Blackstone and KKR looks up for Indian Commercial Real Estate

India’s UB Holdings is in talks with private equity funds Blackstone and Kohlberg Kravis Roberts to sell some of its commercial real estate for 6.5 billion rupees ($123 million), writes Reuters. UB Holdings, controlled by liquor baron Vijay Mallya, is part of the UB Group that owns majority of United Spirits and United Breweries, apart from debt-laden carrier Kingfisher Airlines, which is looking for funds to continue operations, writes Reuters.

Reuters – India’s UB Holdings is in talks with private equity funds Blackstone and Kohlberg Kravis Roberts to sell some of its commercial real estate for 6.5 billion rupees ($123 million), the Times of India newspaper reported on Tuesday citing unnamed banking sources.

 

The UB Tower in Bangalore, which Mallya is looking to sell, is occupied by companies like Apple, Citibank, and Yahoo, the report said. A UB Group spokesman, quoting Mallya, denied the company was in talks to sell the real estate space, the paper reported. Prakash Mirpuri, a UB spokesman, told Reuters there was no plan to sell UB Towers. He, however, could not immediately confirm whether other real estate assets from UB Holdings were up for sale. A Blackstone spokesman declined to comment, while KKR could not be immediately reached by Reuters on Tuesday, which is a local holiday in India. UB Holdings and the private equity players are considering a sale-and-lease-back model, with UB having the right to buy the property back after a specified period, the report said.

2012 is a Tougher Year for Fund Raising

Due to global issues, liquidity is becoming a problem. Though the phase is temporarily, the concern cannot be ruled out. Indian real estate sector is banking on the fact that change will take place and market will come out of the situation. The fact of the matter is that next 12 months and in fact 2012, does not look too bright for the sector.

The global debt worries have led to more and more uncertainty. In the last few months, the sector has been plagued by a potential liquidity squeeze. The situation is very unsettling and the fear is that we might end up looking at the year 2008 situation. It is certain that banks will get into selective lending with more strict verifications. In 2012, we are expecting that interest rates might get stabilized but disbursal of home loans will come down.

As RBI has been steadily increasing interest rates, debt for developers is becoming expensive. Also many banks are right now not keen to lend to real estate projects. Due to global uncertainty even private equity is cautious of investing in India. In fact, companies have started looking at alternative routes of fund raising. And many a deals are being done as structured debt deals hiding behind the facade of an equity structure.

In structured debt deals, the companies—investor and investee—sign two agreements. In the publicly announced agreement the investor—a PE or a VC fund—buys an equity stake in the company; and in the second contract they have buyback clause, which allows investee company to buy back its shares from the PE/VC fund at a price that will give the fund a return of about 20% per annum over the duration of the investment.

All signs currently suggest that 2012 would not be an easy year. As debt becomes more expensive and PE funds find it difficult to deploy cash due to global economic conditions, we would see higher number of structured deals taking place in 2012. Though these structured deals are being done, they have their share of problems. The problem is when the side-contracts are not honoured.

Real Estate Sops can’t impress Firms.

The finance minister relaxed borrowing norms for real estate firms and extended the loan subsidy for low-cost affordable houses. The concessions have, however, failed to impress the industry leaders who termed it as a too-little-too late move that would have a limited impact on the sector.

“I propose to allow ECB (external commercial borrowing) for low-cost affordable housing projects,“ the Budget said.

The move has a dual aim of expanding the window of funds for real estate developers such that affordable housing projects do not face cash crunch and are completed within the time frame.

Global consultancy Deloitte said RBI had earlier allowed ECB for developers in integrated township projects of 100 acres or more till December 31, 2010.

The FM also extended, by a year, the 1% interest subsidy on loans up to R15 lakh where the cost of house does not exceed R25 lakh.

Budget 2012: 1 per cent TDS imposed on property sales.

The government has proposed one per cent TDS (tax deduction at source) on transfer of immovable property if the sale value exceeds Rs 50 lakh in urban centres and Rs 20 lakh in other areas.

Finance Minister Pranab Mukherjee said in his Budget speech that the measure is proposed in the Budget and is being taken to “deter the generation and use of unaccounted money.” Immovable properties, other than agricultural land would be covered under the new provision.

