must face reality checks in the form of the country’s limited capacity for infrastructure and system supports, competition from public insurers, operating expenses and investment costs.

The Indian Parliament’s raising of direct foreign investment limits in insurance ventures from 26% to 49%, if enacted in December, will mark a milestone in India’s insurance industry since the opening of the sector for private and foreign investors in 1999. Since then, insurance sector has been expanding by an average of 25% per year, according to PricewaterhouseCoopers in a recent report.

Underlying factors for liberalization are being driven by fundamental developments in the country’s insurance market, in which foreign capital injection and knowledge are important to fuel the growth of distribution and product promotion.

Prior to the partial opening of the market, the insurance sector was controlled by a handful of state-owned enterprises. In the absence of competition, product choice was largely limited to endowment and money-back life policies and fire and property policies, according to PricewaterhouseCoopers.

Best real estate deal

Real estate prices are over the moon these days and if you are house hunting there isn’t a decent deal available on earth. So isn’t it better to have a piece of land on moon.

The commute would may be a drag but there’s plenty of space on the moon and the view is to die for. A whole acre costs a measly Rs 1,000. No wonder, even Indians have put down a deposit. Scientists know it is rich in minerals and believe it might have frozen water. This is why NASA’s planning a lunar post by 2020.
“International treaties forbid private or sovereign ownership of extraterrestrial real estate,” says space lawyer Ranjana Kaul.
Plots have already started been named – The Sea of Tranquility, Mount Agnes, the Alpes Valley.

DLF looks for distress sale

DLF Vice-chairman Rajiv Singh says the company would try and fill the gap in its portfolio by acquiring suitable assets which come up for distress sale in a depressed real estate market.

“We will be prepared to look at opportunities, but won’t pick up something just because it’s cheap. However, there are some gaps in our portfolio, which we would like to fill. If there are some significant assets, which are hard to replace in a market like NCR or Mumbai, we will certainly look at it,” said Mr Singh.

He said a challenging external environment had forced his company not to move “at a pace we would have liked to” and asked the government to bring down interest rate for home buyer as well as developers.

“We pay 3% more interest on loan compared to any firm similar to us in another industry,” Mr Singh said. DLF recently borrowed at 16% interest rate. The company reported a 4% decline in net profit at Rs 1,935 crore for the September quarter, compared to the corresponding quarter last year. In comparison to the first quarter of the current fiscal, DLF’s revenue remained flat at Rs 3,840 crore, even as customer advances fell 8.6% to Rs 1,585 crore.

As global economic turmoil unfolds, several MNCs have been taking a relook at their space requirements. Mr Singh says no client so far has backed out, but most of them have been “reluctant to commit space in the past 2 months.” Office space contributes major chunk of DLF’s revenue.

Sales to promoter group company DLF Assets (DAL) contributed 37% to DLF’s sales and 47% to the company’s profits in September quarter. The receivables from DAL though have been piling up, raising analysts’s apprehension on its ability to pay back. DAL currently owes Rs 4,800 crore to DLF. Mr Singh agrees raising equity would be difficult in current situation, but says DAL will be able to raise enough debt on the strength of its rentals and pay back entire amount due to DLF by the end of this fiscal. Properties held by DAL are expected to generate a rental of over Rs 600 crore by March ‘09.

On company’s retail foray, Mr Singh said, “Our intention is to bring high-quality retailer to our malls and that’s why we keep engaging with them. But we have no intention to compete with our other tenants.”

DLF-Hilton JV hit by regulatory delays

The DLF-Hilton, the joint venture company formed between India’s largest real estate company and world’s largest hotel chain, has been hit by regulatory delays. The first project, The Hilton Garden Inn in New Delhi, which was supposed to have opened in December, is delayed due to local planning consents and license approval. However, Hilton Hotels Corporation, according to a senior official, continues to be committed to its relationship with DLF in India.

Faith Thoms, director of public relations and communication-Asia Pacific, Hilton Hotels said, “The Hilton Garden Inn Saket project was delayed on various regulatory grounds. We are looking forward to opening the property next year. Hilton Hotels Corporation continues to be committed to its relationship with DLF in India.”

DLF, in its clarification filed with the stock exchanges on Tuesday, too said, “For the benefit of the market in general, it is clarified that DLF’s JV with Hilton is on a firm footing and all plans for development of hotels stand as originally envisaged.”

