Unitech, India’s second largest listed real estate company, is looking at restructuring a Rs 800-crore loan from public sector banks, as it attempts to save itself from sinking under the huge debt burden. The company is pinning its hopes on debt restructuring, asset and stake sales to private equity (PE) funds to pay a debt of Rs 2,500 crore, which is due by March ’09.

“We are in discussions with public sector banks for rescheduling our loans,” Unitech head of strategy and planning, R Nagraju said. Another company executive, requesting anonymity, said Unitech was seeking to restructure a loan of over Rs 800 crore.

The Reserve Bank of India (RBI) recently allowed banks to restructure loans taken for commercial real estate without turning them into non-performing assets (NPAs). The RBI directive had come following intense lobbying by realty firms, which were finding it difficult to service debt, as sales had dried up and fresh debt was not available.

Most developers are hopeful that banks will reschedule their loans. “It makes sense for banks to reschedule loans, as it will help them show lower NPAs on their books. If banks were to re-possess land, given as collateral by developers, they may get in trouble,” says a Delhi-based mid-sized developer, who didn’t want to be named.

“Land in most cases was over-valued, and prices have been falling since the loans were disbursed. Moreover, in a market, where you have no buyer for land, banks are unlikely to recover even half their cost,” the developer added. Unitech is also expected to pay Rs 200 crore by March for the land it purchased earlier. Mr Nagraju says the company need not pay land dues immediately, as it is yet to get possession of the land.

Unitech is also banking on the sale of its assets, including hotels, office building and land parcels to raise cash. While any deal on its hotel in Gurgaon or office building in New Delhi is yet to be finalized, the company has reportedly sold off a few land parcels meant for institutional use. The company recently sold one school plot for around Rs 30 crore.

Unitech is also looking at raising funds through private equity infusion at company and project levels. Unitech is holding an extraordinary general meeting (EGM) on January 19 to seek shareholder approval to raise Rs 5,000 crore by issuing fresh equity or convertible instruments. The RBI had raised the ceiling for FII holdings in Unitech to up to 100% in November 2007.

The company has been holding negotiations with multiple PE players to raise between $300-$500 million by issuing convertible debentures at the company level and around $200 million by selling stakes in mid-income housing projects.

With its promoter in jail, stock price nearing 52-week lows, downgrades by rating agencies and the state chief minister saying he would look into the realty major’s ability to complete plum projects, Maytas is clearly tottering and looks like it is on the brink.
A cross section of its employees, however, maintains that all is well and they are not the same as Satyam. Nevertheless, pointers suggest that either a strategic deal or a sell out is imminent.
Sample this: The promoters of Maytas Infra have pledged substantial portion of their holding -36% as of September 2008-to raise money. With margin calls getting triggered, institutions have begun offloading stakes.
While IL&FS Trust has sold off 11.52%, Investmart dumped 5.61% of the promoter holding pledged with them. The exact quantum of stake that the promoters hold today is not known.
“With an order book of over Rs 13,000 crore, the company needs an immediate cash infusion of Rs 1,200-1 ,300 crore to complete existing projects. With the current situation of promoters, that looks difficult,’’ an analyst tracking the company said.
Only last week, ICRA downgraded the debt programme to LBBB. This means Maytas would now access funds at a higher rate than what it would have before.
State-run MMTC has cancelled its association with the company for the proposed Rs 8,603 crore SEZ near Chennai.

