Author
Gurbir Singh is an award-winning senior journalist with over 30 years experience. He has worked for BW Businessworld since 2008, and is currently its Executive Editor. His experience ranges from covering 'Operation Bluestar' in 1984 to pioneering coverage of the business of Media & Entertainment and Real Estate for The Economic Times.
Way back in 1984, the Tata Group entered the real estate business by setting up Tata Housing Development Company as a subsidiary of Tata Sons. It stood out because most industrial houses shunned property development those days. Even the industrialists who were building up conglomerates or diversifying into new areas rarely looked at realty, then considered a messy business. On the other hand, real estate barons such as Kushal Pal Singh of DLF, the Ansal brothers (Sushil and Gopal), Ramesh Chandra with his Unitech brand in Delhi, and the Rahejas, the Hiranandanis, Mofatraj Munot with his Kalpataru Group in Mumbai, to name a few, were cementing the foundations of their real estate empires in the 1980s and the 1990s.Cut to 2012, and many traditional industrialists have embraced real estate as a big business opportunity. The Mahindras have their realty play. The Godrej property dream is being realised by a team under Pirojsha Godrej, a third generation scion. UB Group's Vijay Mallya has developed a couple of iconic towers and a mall in Bangalore on land that he inherited. The Wadias are developing their massive tracts of textile mill land they own in the heart of Mumbai. B.K. Birla's Century Textiles is on the same path. The Ashok Piramal Group has been in real estate for over 10 years and has scaled up by acquiring a couple of defunct textile mills. And there are dozens more.Meanwhile, the Tata Group set up a second company — Tata Realty and Infrastructure (TRIL) — in 2007 to focus on information technology parks, special economic zones (SEZ) as well as airports, roads and bridges. This is quite apart from Tata Housing Development Company, which has roughly 45 million sq. ft under development currently. Some of the corporate houses have got into the game as they have acres of land assets which they acquired decades ago, mostly for other businesses. Others simply see it as another opportunity that can yield rich dividends. Either way, the newcomers are challenging the hegemony of the older and traditional realty houses as they carve out their own property plays.The TriggerThe economic liberalisation and the real estate boom of 1994-97 set off an avalanche of investments into the traditionally-closed real estate sector. It received further impetus when the Union government allowed foreign direct investment (FDI) in realty in 2002. A huge shortage of housing — now pegged at 28 million units — is a fundamental that throws up huge opportunities. Besides, the 1994 boom, where realtors saw galloping growth and huge returns on investment, got a lot of mouths watering. "Those who initially came in were either those with large land assets they wanted to leverage or those with a pile of cash who wanted to invest it in real estate to maximise returns," Rajeev Bairathi, property consultant DTZ's co-head of investment advisory, told BW.Among the more prominent players who entered real estate was Mukesh Ambani's Reliance Industries (RIL), though in many ways it was not a purely commercial venture initially. In the early 2000s, Reliance Land was floated as a subsidiary to service the vast needs of the group for offices and residences for its growing army of executives. Interestingly, the Reliance Land strategy was to build assets by acquiring residential properties at bargain prices during the 2003-05 real estate trough. By leveraging the group's large demand, Reliance Land was able to buy over 2,000 apartments in Mumbai, Surat and Jamnagar at very favourable prices.Later in the decade, after the split in the group, Mukesh went into SEZ development, with plans for SEZs in Maharashtra and Gurgaon. But RIL has faced problems over land acquisition since. RIL has been in realty in Mumbai's Bandra-Kurla Complex (BKC), too. It picked up an 18-acre BKC plot for Rs 1,104 crore in 2006 to develop a convention centre and a commercial hub that would include its own headquarters. However, the plot was locked in litigation for years with brother Anil Ambani's Reliance Infrastructure challenging the award to RIL. In recent months, there is a move to develop the property in alliance with Mumbai's Wadhwa Developers.break-page-breakDown south, Mallya has also got into realty, though in a limited way. His UB Group held a large parcel of land on Vittal Mallya Road where it developed UB City, an iconic real estate project. The project includes the 500,000 sq. ft UB Towers, which mostly serves as the company's headquarters, as well as well-laid out service apartments over 800,000 sq. ft, which were developed