The application of TDS would be effective from October 1 this year. It has been provided that transfer of property would not be registered unless the buyer furnishes proof of deduction and payment of TDS.

At present, tax is required to be deducted at source by the transferee on transfer of immovable property by a non- resident. But, there is no such requirement on transfer of such property by a resident except in few cases, it added.

Reacting to the proposal, the apex realty body CREDAI said that this would lead to increase in property prices.

“It looks like that the proposal of TDS would apply on transactions in the secondary market and not on sale of builder’s flat,” Confederation of Real Estate Developers’ Association of India (CREDAI) Chairman Pradeep Jain said.

The new proposal intends to collect tax at the earliest point of time and have a reporting mechanism of transactions in the realty sector.

The provision would apply if the consideration exceeds Rs 50 lakh if property is situated in “specified urban agglomeration” and Rs 20 lakh if property is situated in any other area.

Union Budget 2012-13: Buying or building of a house will cost more.

Realty players said that purchase or construction of a house would now cost more due to expected rise in prices of key raw materials cement and steel and a hike in service tax by 2 per cent.Barring low-cost housing, property prices are expected to rise in the coming days after the proposed hike in service tax from 10 per cent to 12 per cent.

TDS at the rate of 1 per cent on transfer of immovable property (other than agricultural land) above a specified threshold will also add to the cost of buying a house. The threshold would be over Rs 50 lakh an urban areas and Rs 20 lakh elsewhere, according to the budget proposals.

Cement and steel manufacturers have already hinted at a price hike after the Budget proposed raising the excise duty to 12 per cent.

Commenting on the budget proposals, Confederation of Real Estate Developers’ Association of India (CREDAI) Chairman Pradeep Jain said, “Application of TDS on the purchase and sale of property and increasing Service Tax by 2 per cent will further add on to the overall cost of property and are bound to make property more costly in coming days.”

Realty consultant DTZ said that increase in the service tax is going to further increase marginally the overall burden on the home buyers of mid and high segment (dwellings costing more than 25 lakh). The impact of service tax would be about Rs 40,000 on a Rs 75 lakh home.

However, DTZ said that affordable housing, being part of negative list, is exempted from service tax and the move would give a boost to the affordable housing segment.

Jones Lang LaSalle India Chairman and Country Head Anuj Puri said that “the increase in the service tax rate from 10 per cent to 12 per cent will increase the cost of production for developers, who are already reeling under high input costs. It follows that this increased burden will be passed on to end users”.

Builders say that Pranab Mukherjee has ignored ground realty in the Union Budget 2012-13.

With predicting an escalation in property prices, top players in the realty sector said they had been ignored by the finance minister.

Chief of the Confederation of Real Estate Developers’ Association of India (CREDAI), Lalit Kumar Jain, said the announcement on external commercial borrowings (ECB) for affordable housing was a minor respite but still meaningless. Jain, who is also chairman and managing director of Kumar Urban Development Ltd, added, “We contribute 6.5% to the GDP and expected a big boost from the budget for affordable housing through special schemes, an interest subvention of 5-7 % for LIG (low income group) and EWS (economically weaker section) housing and promotion of rental housing through tax exemption.”

Jain also pointed out that the interest subsidy on home loans was too low. The Budget has extended the scheme of interest subvention of 1% on housing loan up to Rs 15 lakh where the cost of the house does not exceed Rs 25 lakh for another year.

In addition, Gaurav Gupta, director, Omkar Realtors & Developers, lamented that the realty sector had got nothing to boost market and customer sentiments. “There are no indications of this sector being granted the status of an industry, which it much deserves. On the contrary, the increase in service tax will push up realty prices as the additional cost will be passed on to the buyers.”

Tata Housing MD and CEO Brotin Banerjee added, “Initiatives to make affordable housing available to a larger section of the society have only been met partially.”

There were some who welcomed the proposals. Sachin Sandhir, MD, RICS South Asia felt it “exceeded expectations” given the pressures on the fiscal situation.

Realty Sector has no resurgence.