Mumbai flat price drop now is marginal, will be steeper later, say brokers and consultants, though developers don’t agree.
It is better to continue waiting and watching before putting your money into that new flat, brokers and real estate consultants advise. They concede that prices have decreased but point out that the fall has been marginal; the real reduction is yet to come.
There had been talk of a price correction since the middle of lat year but builders continued to increase prices through the monsoon and Diwali, said real estate consultant Sandeep Sadh, CEO of the portal Mumbai Property Exchange.
“Only after November did they start decreasing prices, marginally. As of January, buyers want a reduction of more than 35%; they should not buy for another six months. It is a farce of a market with builders talking in the air and buyers fishing in the market. Unless builders offer a substantial discount, the market will stagnate till October,” said Sadh.
Only in the distant suburbs does availability outstrip demand, he said, with developers having started reducing rates by 10 – 25%. As per data compiled by the portal, existing rates in Mumbai on an average are not much different than those last September.
Ishwar Kakkad, a broker working in Dadar-Worli area, said that in today’s market he would rather sell than buy. “A price rise can be called healthy if it happens at the rate of inflation, say about 8 – 10% per year. But in the last three years, prices have increased by about 400%. Right now builders are willing to negotiate depending on their urgency; an actual price cut will come when builders openly announce one,” said Kakkad.
He expects the prices to fall eventually, by 40%, “but that will take at least three months to start”.
Faced with little choice as they are, home buyers are not jumping the gun. “The price of my 440 square feet rented apartment at Seven Bungalows in Andheri is now Rs 42 lakh; a year earlier it was Rs 45 lakh. So technically the decrease in price has been less than Rs 500 per square feet,” said Akshay Mishra, who works with a multinational financial firm. Mishra, who has been looking to buy a home for over a year now, has put his plan on hold.
Developers maintain that the market has already seen the much expected correction. “We clearly feel the prices have stabilised and that there would be no more decrease in rates. Developers haven’t increased their rates since March 2008; in the last three months, these rates have fallen by 5 – 20%,” said developer Dharmesh Jain, chairman of Nirmal Lifestyle and vice-president of Maharashtra Chamber of Housing Industry.

With reduction in land prices , an average 30% across India in the past 6 months, many medium-sized developers are trying to renegotiate the joint development agreements, they had signed with landowners earlier.

“Renegotiations have definitely started happening now with a drop in land prices,” says Cushman & Wakefield director (land & industrial) Manish Aggarwal. Players such as BL Kashyap, Sobha Developers, IVR Prime had entered into JDAs, when the real estate market was at its peak in 2007 and early-2008.

At the peak of the real estate market, several medium-sized developers found it too expensive to acquire land at very expensive rates in cities such as Gurgaon, Pune, Bangalore and Hyderabad. Then, JDAs emerged as the best option.

These same agreements are being renegotiated today because developers feel it is unviable to go ahead with projects in a slow moving market. But the agreement with landowners specifies a time limit for the project to be finished.

The market today is such that developers are being forced to offer lower cost housing, which will be impossible if they do not negotiate. To offer a lower cost product to customers, they will need to get land at a much lower cost.

On the other side, another pressure for some real estate developers is from their private equity partners who want better IRR (internal rate of return), as they perceive the market as higher risk today. Private equity players have, in some cases, increased their IRR expectation by about 10%.

“The land value and sale price along with the overall risk profile of projects have been altered considerably. Therefore, the structuring parameters will have to be adjusted accordingly too,” says real estate expert Anckur Srivasttava.

There are some developers who are trying to get out of deals completely. “Landowners have become more reasonable in the past 3-4 months. They are also willing to negotiate, as they understand that the market is slow and it might be difficult to get another deal in this scenario,” says Cushman & Wakefield’s Mr Aggarwal.

Developers and landowners today are renegotiating both on time as well as percentages. According to a source, in a renegotiation happening between a developer and landowner in Pune, the land valuation has been pegged 10-15% lower, and the developer is asking for at least another 6 months before he starts construction.

With the information technology and business process outsourcing companies facing an uncertain future following a recession in the US, some real estate players developing space for these companies are being forced to shelve their projects, while others are slashing their rentals and renegotiating lease agreements to stay afloat.

For these real estate developers, already reeling under the impact of a crash in property prices and a severe credit crunch, the demand from IT-BPO sector is shrinking fast. The rentals for IT ready-office spaces have already crashed by up to 40%.

India’s IT-BPO sector, which was growing at a breakneck pace of about 30% in the past five years, is expected to be affected by the economic crisis in the US market. Work outsourced by the US firms accounts for about 65% of the revenues of the sector.