in alliance with Singapore-based Oakwood Group. This was, however, a one-off project by the UB Group. A more concerted bid was made in the past decade by Essar. The Ruias-led group floated Equinox Realty as an independent business vertical. After about six years of work, the company has developed a high quality, 1.2 million sq. ft Equinox Business Park in Mumbai, and is in the process of setting up a 216-acre Vadinar residential township in Jamnagar. Equinox today has nearly 300 acre under development as township residences and commercial offices.Some smaller groups merely traded in land. They sold surplus holdings to make windfall gains when land prices began going through the roof. For instance, DCM Shriram Consolidated sold its 38-acre Swatantra Bharat Mills estate in West Patel Nagar to DLF in August 2007 for Rs 1,700 crore. It was the country's largest private sector land transaction then. Similarly, the sick public sector giant National Textile Corporation (NTC) sold five of its 25 mills in the heart of Mumbai between March and July 2005 for a humungous Rs 2,020 crore. It included Jupiter Mills, Apollo, Mumbai Textile, Elphinstone and Kohinoor Mills No. 3 — totalling 50 acre. The sale proceeds have been used to pay off retrenched NTC workers and refloat some of the mills that had the potential to be revived.Good performers such as Hindustan Unilever (HUL) and Siemens too have consolidated their operations to free up land and estates to improve their cash flow, but have not entered the real estate sector. In April 2012, HUL sold off its former training centre, Gulita, in Mumbai's Worli to the Ajay Piramal-promoted Piramal Realty for Rs 452 crore. More than a decade earlier, in 1998, Siemens sold off some 2 acre of its office estate in Mumbai's Sakinaka to consumer goods entrant P&G for Rs 13.5 crore — a big sum then. The latter went on to construct its country headquarters there. "They may not be in real estate, but they made more money selling land than in their core industries," remarks Pranay Vakil, chairman of property broking house Knight Frank India.But there are those who came in purposefully as real estate developers over the past 10-15 years. Property consultants Cushman & Wakefield, in a survey released during the second big boom in 2006-08, reported that as many as 200 corporate entities had amended their memoranda of agreement (MoA) to include real estate operations such as residential and commercial development, SEZs and software parks, hotels, malls and amusement parks. Such companies ranged from textile manufacturer Standard Industries to tyre cord producer Nirlon and Shalimar Paints.Says Mumbai builder Niranjan Hiranandani: "Three kinds of businesses came into real estate in recent years — those looking for a one-time windfall opportunity, those that had long-term ambitions, and those who were sitting on plenty of land."Textile RealtorsTextile companies have leveraged their land assets to maximum advantage. Some private mills have sold their land to other developers — Standard Mills hawked off its Mumbai Worli unit to Sheth Developers for Rs 135 crore in 2003. The more astute have preferred to do it themselves. Many of these, including Phoenix Mills, promoted by T.B. Ruia, Bombay Dyeing and the Ashok Piramal Group, are now textile companies only in name as their primary activity has shifted to property development. B.K. Birla Group-promoted Century Textiles, which holds 40 acre in Worli, was the last of the city's textile mills to shut its operations in 2007 and is currently developing a first-phase, Rs 600-crore commercial project for leasing to banks and service sector companies.This mass movement to realty has come because of the exponential rise in land prices in Mumbai — an unprecedented 20-fold increase in the past decade. Land cost in NTC auctions in 2005 were at around Rs 7,000 a sq. ft; it ballooned to Rs 14,000 per sq. ft by 2007 and the latest auctions of Bharat Mills have fetched over Rs 41,000 a sq. ft. A similar transformation is not seen in Kolkata's limping jute mills as land does not command the same kind of premium. The transformation of the textile district of Mumbai — Parel and central Mumbai — has also been facilitated by a regulatory regime that has encouraged industrial units to shift out of Mumbai and the amendment of development control rules (DCR) that allow textile mills to exploit their land as realty. An interesting case study is Ashok Piramal Group, which used its land assets to diversify into real estate, while holding on to its core textile functions too. The group kicked off its entry into real estate by incorporating Piramal Holdings in 1997 and developing Mumbai's first mall, Crossroads, in central Mumbai, and following up with a second, larger mall-cum-parking-hub in south Mumbai called CR2. Simultaneously, the flagship Morarjee Goculdas Spinning & Weaving