Further Thoms said that the relationship (with DLF) has evolved positively, with an unprecedented 17 hotel projects currently under development. The first hotel under the alliance, the Hilton Garden Inn Saket in Delhi, is scheduled to open in 2009, Thoms added.

On further progress of the joint venture, Thoms said, “Other examples of our progress include ongoing development of the Hilton and the Hilton Residences in Kolkata which amount to 550 rooms, and the Hilton, Homewood Suites by Hilton and the Hilton Garden Inn projects in Dwarka which comprise over 800 rooms.”

“DLF will exercise prudence in build out phase for the hotel business, which could be pushed back by 12-18 months from planned date owing to existing liquidity constraints,” said DLF in its clarification.

Parsvnath postpones its retail forays

Parsvnath Developers Ltd, the New Delhi-based real estate developer, has postponed its retail forays due to the current economic slowdown. The company, according to a senior official, would further re-evaluate the market situation to continue the initial plan. Meanwhile, the company is close to finalize the SEZ stake sale to private equity investors.

Pradeep Jain, chairman, Parsvnath said, “Due to the present economic slowdown, the company has put a hold on retail diversification. But this is a temporary hold and our international partner has also put hold on its expansion plans in India. If the condition improves, we can review the situation again in another 3-6 months.” However, Jain did not divulge the name of the retail partner.

Jain further added, “At present, we are talking to number of private equity investors, and talks are on for dilution of SEZ stake. We expect the deal to happen in another 2-4 months.”

On retail front, Parsvnath was planning to have 5-10 front-end stores by this fiscal, with an international retail partner supporting the company for logistics. The company’s retail plans included, hypermarkets, food joints, and “very large” retail stores of about 2.5-3 lakh square feet, but it will not include the cash and carry format.

In June, when the company announced its plans to foray into retail space, it expected large roll-out number to add to its balance-sheet this fiscal.

RBI may relax norms for loans

The Reserve Bank of India (RBI) is likely to relax the provisioning norms against loans given to real estate and other sectors. In a meeting with FM P Chidambaram on Tuesday, PSU banks have asked for relaxation of the provisioning norms, without compromising on the quality of credit to utilize their capital more aggressively.

For example, at present banks must have a capital base of Rs 9 to offer a loan of Rs 100. But, in case of real estate sector, RBI has increased the requirement of capital base on certain category of loans by almost 50%. So to offer a loan of Rs 100 to realty, banks should maintain a base of Rs 13.5. On home loans of more than Rs 20 lakh, banks need to keep a capital base of almost 13.5% of the loan amount.
CMD of a public sector bank said this norm has increased the cost of funds, while lending to real estate, even if bad loan in this sector is less than 1%, which is lower than the banking sector average. If government wants to increase the credit flow to realty at competitive rate, the provisioning norms must be relaxed, the banker added.

Chidambaram on Tuesday said the real estate sector affects 50% of GDP, considering dependence of sectors like steel, cement and other small scale industries. He asked banks to enhance credit flow to realty.

The bankers also demanded change in the provisioning norms for other NPAs (non-performing assets). While RBI has tightened norms in the last couple of years, projects are getting delayed because of non-availability of funds, In some cases, corporates are asking for rescheduling of loans.

According to the existing norms, such accounts should be treated as bad loans and capital provisioning has to be made, which affects banks’ profitability. Besides, it reduces capital base of a bank and capacity to give loan.

Therefore, banks said if they are asked to reschedule loans or to give credit to vulnerable sectors, the provisioning norms should be relaxed and be made more practical. It is learnt that finance minister has given them the assurance that RBI will look into the matter soon. After the global financial crisis, central banks world over have relaxed the provisioning norms to enable banks to increase their exposures to companies.

However, keeping in mind the safety factor, Chidambaram asked banks to increase their capital bases to ensure that their total loan portfolio should not be more than 8.33 times of the capital base or in banking terms their capital adequacy ratio (CAR) should not be less than 12%.

Atria to expand in India

Bengaluru-based Atria group will expand in the Indian hospitality sector with plans to add 1500 rooms to its inventory at an investment of Rs 1500 Crore in the next five years. Hotel projects will come up in Delhi NCR, Chennai, Mysore, Coorg and Hyderabad. The group also plans to launch the 270 room Atria Grand, Whitefield, a five star luxury hotel, in 2009.

Atria Hospitality Management Services (AHMS), a part of the Atria group, will plan, build and operate the Atria Hotel, Atria Express Hotel, Atria Serviced Apartments and Atria Resort brands. AHMS will also offer Hotel and Hotel Project Consultancy, Management Services, Brand Franchise, Training and Sales and Marketing services on a pan-India basis.
Atria has interests in hospitality, power generation, convergence, education and real estate development.