The latest Economic Survey reveals that the share of the housing sector to the overall GDP is likely to rise by one per cent to 6 per cent on increased investment. Currently, about 5 per cent of India’s GDP is contributed by the housing sector. With institutional credit for housing investment growing at a compounded annual growth rate of about 18-20 per cent per annum in the next three-five years, the housing sector’s contribution to GDP is likely to increase to 6 per cent.

As every rupee that is invested in housing and construction, Rs 0.78 gets added to the GDP. Investment in housing and real estate activities can be considered a barometer of growth of the entire economy. Unfortunately, the 2012-13 Budget does not recognise this. Although the finance minister’s speech concludes by reiterating the fact that there is a need to create an “enabling atmosphere” and that India is on the brink of “resurgence”, he has done precious little to make that happen.

India’s GDP has not been growing as it was sometime earlier was the topic of the finance minister before presenting the Budget. His five-point objective does not really lay any emphasis on the housing and real estate industry. While he has tried to restrict central subsidies to fewer than 2 per cent of GDP to improve the quality of public spending, he has failed to provide for measures which will give impetus to the industry at large, housing and real estate in particular.

The finance minister has permitted external commercial borrowings (ECBs) for low cost affordable housing projects. One wonders if this would do any good, since players in this industry are not used to taking the ECB route for affordable housing projects. This provision therefore does not make sense.

Extending the scheme of interest subvention of 1 per cent on housing loans up to Rs 15 lakh (on houses costing up to Rs 25 lakh) for another year also does not make sense, unless and until the limit of Rs 25 lakh is increased.

Home Loan Rate Should Be Restructured.

With speculations about the Union Budget 2012-13 already doing the rounds, city’s real estate industry too has voiced its expectations. Mainly revolving around increased subsidy on interest rate for loans towards affordable housing and industry status for taxation and construction and relaxation of FDI up to 51 per cent into multi-branding, the industry is hopeful of a favourable budget.

Sushil Mantri, president of CREDAI, Bangalore, says that “The Indian real estate industry was riding through highs and lows in 2011. Last year, one per cent interest rate subsidy was offered for loans towards affordable housing. If the subsidy can be broadened, home buyers especially in mid and lower income groups will benefit.”

“Indian real estate, especially housing needs the government’s support for further growth. The government should consider restructuring interest rates on home loans to attract larger base of lower and middle income group to benefit. For loan amounts lesser than Rs 25 lakh, the interest rate should be lower and should scale up as the loan amount goes higher,” said Sankey Prasad, chairman and MD of Synergy Property Developments Services.

Further the Experts demanded that the glaring concerns of the real estate industry be addressed.

“The real estate industry will be looking forward to RBI’s intervention to control inflation which has adversely affected the industry. If FDI is relaxed up to 51 per cent in multi-branding, this will boost the growth path for the Indian retail industry,” Sushil Mantri added.

Brokers Hunt for Jobs as Slump Hits Realty Sales

NEW DELHI | BANGALORE: Broker in Bangalore bylane has just opened a stationery shop. He has named it ‘Smart Shop’, borrowing the name from the realty brokerage firm that he ran from the same premises until about two months ago. He switched to retail after his property business hit a rough patch following a slump in home sales. About 03-quarters of his revenues came from sale of apartments, the remaining from renting.

“With home sales dropping, it doesn’t make business sense anymore,” he says. It’s the same story in other big cities. In Mumbai, a mid-size broker has set up a small fast food joint to make ends meet. In Nagpur, a real estater has quit the real estate business and set up an ice-cream parlour. Their worries are not unfounded. While the large and established players in the property business have managed to stay, even during the slump, thousands of smaller players like brokers and agents are being forced to look for other jobs.

It also hit lakhs of people employed with such small outfits – each of which hires 5-15 people.With many brokers closing shops or reducing size, these people are out in the market, looking for jobs in sectors such as retail, banking, insurance and call centres. The real estate industry employs about 10 lakh people across the country, the majority in the unorganised sector.