Company was split into Morarjee Realties and Morarjee Textiles, which continued with the original textile operations. Later, in 2005, Morarjee Realities and Piramal Holdings were merged to form Peninsula Land, which undertook among the earliest projects on mill land in Mumbai.These include the well known Peninsula Business Park developed on the Parel unit of Gokuldas Morarjee Mills and the high-end residential complex in a second unit of the mill, also in Parel, called Ashok Towers. Peninsula Land thereafter did a joint venture with Swan Mills at Sewree, in Mumbai, to develop the Ashok Gardens project. The company also expanded its land bank through acquisitions. For instance, in 2005, it picked up a majority stake in the defunct Dawn Mills from its promoters Ravi and Nirmal Ruia. The 6.5-acre mill today has transformed into a swanky commercial office complex nearing completion.break-page-breakA comparison between the financials of Peninsula Land and Morarjee Textiles shows why textile tycoons prefer selling homes and offices to spinning yarn. Peninsula Land recorded sales of Rs 779 crore for FY 2010 and a net profit of Rs 250 crore. Sales fell to Rs 501 crore in FY2011, but the company still made a profit of Rs 191 crore. With the realty business gripped by recession, the first three quarters of FY2011 saw sales of just Rs 201 crore, but there was still profit after tax of Rs 74 crore. Morarjee Textiles, on the other hand, has over the past three years recorded sales in excess of Rs 300 crore, but turned in a net loss of Rs 6.2 crore in FY2010, and a marginal profit of just Rs 4.6 crore in FY2010-11. In the case of Bombay Dyeing, where realty accounted for about 25 per cent of the company's Rs 1,950 crore turnover in FY2011, the promoters — the Wadias — are very clear on the direction of the company. They are currently developing high-end residential and commercial property in their two mills spread over 55 acre in central Mumbai and are looking to exploit their substantial land banks in other centres too. "We will essentially become a real estate firm in years to come," Bombay Dyeing managing director Jeh Wadia told shareholders last year.Those With Cash PilesThen there is Bharti Airtel, which made galloping profits in the early telecom years and was looking to deploy it to get maximum returns though Bharti Realty. Says DTZ's Bairathi: "Bharti did not have large land parcels, but it had a substantial cash pile; and it had domain knowledge as it was already in the business of acquiring and developing a large network of offices for itself."Bairathi, who has watched Bharti from close range, says the company formed a realty arm quite early on to take on the complex task of identifying, buying and leasing operational centres and offices all over the country as part of its telecom business. From an adjunct to the telecom operations, Bharti Realty grew to set up captive retail stores after the group inked a cash-and-carry joint venture with global retailer Walmart. By 2008, the group had poached senior DLF executive David Rebello, and launched its own independent realty business.Focused on north India and the national capital region, Bharti Realty has been since buying land as if there is no tomorrow. It has picked up three land parcels totalling about 20 acre near the Delhi airport, investing close to Rs 1,000 crore with the intention of developing upscale commercial offices and malls. The company's website says the projects at Aerocity hospitality district near the T3 terminal will have a humungous 1.5 million sq. ft. of offices and retail shopping.Bharti Realty is also developing its maiden mall, a 360,000-sq. ft project, in Ludhiana. Clearly, the focus of the company is on large format spaces — commercial offices, IT parks, and retail areas for leasing. It is also developing commercial offices on Gurgaon's Golf Course Extension Road as well as an IT park in Manesar, Haryana. Ironically, Bharti Realty has recently been in talks with realty giant DLF to buy out two of the latter's 25-acre plots in Noida that have clearances for developing IT parks. The deal is being valued at Rs 250 crore. Bairathi estimates that Bharti has deployed about Rs 2,000 crore in acquiring land banks, and it is hungry for more. The company declined to participate in this story.Leveraging Brand Value"We neither had a cash pile nor did we carry the dowry of a large land bank," says Anita Arjundas, managing director and CEO of Mahindra Lifespaces, the realty arm of the Anand Mahindra-led M&M Group. Recounting M&M's foray into property business in 1997, Arjundas says it started with the formation of Mahindra Realty, initially an offshoot of the steel joint venture, Mahidra Ugine Steel Company. "When Anand Mahindra took over the reins and reviewed the group's focus, he saw real estate development as central to India's growth story, as