Tuesday, February 17, 2009

'Real estate price will fall further'



'Real estate price will fall further'
February 17, 2009



Sameer A Nerurkar is the managing director of Samira Habitats, a Mumbai-based developer and retailer of luxury and budget villas and homes.
Samira Habitats is the pioneer of land development in the idyllic town of Alibag, a few miles from Mumbai. Among Samira's many projects in Alibag is also a plan to build a housing complex bang in the middle of lush natural beauty. People living here can commute daily to Mumbai in a ferry.
Samira Habitats is sponsoring the International Boat Show to be held in Mumbai on February 19.
In a brief interview with Contributing Senior Associate Editor A Ganesh Nadar, Nerurkar speaks about the prospects for the real estate market.
You have big projects coming up in Alibag. What prompted you to choose Alibag? What about Panvel? Has development work started there?
First of all, Alibag is very close to Mumbai, just nine nautical miles away. Secondly, Alibag is a lifestyle choice. It's like staying in Malabar Hill area in comparison to Tardeo. I would choose Malabar Hill. That's where the density would be low. There is a lot of zoning there. Most South Mumbai people have bought plots in Alibag. We are creating a niche of sorts.
Alibag has the sea on all sides. Proximity to the sea becomes a unique selling proposition. Panvel too is a good place for developers, but it's a different market all together.
We have three different projects coming up. They are huge projects. One is called Shanthi Villa and is very exclusive. We scrutinise individuals and select those we think would buy there.
The other one is Pavilion, which is actually Indian batting maestro Sachin Tendulkar's concept. Sachin has not invested as a partner, but he has bought shares in my company. He is a shareholder, a keen advisor and a very good friend.
Image: Sameer A Nerurkar, managing director, Samira Habitats. All photograph, courtesy: Samira Habitats

Is there further scope for correction in real estate prices in India? How soon do you think the sector will witness a turn around?
This is not the rock bottom. A lot of people are still holding on. I think there will be a correction and a good correction. It will take another two years to turn around.
Has the government done enough to help the real estate sector to tide over the slump?
They have brought down the interest rates. What else can the government do? When the going was good, the builders made enough money. Now because the global economy is collapsing you can't blame the government.
They could increase the liquidity. But I think if the prices were correct the demand will go up again.
Among your upcoming projects are services for special economic zones and luxury hotels. What exactly are services SEZ and where will they be developed. Also where will the luxury hotels come up?
We have land near an upcoming SEZ. Ours is a premium site near the road. We were planning to provide services that the people in the SEZ will need. But right now, we are not looking at that.
There is a property close to Mandwa, near Mumbai, where we are thinking of setting up a luxury hotel. We are talking to some big brands. The project will begin in March. We want an international brand to come in. As soon as we decide that we will start the project.

Wednesday, February 4, 2009

500,000 jobs lost in 3 months in India

February 4, 2009
Over 500,000 people were rendered jobless between October to December 2008 due to the recession, according to the latest government study.
The findings are part of a first of its kind survey conducted by the Labour Bureau of ministry of Labour and Employment as part of a study on the effect of economic slowdown on employment in India.
A sample size of 2,581 units covering 20 centres across 11 states was taken up for the survey.
PTI

Eight major sectors like textile and garment industry, metals and metal products, information technology and BPO, automobiles, gems & jewellery, transportation, construction and mining industries were also included in the survey.
The total employment in all these sectors had come down from 16.2 million in September 2008 to 15.7 million by December 2008.

Exporting units had observed a higher decline in employment with gems & jewellery sector shedding 8.43 per cent of its work force. This is followed by metals and textile sector which laid off 2.6 per cent and 1.29 per cent of their work force, respectively.
Among the domestic sector units, gems & jewellery sector again witnessed the maximum decline in employment with 11.9 per cent of their work force losing jobs.

This was followed by automobiles and transport sectors who shed 4.79 per cent and 4.03 per cent of their work force.
The study also found that the overall decline in contract workers was observed to be 3.88 percent during the period in comparison to only 0.63 per cent decline for direct employees.