In the first quarter of 2011, home sales dropped 17 per cent in Mumbai, 14 percent in Bangalore and 15 percent in Hyderabad. According to consultant Jones Lang La-Salle, unsold residential units in projects that are complete or are nearing completion in 6-12 months in Mumbai and Delhi-NCR are as high as 25 percent and 16 percent, respectively. In other big cities, including Bangalore, Chennai and Kolkata, the numbers range between 12 percent and 19 percent. Sales in tier-II and tier-III cities are steady, though there is some panic due to the increase in interest rates, which have climbed to about 11 percent from 8.25 percent a year ago.

“For smaller brokers, the impact of the current market factors is a lot more compared to the larger brokers,” says the president of the National Association of Realtors India . “Even for our members – who are fairly well-off – business is down 40 percent compared to 2009-10. But the smaller guys are in trouble and are setting up businesses that move on a daily basis. Many I know have asked their employees to look out” Ravindra Bramhe, chairman of the Maharashtra Property Brokers’ Association, says.

For whatever business is left in the market, there are hundreds of agents in queue. For instance, there are pockets on the Noida Expressway, near large projects, where real estate brokers can be seen sitting inside small tents, under the sweltering sun, waiting for business. Those who can’t afford to set up these tents can be seen on the roadside, running after every car that passes by, with brochures and flyers of projects in hand. Industry refers to them as the broker mandi. “All my friends and colleagues are now looking outside real estate before things get worse,” says Chaudhary. Many have returned to the insurance industry and others have found jobs with small call centres. A few have found employment with retail stores.

TPG purchases 15% in Shriram Properties

Texas Pacific Group Capital, a US-based private equity firm has taken up a 15% shareholding in Shriram Properties, the realty arm of diversified financial services group, forINR 450 crore. The transaction values the Bangalore-based developer at more than INR2,700 crore. TPG currently holds 49 percent shareholding in Shriram Retail Private Holdings and another 28 percent in Shriram Citi Union Finance. In March, the private equity firm had possessed the assets of Vishal Retail for INR 70 crore through Shriram Retail.

Shriram Properties said it would use the proceeds of the shares sale to venture into retail, hospitality and information technology parks, besides growing its base in the residential projects. “The money raised from private equity fund will also be used to purchase distraught assets in the market,” said M Murali. The company has postponed its proposed plans to increase money from the stock market this year. “We are in talks with builders for buying five projects in commercial and residential space,” Murali managing director of Shriram Properties said. Shriram’s move to diversify its asset portfolio comes at a time when developers are starting to push commercial assets such as retail, hotels and IT parks, riding on the back of economic recovery, to generate steady returns in the next couple of years.

Fire Capital Plans to Increase $ 100Million to Invest in Housing Projects

Fire Capital, the first private equity fund focused on the Indian real estate sector , plans to increase $100 million to capitalize in housing projects. The company will increase the money initially from its existing investors in the US to invest in tier-II and tier-III cities in states like Haryana, Punjab, Rajasthan, told the CEO Om Chaudhry.

“There is an intense scarcity of residential projects, as India would require at least another 30 million homes by 2012 to fulfil the existing housing need. We want to cut some bit of the demand and supply gap in small towns and accommodate to the middle income segment,” he said. Majorly homes are needed in the mid and lower income group. Fire Capital, established in 2004, raised its first fund worth $121 million in 2006, with an ability to invest around $250 million through the co-investment commitments of its investor base. All the funds are almost over. It is raising the additional amount to built 25-50 acres with each builder in small towns this financial year.

The real estate sector in the country was one of the biggest effected area of the global economic recession in 2008-09 as buyers kept away from the market and banks became panicky about giving loans. Although recovery in the sector is gaining speed, but the amount of debt in the industry is a big concern. According to industry estimates, real estate firms have built up a total debt of about 75,000 crore. Property developers are increasingly approaching private equity firms to complete both existing and new projects besides repaying a part of their debt.

State Bank of India Increases Loan Rates

Country’s largest lender State Bank of India has declared a hike in loan interest rates by 75 bps, making housing , auto and other loans tougher for both new and existing debtors. State-owned SBI has increased the base rate, or the minimum lending rate, by 0.75 % to 9.25 %.