Travel India Marketing launches serviced apartment in Malad

Mumbai-based Travel India Marketing has launched a 60-room standalone serviced apartment in Malad at an investment of Rs 15 Lakh. The company has commercially opened three apartments and will open the rest within six months. It has 25 apartments with a combination of three and four bedrooms. It is targeted at corporates especially long stays in and around the Malad area and from Mindspace, a business park which houses more than 200 companies. The rooms will be offered at promotional rates of Rs 3,500 per night till January 1, 2009, after which the tariff will be Rs 4,500 and above. The apartments have three or four rooms, a balcony, a common hall and a lobby area. There will be 24-hour butler service and home made food will be provided based on requirements.

“Service apartments are gaining popularity in Mumbai. There is always a room crunch in November every year especially for long stay guests. Also, companies are cutting down on the cost owing to the recession. Serviced apartment is the next best alternative. There are 9,000 rooms in the five-star category alone in Mumbai which is expected to increase to 11,000 by 2011.

Capital won’t be issue for big realtors

Fund-starved realtors may heave a sigh of relief. Banks are now considering loans to this sector on case-to-case basis, especially for those facing genuine liquidity problems.
The move follows Prime Minister Manmohan Singh’s assurance to the industry that liquidity should not be a problem for companies having good fundamentals. Leading bankers have started asking developers to present a detailed account of their business challenges. Banks are also considering providing loans for purchase of land which was a strict no-no so far. Public sector banks are taking the lead in reviving the hopes of realtors.
Experts say RBI’s recent moves will also provide sufficient cushion to banks to lend to real estate companies. RBI slashed CRR by 350 basis points in the last few weeks, which will infuse about Rs 140,000 crore in the system. The central bank will also inject liquidity through its repo tenders at 7.5% instead of 8%. RBI has also lowered SLR to 24% from November 8 against the current norm of 25% of the banks’ deposits. Real estate developers’ association, Naredco, has had series of meetings with the leading banks, highlighting the effects of credit crunch on the sector and their shrinking revenue streams.
When contacted, Assotech MD Sanjeev Srivastava, who is a member of Naredco, said: “It has been brought to banks’ notice that 90% of the real estate market comprises unlisted firms. Hence the market situation is not the benchmark to draw conclusions about paying capabilities of unlisted companies. Top bankers have given us positive signals that things would soon improve.”
DLF executive director (finance) Saurav Chawla said things have started improving for the real estate sector. “In October, banks had temporarily shut loan disbursals but now interest rates have gone down and lending will regain momentum. As far as DLF is concerned, in the hardest of the times, we could sell our properties. We expect to do even better if liquidity improves,” he said.
Industry players pointed out that banks are waiting for a bit of correction to happen in the real estate sector. “With a slump in the Indian real estate sector due to excessive credit crunch and demand slowdown, home buyers can expect a further correction in real estate prices in the range of 20% in the short term. This would improve paying capacity of the loan borrowers and reduce their overall exposure,” a Delhi-based developer said.

Realtors still stuck in house of correction

The RBI’s rate cuts alone may not stimulate the sluggish residential market. Experts feel that developers may have to further cut prices to bring buyers back into the market. Meanwhile, as a result of drastic fall in home sales, higher capital and construction cost, most developers have reported decline in revenue in September quarter.

“We are not very sure, but hope that RBI rate cuts will encourage banks to lower interest rates for home loans. A lower home loan rate will increase home buyers’ interest in the market,” says Omaxe CMD Rohtas Goel.

“The lower rates may enhance enquiries from potential home buyers, but may not necessarily result in higher number of transactions,” says international property advisor DTZ director Abhilash Lal. Adds Centrum Broking real estate analyst Rupesh Sankhe, “Affordability is the major issue for any home buyer. Today, the affordability is much lower compared to 2003, when both interest rates and property prices were lower. The property prices too need to come down along with interest rates if people are to be lured to realty market.”

According to an analysis, a buyer’s decision depends 60% on interest rates, 30% on property prices and the rest on sentiment or other unexplained factors. Now, home loan rates are expected to come down, bringing down EMI for buyers, but would still remain high compared to 2003-04 level. Therefore, property prices, which have gone up almost thrice in most markets in the past five years, also need to rationalize. “We earlier expected property prices to correct by 30-35%. Now with expected lower mortgage rates, a correction of even 20-25% may have the desired impact on home buyers,” says Mr Sankhe.