a part of building India's infrastructure," says Arjundas.Leveraging the M&M brand, the group kicked off its realty play in partnership with the Tamil Nadu government in 1997 by setting up an industrial township near Chennai spread over 1,500 acre. The Mahindra World City Developers, in which the state government held 11 per cent equity, initially opened in 2002 as an auto ancillary export hub. It later accommodated IT services too, and now has 60 companies with a combined export value of Rs 4,500 crore. Having set up the industrial infrastructure, the company is developing residential and other support infrastructure, toppings that will provide lucrative returns. The success of its Chennai ‘World City', an integrated business city, won an invitation from the Rajasthan government to replicate the project in Jaipur. The long-gestation model, initiated by Mahindra Realty, is now being tested out at the 3,000-acre Jaipur World City project in which the Rajasthan government holds a 26 per cent stake."Learning from Chennai, Jaipur has come up faster and the first 500 acre of infrastructure is already in place with 37 functioning IT companies that include Wipro, Infosys and Deutsche Bank. The ‘World City' model is the first successful public-private partnership in township development," says Arjundas. The company has so far sunk in Rs 1,000 crore in the Jaipur project and expects an additional deployment of $2 billion over 20 years.On the corporate front, the Mahindras expanded the business by first acquiring GE Shipping's real estate division called Gesco in 2000, after it was drafted as a white knight to avert a hostile takeover bid by the Dalmias. Anand Mahindra then merged Mahindra Realty and Gesco to form Mahindra-Gesco. Mahindra Realty had meanwhile developed among the first of Mumbai's high-rise luxury buildings, Mahindra Towers, at Tardeo, and had begun acquiring additional land parcels in Pune, Delhi and Mumbai. Mahindra-Gesco was among the first to list in 2001, and again was the first to do a public funding through a qualified institutional placement, raising Rs 500 crore in 2006.break-page-breakMahindra Lifespaces, as the company was rechristened in 2006, has been active in residential projects too. It picked up industrial land in an auction by ICICI Bank of bankrupt company GKW, and has developed an 8-acre residential project with 250 units in Mumbai's eastern suburb of Bhandup. "Recession hit us hard with almost zero sales over 5-6 months in 2008-09. Our market capitalisation fell from Rs 4,000 crore in 2006 to Rs 1,250 crore now. But we weathered it well, and continued with construction," says Arjundas. The ability to tap cash from the M&M system — a luxury not available to an independent builder — kept the company afloat till fortunes revived, she adds. The consolidated results of the company for FY2012 show sales rising to Rs 700 crore from the previous year's Rs 610 crore, while net profit too has grown 10 per cent to Rs 119 crore from Rs 108 crore in the same period.For the $1.3-billion Godrej Group, primarily identified with consumer durables, "the rationale for entering property development was a combination of three factors: a sizeable land bank, a strong brand we could leverage, and the substantially higher margins," Pirojsha Godrej, the newly-appointed managing director and CEO of Godrej Properties, told BW. Significantly, the massive 2,000-acre sprawl owned by Godrej & Boyce in Mumbai's north-east suburb of Vikhroli is a land asset that has largely remained locked over issues such as the Urban Land Ceiling Act (ULC) and coastal regulation zone (CRZ).Unknown to most, Godrej Industries entered real estate early launching its first residential project, Godrej Edenwoods, in 1991. It was, however, in the mid-2000s that the group floated Godrej Properties and identified realty as a major growth area. "A few years down the line, property development will be the group's largest business," group chairman Adi Godrej had said in an interview he gave in 2006.In pursuit of that vision, Godrej Properties adopted the joint development model as its main driver. "The joint ventures with landowners worked well as we did not need to lock up scarce capital for buying land," says Pirojsha. Godrej Properties has executed or has in the pipeline as many as 14 such joint ventures, including the most recent one with Jet Airways for the development of 1 million sq. ft of commercial office space in Mumbai's Bandra Kurla Complex. Jet had acquired the 2.5-acre plot in an auction almost a decade ago, but has been unable to go it alone because of the serious cash flow problems it has faced.Godrej Properties has notched up sales of just Rs 453 crore in FY 2011 and Rs 420 crore for the first 9 months of FY2012. Though profit-after-tax has been reasonably good — Rs 131 crore in FY2011 and Rs 58 crore for the three quarters