Contradicting popular belief that the IT and BPO sector during the same period had seen retrenchment the sector had in fact increased its employment marginally by 0.33 per cent.
The government, which has so far said that the economic slowdown would have very little impact on the economy other than on parts of the financial system linked to the United States, now agrees with findings of international studies which suggested that developing economies will be impacted by the recession

"The global slowdown has its implications on the domestic economy. . . The Ministry of Labour and Employment also took a serious note of the economic slowdown and it felt the need to have an assessment of its impact on employment to enable the government to take preventive and ameliorative measures to arrest the decelerating employment in the country," Ministry of Labour and Employment secretary Sudha Pilla said.
All eight industry sectors had experienced an average decline in earnings by 3.45 per cent during October to December 2008. Overall capacity utilisation had reduced by 1.32 per cent per month during the period, with automobile sector witnessing a monthly decline of 7.05 per cent.

Monday, February 2, 2009

DLF, Unitech lack in transparency, disclosures like Satyam : Credit Suisse

With Satyam scam making investors more concerned about corporate governance issues, a global investment banking major Credit Suisse has said that the country`s top real estate firms, including DLF and Unitech, are found lacking in terms of transparency and key disclosures in their businesses.Noting that related-party transactions account for a significant portion of their revenues, Credit Suisse said in a report that their network of key related parties run into hundreds of entities and include a number of un-listed JVs, subsidiaries, partnership firms and companies under control of key management personnel."It is clear after the Satyam incident that investors should focus on corporate governance issues, particularly because of losses incurred in the past 12 months that have failed to rise to the fore," Credit Suisse said in its report on Corporate India.Some "concerns" might not be wrong from a legal viewpoint, but "flags for investors what they should know."On DLF Ltd, the report said the company has had significant intangible asset/goodwill on its balance sheet, there are significant departures from conservative accounting practises, there have been material related-party transactions and the company does not disclose detailed accounts of key subsidiaries on a regular basis.Besides, there is "no transparency in the land acquisition process. Promoters have privately controlled entities from which DLF buys land. Also, its landbank disclosure in annual reports is inadequate."Credit Suisse further noted that "DLF`s dealings with the promoter entity have been questioned by investors. In FY`08, DLF sold assets/real estate projects amounting to Rs 5,560 crore to a promoter-controlled entity, DLF Assets. It also cancelled an earlier sale of assets worth Rs 1,890 crore."Previously, DLF has settled with minority shareholders who complained that they were denied participation in the company`s rights issue in September 2005.The report further noted that while DLF does not actively deal with derivatives, it "does use forward contracts and swaps to hedge its risks associated with fluctuations in foreign currency and interest rates."Unitech also does not actively deal with derivatives and other financial market instruments, the report said on the country`s second largest real estate firm.However, both DLF and Unitech have departed from conservative accounting practices, it said. The two companies recognise revenues on a percentage of completion method even where the cash receipt is yet to become due and they also capitalise on interest expense during construction of project.Incidentally, auditors of both firms have not made any observation in their last annual or limited review reports.On related-party transactions at Unitech, the report said that loans taken from key management personnel and controlled entities amounted to Rs 350 crore in FY`08. The key related parties at Unitech include a listed entity Unitech Corporate Parks and un-listed parties are Unitech Wireless, 316 subsidiaries, 21 JVs and associates and four entities under the control of key management personnel.Unitech also does not disclose detailed accounts of all subsidiaries and has invested in an unrelated business of telecom at a time when real estate business needed funds.On DLF Ltd, the report said the company has had significant intangible asset/goodwill on its balance sheet, there are significant departures from conservative accounting practises, there have been material related-party transactions and the company does not disclose detailed accounts of key subsidiaries on a regular basis.Besides, there is "no transparency in the land acquisition process. Promoters have privately controlled entities from which DLF buys land. Also, its landbank disclosure in annual reports is inadequate."DLF, where key related parties included 245 subsidiaries, 12 partnership firms, 12 JVs and 124 entities under control of key management personnel, had outstanding receivable from promoter entities of Rs 1,940 crore as of March 2008.DLF, where key related parties included 245 subsidiaries, 12 partnership firms, 12 JVs and 124 entities under control of key management personnel, had outstanding receivable from promoter entities of Rs 1,940 crore as of March 2008.