Mumbai-based realty firm Housing Development and Infrastructure (HDIL), which is developing two IT SEZs in Kochi and Mumbai, has decided to go slow till the real estate and IT industries make a recovery. “Since rentals have crashed by 25-40%, there is no point developing these projects immediately,” said Ashok Kumar Gupta, a director of the company.

Some developers are offering lower prices to push their projects. Ganesh Housing, which is developing a 6 million square feet SEZ in Gujarat, is negotiating with potential clients. “Gujarat can offer cheaper space compared with IT hubs like Pune and Bangalore,” said Bhavin Mehta, in charge of business development at the company.

Several real estate players in India’s IT capital, Bangalore, are facing the harsh reality. Srinivas Reddy, who has developed some 18,500 square feet space in Bangalore’s Electronic City, has been quoting a rent of Rs 40 per square feet.

Finding no takers, Mr Reddy is now open to negotiations. Bangalore-based Ranka Group, which has developed 1 lakh square feet at KR Puram, finds itself in a similar situation. “We are demanding a rent of Rs 45 per square feet but potential clients are not willing to offer more than Rs 35 per square feet,” said AK Shetdy, the group COO.

Several real estate brokers are now doing the rounds of IT firms to renegotiate lease agreements. “Renegotiations on lease rentals are bound to happen now since the real estate prices have crashed considerably. The biggest problem for the realtors will be the projects that are under construction and those that have not yet been occupied,” said Raman Roy, CMD of Quatrro BPO Solutions.

Consultants say IT companies will increase pressure to reduce rentals when the date of renewal of the lease agreements comes near. “Typically, these lease agreements are signed for a period of three years and have an automatic rental escalation clause. Since rentals have crashed below the levels prevailed 2-3 years back, renegotiations will happen for sure,” said Anshuman Magazine who heads the South Asian operations of global real estate consultancy CB Richard Ellis.

Loans extended by banks to hotels and hospitals may no longer be treated as commercial real estate category. The Reserve Bank of India revised norms on real estate exposure where it included loans extended against security of future rent receivables from commercial real estate exposure.

The revised norms will not immediately impact banks’ balance sheet. This is because standard provisioning for real estate companies were brought on a par with all other industries on November 15, 2008.

As a part of the stimulus package, the general provisioning requirement on standard advances for commercial real estate sector has come down from 2% to 0.04%.

However, under reducing the standard provisioning for commercial real estate, RBI had said that they were counter cyclical prudential measures. This means that as and when the economic cycle changes, RBI may increase provisioning norms on commercial real estate sector.

Meanwhile, on Thursday, RBI has continued to maintain that SEZs will be treated as commercial real estate. In case of hotels, the cash flows would be mainly sensitive to the flow of tourism, not directly to the fluctuations in the real estate prices.

In the case of a hospital, the cash flows in normal course would be sensitive to the quality of doctors and other diagnostic services provided by the hospital. In these cases, the source of repayment might also depend upon the real estate prices to the extent that the fluctuation in prices influences the room rents, but it will be a minor factor in determining the overall cash flows.

In these two cases, the recovery in case of default may partly depend upon the sale price of the hotel or hospital. Considering that repayment is not dependent on real estate prices, recovery is only partly dependent on the real estate prices, RBI decided not to treat them as real estate exposures.

Justifying its stand on treating loan against future rent receivable as real estate, RBI pointed out that a few banks have formulated schemes where the owners of existing real estate such as shopping malls, office premises agree to repay loans from the income that is generated from the rentals by these properties.

Such finance may or may not be secured by the mortgage of the underlying properties. In case it is unsecured, the repayment will be sensitive to fall in real estate rentals and there would be no source of recovery in case of default. In case the loan is secured by mortgage of the underlying property, both the repayment and recovery would depend upon property prices.