Residential market has seen price correction in the past few months to the tune of 20-25% in several pockets, but sales haven’t picked up. Besides higher interest rates and property prices, global financial turmoil, stock market crash and fears of job cuts too are worrying home buyers.

The squeeze in the real estate market is now getting reflected in realtors’s earnings figure. India’s largest real estate developer DLF reported a 4% decline in net profit at Rs 1935 crore. The second largest realty firm, Unitech, reported 3% decline in sales at Rs 983 crore and 12.6% lower profit at Rs 358 crore. Parsvnath’s sales fell 45% to Rs 217 crore, and profit dropped 78% to Rs 22 crore. Omaxe’s revenue declined 70% to Rs 204 crore and profit fell 87% to Rs 20 crore.

The biggest issue for realty firms today is liquidity crunch, as sales have dried up and banks are refusing to lend while private equity funds have slipped into wait-and-watch mode. “Rate cuts may not actually help ease liquidity situation for the real estate firms. Unless RBI relaxes lending norms to real estate, nothing is going to change,” says Mr Lal of DTZ.

New housing projects on hold in mumbai

The city is unlikely to see any new housing project coming up soon as the screws turn on the property market. Last month, Mumbai’s leading developers met and discussed the possibility of not launching new residential projects considering the slowdown, sources said.
“New projects are not viable, sales are slow and buyers are sitting on the fence. Every developer is looking at his own cash flow and many projects have slowed down. Each one is wise enough to take a call on what to do,’’ said Mufatraj Munot of Kalpataru, one of the city’s oldest builders and past president of the Maharashtra chamber of housing industry. He, however, denied that builders had taken a unanimous decision not to start new projects.
But with each passing week, stagnant sales is turning up the heat on the construction industry. “Builders are deferring launching of new projects. With banks and financial institutions turning the screws, the real estate market has dried up. There are no investors and the actual users are waiting for prices to come down,’’ said a property developer, not wishing to be identified.
With their backs to the wall, a majority of builders has also started retrenching employees. Last week, a prominent developer known for his signature buildings decided to virtually halve the 450 employees on his payroll, it is learnt.
Even the once lucrative transfer of development rights (TDR) market has lost sheen. Builders used to purchase slum TDR at Rs 4,000 a square feet till about six months ago. It is now down to Rs 1,200 a square feet. Still, there are few takers. Moreover, builders who have bought TDR have been unable to pay sellers. It is estimated that about 100 builders owe close to Rs 200 crore to TDR owners and traders.

In the market, although builders are not officially reducing the rates of properties, they are negotiating with individual flat buyers and offering discounts to bulk purchasers. In Bhandup, a developer recently sold six flats after he reduced the price from Rs 7,500 to Rs 4,200 per square feet. In Goregaon, the builder has offered a similar reduction to six buyers.

Realty companies look at alternative financial support

With banks reluctant to lend to the real estate sector, developers are looking at alternative instruments of funding such as lease discounting for completing ongoing projects, especially the commercial ones.

The sector, which has been hit by the global financial crisis, has seen more than a 60% fall in demand in the last six months, say experts.

Under a lease or rent discounting agreement, banks lend to developers for new projects against rents they directly realize for completed projects, which also is mortgaged with the bank. Thus, banks are assured of guaranteed cash flows and also have physical assets in case of defaults.

Also, the rate of interest charged by banks for loan against rent, generally for tenure of five-six years, is generally 1%-2% lower than the benchmark lending rate. “Lease discounting is a much safer mode of lending, as the entire loan amount is covered through the rent agreement, and the banks are cushioned against defaults,” admitted a senior official from SBI Capital Markets.

According to real estate developers, for commercial projects, unlike the residential projects, where the funding is mostly through advances, lease discounting is a preferred funding option at present.

“Unlike other sources, bank loans against lease agreements have not dried up in the recent months. Also bankers are more interested in such safer modes of funding,” said Pradeep Sureka, president, Confederation of Real Estate Developers’ Associations of India (CREDAI) Bengal. Ravindra Chamaria, chairman and managing director, Infinity Infotech Parks, said, “For commercial project, internal accruals and banks have been major sources of funding.

However, banks are now selective in lending, and rent discounting is an option for developers who already have one commercial project on lease.” Sources in major PSU banks like Allahabad and Uco Bank said, they had limited exposure in the real estate sector and little headroom for further lending. Banks preferred alternative instruments like lease discounting, only after assessing underlying risks, said sources.