See realty prices at inflation-adjusted '98 levels: DLF


Published on Mon, Feb 02, 2009 at 12:41 , Updated at Mon, Feb 02, 2009 at 15:08 Source : CNBC-TV18




During the just-concluded results season, the real estate sector was expected to show dismal numbers. The star player in the realty pack, DLF, came out with its third quarter results on January 31. The company's net profit was down by 68.72% from Rs 2144.98 crore to Rs 670.79 crore on YoY basis.

“Real estate prices would come down to inflation-adjusted 1998 prices,” Rajiv Singh, Vice Chairman of DLF, said.

Speaking on the results, Singh said the company is ready to fight the price war and would offer customers a lucrative price — the company, he said, has launched new projects at lower prices and has stopped buying land. “We saw the slowdown as early as December last year,” Singh said. DLF, he said, had tweaked its product mix to include affordable housing as demand for luxury housing and corporate offices had come down.

Singh added that things had improved after September, when customers found it difficult to avail of credit. “New volumes had declined but thankfully, old bookings didn’t get cancelled. Now, people have started thinking of buying.”

Talking about the company’s about 50% margins, Singh said margins of realty companies were a little deceptive. “We have about 100% margin in rentals. If you remove that component, the margin would come to about 35%,” he said. The working capital cycle in some cases is about 15-20 years, he added.

Here is a verbatim transcript of the exclusive interview with Rajiv Singh on CNBC-TV18. Also watch the accompanying video.

Q: Big drop in earnings, why was this quarter particularly difficult?

A: We witnessed almost a shut down of all forms of economic activity and real estate being something which is driven a lot by sentiment as well as availability of money we got hit by a double whammy. In late October, the demand completely fell off and we are yet to see it recover in any substantial measure, so that’s the first part. Secondly, since the office business and the world economy is changing in a large order, we have also decided to review our strategy viz building out DLF Assets Ltd. We have also muted our performance in that area. If you go through our numbers and see carefully, the net reductions in DLF assets are reasonably good, considering the circumstances and we are quite pleased with it.

Q: Did you see this coming in September, because in September the feeling was that it was a difficult phase, but you would not see an alarming fall off like this, have you been surprised too by the fall in October-December?

Q: Did you see this coming in September, because in September the feeling was that it was a difficult phase, but you would not see an alarming fall off like this, have you been surprised too by the fall in October-December?

A: Yes, we all are surprised by the fall and actually as far as we were concerned we saw the slowdown as early as maybe last December or January and all our launches after that were at very competitive prices, we did exceedingly well. But we have to operate with tight margins, the leasing volume though continued strong and that part of the business was unanticipated low in the last quarter.

We knew that real estate business is going to be under some pressure and we stopped our land buying almost a year back. We knew it’s going to slowdown, but not so suddenly, but net-net we are feeling reasonably confident now looking ahead in terms of the product mix we have and the pricing positions we have.

Q: What’s fallen off - is it new demand which has dried up completely or old bookings which are also getting cancelled?

A: Fortunately it’s not much of the old bookings that are being cancelled. Some customers did face pressure during the last quarter because they may not have been able to get their own disbursements from their banks. We were patient and we supported them through this difficult phase and that part is now getting behind us. New bookings were the ones, which were severely impacted. The main thing people weren’t sure about their own future and more importantly everybody read newspapers about imminent fall in prices and people are searching for the bottom now, and the good part is that everybody thinking about buying something, but then they are unsure about when to buy. So, we believe that’s a good sign now and the thought at least is towards buying property and possibly in the near future people will make a judgment as the pricing levels are attractive and may not decline much further.