The adverse effects of the Satyam fiasco are not only going to be felt by the IT industry. Even the real estate sector is worried.
If global clients and investors in the IT domain decide that India is not the best place to dabble in for the moment, then there is going to be an enormous amount of vacant commercial and residential space in the market. This will add to the woes of the real estate sector, which has seen a correction in prices of 25%-30% in the year gone by.
According to global real estate consultants Cushman & Wakefield, over 80% of commercial space taken up in the country is by the IT and ITeS sector. The total commercial space absorption in 2008 by the country’s main business metros that include Bangalore, Chennai, Hyderabad, Kolkata, Mumbai, NCR and Pune was 36.7 million square feet.
“There could be a significant slump or deferment of planned IT SEZs across the country,” says a leading real estate developer who has a large bank of commercial office space planned for.
Besides, companies like Satyam traditionally lead the herd to set up shop in tier II and III towns, which in turn spurs real estate development in those destinations. This too may slow down.
But developers and consultants are more worried about Hyderabad’s real estate market, which is already reeling under the impact of the global slowdown. The absorption rate of commercial units for 2008 had fallen by a whopping 67% in the city at just 1.3 million square feet when the total supply was close to 4 million square feet.

Home buyers could arrive back in the Indian real estate market in force after the Reserve Bank of India reduced rates and the cash-reserve ratio requirement. The bank slashed the repo rate by 100 basis points to 5.5% and the reverse repo rate to 4%. Officials also lowered the cash reserve ratio by 50 basis points to 5%, effective from January 17.
Real estate companies are now hoping the move will finally start to see credit moving again after a clampdown on lending saw sales slump.
Mr. Rohtas Goel, M.D., Omaxe, said, “We are confident that banks will reduce interest rates for the housing sector, which will help bring back the end-user to the market.”
Financial analysts are now waiting to see how many of India’s banks pass the cuts on in full.
Confidence in the market had already been boosted in December after officials revealed the government was working on a second stimulus package for the Indian economy.
Many experts believe that home loan rates will drop down to around 8% – the level expected to tempt buyers in huge numbers.

The slow down in the global economy has led to huge vacant office spaces. According to reports, empty offices in New York City, Chicago and Los Angeles have already exceeded 10%. And Mumbai, too, is following a similar path. “It’s the same story here, and it has to do with the global meltdown,’’ said a CEO of a leading city-based real estate company, who did not wish to be identified. Real estate observers say that the city’s premier commercial business district of Nariman Point has been witnessing a growing number of empty offices. It is learnt that for the first time in several years, there is space available in grade one buildings in Nariman Point. In fact, the business hub has seen vacancy levels in grade one buildings rise to 11%, said sources tracking the rental market. Till recently, the vacancy level was barely 2% in this area.

According to a report by the US-based Urban Land Institute and PricewaterhouseCoopers, commercial real estate in America faces its worst year since the “wrenching 1991-1992 industry depression’’. The report predicted 15-20% losses in real estate values, from the mid-2007 peak, and quoted real estate industry experts expecting financial and real estate markets in the US to bottom in 2009, and then flounder for much of 2010. Since the last quarter of 2008, all the prime commercial business districts such as Nariman Point, Bandra-Kurla Complex and Parel have been affected. Corporates and MNCs are not renewing their lease agreements and are shifting out. But even as the demand slackens, at least 5 million square feet of office space is expected to hit the market this year in the mill land enclave of Lower Parel. Sources say that the vacancy levels, which are in the region of 5%, could increase in the coming months. In Parel, several corporates have renegotiated their lease agreements by hammering the price down by as much as 40% to 50%.

Kaustuv Roy, director Transaction Services of global property consultancy firm, Cushman & Wakefield, said vacancy levels have been inching upwards largely due to a change in corporates’ business strategies as visible in the last six to nine months. The firm’s research shows a 6.4% overall vacancy in Mumbai. “Many corporates are relocating from high cost to lower cost locations, thus ensuring locations such as Worli seeing a marginal increase in the vacancy levels. The demand side has been very slow and cautious. This has slowed down the rate of absorption of office space over the last year,’’ he said.