“We have entered into lease discounting arrangements with developers. However, one has to take into account several factors like proper lease agreement, credit rating and market conditions before entering into such agreements,” said sources in Allahabad Bank. “We have limited headroom for real estate sector, and have already exhausted the stipulated limit for real estate lending. If we had the limit, we would have considered, alternative and safer lending options to the sector,” said sources in another public sector bank.

In the recent months, unviability of commercial projects has prompted many developers to convert commercial projects into residential ones, said Pradip Chopra, chairman and managing, P S Group, which is also developing an IT project in Sri Lanka.

“Recently, many banks have extended substantial credit to real estate developers. For example, one of the public sector banks recently funded as many as ten real estate projects in Kolkata,” said Chopra.

For real estate developers with a national presence, the withdrawal of funds by foreign institutional investors have also been a cause of concern, prompting newer instruments for completing the ongoing projects.

“The FIIs withdrawal had a major impact on real estate projects. Evidently there is a slowdown in the pace of construction in commercial projects,” said sources in Unitech.

NRIs stay away from investment in realty sector

Another blow of the global meltdown has been felt by the already bleeding realty estate industry. Non-Resident Indians (NRIs) are avoiding coming home this year and not investing in property, something that brokers look forward to every year.

NRIs from across Punjab prefer investing in residential properties in and around Chandigarh, Jalandhar, Amritsar, Patiala and Ludhiana. This year, however, they have decided to stay put and not return home.

“The situation is very bad at present and is expected to grow worse in future,” says Kamaljeet Singh, president of the NRI Sabha in Jalandhar. He added that the impact of the global meltdown has been felt by all the sectors and real estate is one of the worst hit.

Property brokers across the city agree that the recession has further dealt a blow on the real estate industry, which was already going through a bad phase.

Good time to buy a home

It could be good time for those wanting to buy a home as developers have started reducing prices to shore up sagging sales. The real estate sector has grown 30- 35 percent during the last half decade, reflecting the fast increasing demand for office, commercial and industrial space. Even the demand for bigger homes, now considered within the range of prospering working classes, run amazingly.

But the economic juggernaut began slowing earlier this year because of inflation and a severe liquidity crunch, fallout from the US sub-prime crisis. Now economic activity may shrink as part of a global slowdown.
India’s growth estimates of 9% at the beginning of current year have been revised to well below 7 percent, and the effect is directly visible in the realty sector.
According to the Associated Chambers of Commerce and Industry (Assocham), the real estate sector is estimated to be worth at least fifteen billion dollar in which FDI is four billion dollar.

Real Estate sector is in dire straits

The tight liquidity condition and the rise in interest rates have affected realty sector hard. Because of the RBI’s policy of discouraging banks in lending to real estate developers, the fund flow to the sector has dwindled.

This might even force a number of units to close down. The construction sector, which is the second largest employment provider in the country, is facing tough time because of the government policies, says CMD of Parsvnath Developers, Pradip Jain. He says that government must change its policy and allow the flow of funds at low interest rates so that people may buy houses. He said that banks should be allowed to lend directly to developers to meet their construction schedule.

This, he emphasized, will enable the sector to tide over the current crisis and help save the jobs of lakhs of poor construction labourers. Builders and developers feel that interest rates on home loans should be brought down to less than 10% from the present 13% to enable end users to buy houses. Since the global financial crisis came to a head, the banks have been discouraging home loan customers. The floating home loan rates of most of the banks have gone up to 13%. This has affected the affordability of end users.

The EMI of the same amount of loan for 20 years has gone up by almost 50% in the last four years as the interest rates have gone up from 7% to 13%. In fact, a senior developer says the problem arose after the government and the RBI started treating the real estate sector as a den of speculators. He says that instead of finding a remedy for the market crisis, they decided to kill the sector itself by discouraging banks from giving loans to developers.

CMD of Assotech, Sanjiv Srivastava , says that the sector played an important role in the high growth of new economies like IT, BPO and retail by providing them state-of-the-art buildings with all amenities, matching their new requirements. The crux of the matter is that the new economies grew only in those cities where world-class realty development first started.

In the NCR also, after the realty development first kicked off in Gurgaon, it came up as a hub of IT and BPO centres. Later, because of the availability of quality retail space, organized retail in the form of malls also came up, with Gurgaon showing the way, once again. Only after similar quality constructions started in Noida, did all these new economic activities start moving to that suburb.