The new rate is effective from 12 May2011, the banker said. The increase in State Bank of India’s lending rates comes a week after the Reserve Bank of India raised its lending and borrowing rates by 50 bps. SBI has also increased its standard prime lending rate by 75 bps which would mean that current borrowers will also have to pay more for their loans. With this, BPLR goes up to 14 %. State Bank of India has also elevated deposit rates by up to 225 bps on selected 04 maturities. Many banks have been on a rate hike spree since the RBI’s decision to raise short-term key rates in its annual credit policy on 03May2011.

Over a dozen banks, including PNB, ICICI Bank, Oriental Bank of Commerce and Corporation Bank, have raised interest rates in past one week.

Real Estate Firm To Raise Funds

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A Real Estate firm Embassy Developers is expected to generate over 513 million US Dollars as said by their Prospectus which was filed today. This will be done through an initial public offering of shares.

The draft is available on the Edelweiss website. The lead running managers for the issue are Nomura, UBS, Local Investment Bank and Citi.

The prospectus included that Embassy property is looking at pre-IPO placement of around 57 million shares for up to 11.75 billion rupees with certain investors. The retail investors may be offered a 5% discount on the issue price.

Though the time line is not yet been set.

The Indian companies have raised a lot of money through share sales by mid-June of FY10 from 56 issues which is higher than last year, as shown by the data collected by Thomson Reuters.

India has also asked bids to appoint 4 banks for managing a follow-on public offering in state-run Power grid Corp of India.

Yatra Capital to Increase Investment In India

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Euronext-listed company, Yatra Capital managed by Saffron Capital Advisors, an Indian Real Estate Private Equity fund has announced to invest around 20 million Euros in India in FY10. The company plans to invest the Rs 115 cr in two deals in the domestic sector of real estate. The company has as of now invested about Rs 916 cr in 13 projects which include 2 entity-level details.

The weighted average Yatra Equity Fund covers 27 million square feet spread over nine cities. They have sold or pre let over 3 million square feet across various projects.

The chairman and Co-Founder, Yatra Capital, Mr. Christopher Wright said, “In India, one needs to be very careful on Real Estate investments as the market is volatile. After a drop in 2008-09, the realty sector is now moving up. The Indian economy is growing well making people more confident on future investments. We have invested 44% in residential projects, which would be our focus area in future. We always look at investing in affordable residential projects in tier I and II cities.”

Yatra has invested in 90 cr Residential Project and 97 cr Market City Retail Project at Pune, 115 cr in Riverbank Holdings, 91 cr in forum IT parks and 23 cr in Taj gateway at Kolkata, 160 cr in market city at Bangalore and 57 cr at Nashik.

It has entered partnership with Phoenix Mills for 5 various projects across Bangalore, Pune and Mumbai.

A presentation by Yatra to investors in March this year said, “Most markets have seen positive traction due to price cuts. However, developers have now started raising prices especially in Mumbai and the National Capital Region which has led to a slowdown in sales. Projects where pricing is realistic continue to enjoy healthy absorptions. The monetary environment tightening may impact the fund raising environment for many real estate companies still out to raise money. Investor enthusiasm for participation in realty IPOs remains muted.”

IL&FS Plan To Invest In Real Estate

IL&FS private equity is planning to increase its investment in infrastructure and Real Estate sector by the end of FY10.

They announced to increase their investment from 660 million US dollars to 1 billion US dollars in the infrastructure sector. In the realty sector they already have investments of 1.6 billion US dollars. They are planning to take deals in both the sectors as well.

Mr Shahzad Dalal, Vice Chairman of IL&FS Investment Managers Ltd said, “We will invest close to a billion dollars in infrastructure as well by about the end of this financial year.”

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In the realty sector the firm has spent 1.2 billion US dollars from the total investment on over 30 deals. It is said that they are now looking at 10 more. The left over amount is expected to be deployed by the end of this year mainly in residential space along with commercial.

The company recently bagged a deal in the real-estate segment through IL&FS Milestone Fund in HCC’s Real-Estate project ‘247 Park’ for Rs 575 cr for a 74 per cent stake.

Mr Dalal further added, “The outlook is fairly bullish on both Real Estate and infrastructure. We believe there are a lot of opportunities. There may not be many good projects, but because of our reach and reputation, we do see some really good projects.”