Mumbai received almost 9.5 million square feet of office space, leading into an excess supply situation in certain locations. Kaustav said this trend will continue in the first few months of 2009 as a large supply of 16 million sq ft is expected, most of which is due in the first six months. Knight Frank India chairman Pranay Vakil said that up to 80% of the office market is driven by the IT-ITES industry, which has now considerably slowed down. “It is no surprise that vacancy levels will go up in this segment as most of the stock was created in anticipation of the demand. In Parel, for instance, offices are getting created but the demand is not there,’’ he said.

In the US, the New York Times reported that in Chicago, demand has dried up just as office towers are nearing completion. Vacancies are also rising in Houston and Dallas, which had been “shielded from the economic downturn until recently by skyrocketing oil prices and expanding energy businesses,’’ said the NYT report. Anuj Puri, chairman and country head of Jones Lang Laselle Megraj, said the only connection between these cities is the meltdown of financial markets. “It is not just about New York and Mumbai. This is a worldwide phenomena. Some of the office space in all major cities will be freed by big investment banks, which have disappeared. Nothing will dramatically change in 09, from what we have seen in the last quarter of 08,’’ he said.

Commercial lease rental market has seen rents dropping on an average of 20% to 25% and going up to 50% in certain locations like the erstwhile mill land enclave in central Mumbai Lease rentals in Nariman Point are currently hovering around Rs 375-Rs 400 per square feet a month in premium buildings compared to Rs 475-Rs 500 per square feet a month nine months ago. Rentals in grade C buildings hardly command Rs 250 per square feet. In Parel, office space which was being leased out at the rate of Rs 300 to Rs 350 per square feet a month four months ago, is now down to Rs 150-Rs 200 per square feet a month. In the BKC, too, there has been a drop from an average of Rs 400 per square feet six to nine months ago to the current Rs 275-Rs 300 per square feet.

Jharkhand’s capital Ranchi emerges as the single city in eastern India that has an incredible mixture of metropolitan culture along with traditional touch. The city is on the way to meet all the criteria of a metropolitan city. Ranchi is a marvelous place with great strength to put itself on the way of growth. It has already made its entry into the era of real estate, since it became the capital of Jharkhand. Mr. S.N. Singh, president of Jharkhand unit of Confederation of Real Estate Developers Association of India (CREDAI) said that with many industry giants have set up their office, there is development in bothresidential and commercial real estate sector. But, land prices are high but plots are less”. Various industry leaders have already opened their channels in the city. Ranchi also has multiplex and few five-star hotels and motels. Clearly, the average Ranchiites lifestyle has mentioned that it is not far to be enlisted as modern city.

DLF, Parsvnath and other real estate developers have lagged behind by 54% in their target to open retail space even as retailers’ vacancy climbed to 16% last year. Cash-strapped real estate developers failed to deliver eleven million square feet of retail space in 2008, according to a study released by Cushman & Wakefield. Out of the proposed 74 malls in key eight cities at the beginning of 2008, only 34 were delivered through the year. Developers in NCR lagged the most with a supply of 4.7 million square feet compared with the earlier target of 7.1 million square feet. Developers may continue to restrict their supply, or go slow on retail space by a similar amount in 2009 across key major cities.

“For any developer, the vacancy level should not cross over 5%. The vacancy level of 16% suggests that most of the malls across India are finding it difficult to manage their operational cost,” said Rajneesh Mahajan, director of retail services at Cushman & Wakefield. The reason for the shortfall was the mismatch between the potential and actual occupancy. The Indian organised retail sector grew at 25% in 2007. Anticipating the growth of retail sector at above 35% in the coming years, developers had announced big retail projects. However, owing to economic slowdown, the growth of the retail sector has come down to 15% in 2008, resulting in developers deferring their projects for 1-2 years. “From the projected supply of 20.8 million square feet space in the first quarter of 2008, we will see a spill over of about ten million square feet development in 2009-10. Lack of funds leading to construction delays and cautious expansion by retailers have resulted in slow absorption of retail space in malls,” said Mahajan.