Q: Even as there has been 60% fall in revenues and profits, you are still working at a 50% operating profit margin. Would you want to clear inventory at much lower margins just to shore up cash flows going forward?

A: Let me clarify to you two-things. One is that margin number in our case is a little deceptive, because we have a very large component rental income. Rental income as you know has 100% margin technically, so if we strip out our rental income, our margin levels come down to possibly somewhere close to 35%.

Q: It is still not bad.

A: It is not bad but let me also mention to you, margins in our business are not something that we buy raw material today, convert it and a month later we sell it and record a margin. In our case our working capital cycle if you want to call it, is sometimes as long as 15-20 years. So, margins are deceptive, it is a return on capital which we have to look at and if you go back and see return on capital – real estate industry’s return on capital is hopefully no worse than other industry but I don’t think substantially better.

Margin reporting is deceptive because you are just taking historical cost and putting current pricing on it without accounting for a lot of inflation in between. So to that extent, I would like to say that we are reasonably competitive in our product pricing and margins will slightly decline because of our product mix changes. Today the luxury housing and the corporate office segment would be weak for the next few quarters. To that extent our margins would be under some pressure but not too much.

Q: The reason I was asking the question is whether to figure out whether you would want to cut down on your inventory to sell at much lower price points to generate cash flow which I imagine would be top of mind for you for the next few quarters?

A: Fortunately we are quite competitively priced. We have different product segments. May be about year back we came out with mid-income homes when we were about 30% below the market at that moment in time. We have just done a test launch in Hyderabad where we are I believe around 30% below the market in Hyderabad today and that test launch is meeting with very encouraging response.

We are ready to fight the price war there is no two-ways about it. We will give the customer pricing a point which will be very strong are done by homework and research. 1998 was about a similar point in time for the real estate industry as it is today.

Q: So you are saying prices will fall 40% like it did in 1997-98?

A: Let me clarify now that price point today which we are planning to operate at which would be in mid-income houses are price points which are about 15-20% lower than what they exist in most cases today and we have already started off. That would be equivalent to 1998 inflation adjusted price. So if I just take an inflation adjusted price from 1998 to today, the real estate pricing levels will come to about that point.

Q: But no more than 20%?
A: I don’t think so, because the margins are not there. To be very honest with you, today in Hyderabad we have launched our project. Our project pricing varies from Rs 1,850 per square feet to Rs 2,200 per square feet. If you look at our cost of construction and government taxes, this is a very attractive and a good price.

Q: What about markets like Gurgaon where there seems to be quite a bit of supply?

A: Our price levels were anyway competitive. We sold at Gurgaon last year in Rs 2250 per square feet and we believe there may be an element to improve by 10% but not much more. So that market will not drop below 10% on what the prevalent prices were when we sold about a year back.

Q: What about places like NCR and Noida?

A: I can’t comment on Noida because we are not present there and in such Tier II cities, it might be 20-25% less. I am talking about price levels where business is happening, there may be some illusionary price levels, which I am not talking about.

We have got our products and our rollout plans ready for 20 cities across the country and we actually held it back because in times of uncertainty, you cant do anything, nobody in certain is talking about buying. However, in responding to the price cuts and the government initiatives, the SBI and PNB have done on the interest rates. We are determined to respond favourably and we will in the next three-four months come out with about eight to 10 products at different points, which will be very attractive that will hopefully revise demand in our sector.

Q: You had set out a guidance of 22 million square feet to be delivered in FY09 — not a whole lot of that has been achieved. Do you think you will fall short of that target?

A: We will be a bit short of that target partially because some of our rental projects are getting delayed. Some of our customers are also deferring their own rollout programmes but overall, as I mentioned to you earlier, we still struggle with government approvals. It is very interesting in our industry but somebody still sits back and says, what's your biggest worry long-term? It is still the whole plethora of approvals, which inhabit our industry and add substantially to our cost. We are constrained in delivery terms more than approvals not necessarily by the immediate problem of what is going on in the markets today.