of FY2012 — the rapid scale-up of the realty business has not been anywhere near the target Adi Godrej dreamed of in 2006. The joint-venture model has the inherent problem of slow decision-making and has worked against rapid growth.Godrej Properties's vision of a high-growth company may, however, be realised with the Vikhroli land now opening up to development in recent months. The company has launched several residential and commercial projects after ULC and CRZ clearances have come through. Among these is a 2 million sq. ft township of commercial and residential buildings called The Tree. Industry sources say about 600 acre had now opened up for development. To speed up Vikhroli Estate's development, Godrej & Boyce has signed up Godrej Properties for managing development for a flat fee of 10 per cent of revenues.It's Not All Hunky DorySome companies have had their noses bloodied and have exited as fast as they had entered. A classic case was D.B. Gupta — the promoter of pharmaceutical company Lupin Laboratories, who had set up Landmark Developers over a decade ago. Landmark built Mumbai's first suburban mall in 2002 — The Hub, in Bandra. The company also developed and sold a few standalone properties such as Star TV's suburban headquarters on the Andheri-Kurla Road, The Masterpiece. However, Gupta exited The Hub, selling it to investors for close to Rs 200 crore, and wound up property development activity following pressure from Lupin investors against risky real estate positions.Electronics major Videocon was similarly an early mover in the late 1990s with company chairman Venugopal Dhoot deploying profits made from selling television picture tubes into real estate. Some of Videocon Realty & Infrastructure's early projects included the reconstruction of the burnt down Handloom House (Fort House) in south Mumbai, and the commercial office building, Videocon Tower, at Delhi's Jhandewalan Extension. It has also done a residential project along Mumbai's Napean Sea Road called The Wilderness. A spokesperson for the group conceded the company had virtually exited from realty. Others who had shortlived real estate forays include Emami Realty, Lloyd Steel and Satyam promoter B. Ramalinga Raju's property and infrastructure venture, Maytas, which shut down under a cloud of scams. Says Bairathi: "Many of these groups that failed treated real estate as a short-term foray. Realty is a tough business that needs to be supervised by a CEO and governed by checks and balances. You cannot treat it as an arm of your core business, or a kind of arbitrage operation."Property broker and consultant Jones Lang LaSalle's chairman and country head, Anuj Puri, points out that the realty business still continues to function on personal relationships with a high degree of cash dealings. Corporates have often failed to grasp these nuances. "Some have failed because they could not understand how the approval process works," Puri adds. Hiranandani puts it another way: "Property development requires a set of entrepreneurial skills that are quite different from corporate or industrial skill sets."But the consensus is: corporate entry has improved business practices. Hiranandani acknowledges real estate has seen big changes. "Every 10 years, I have seen a 100 builders leave the industry, and another 100 new ones join. The Rahejas, the Mittals survive. Siraj Lokhandwala, the Majithias and Ranbir Maker have bowed out. Meanwhile, there has been a merger of old entrepreneurs with the new corporate leaders. You see far better quality and professionalism today."Jones Lang LaSalle's Puri agrees. "Corporates entering real estate has introduced processes and transparency where there was none. It has created branding and pushed the importance of delivery schedules." And some are all for more corporates entering the fray. Says Shashi Kumar, head of real estate investment advisory at Birla Sunlife AMC: "More corporate houses should get in. It will help clean up the industry."gurbir(dot)singh(at)abp(dot)in(This story was published in Businessworld Issue Dated 04-06-2012)
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India imported over 900 tonnes of gold in 2011, putting pressure on the current account deficit. The affair with gold is now under scrutiny from the government and RBI. While the budget doubled import duty on bullion and non-standard gold and slapped a cess on unbranded jewellery, inviting protests, RBI has tightened norms for gold-based lending NBFCs. It has capped their loan-to-value ratio at 60 per cent for loans against gold jewellery. The message is clear: reduce gold's allure and direct Indians to ‘productive' investments.The government may be forced to withdraw the 1 per cent excise duty on unbranded jewellery it proposed in the budget. Since 17 March, bullion traders and jewellers across the country have shut shop in protest; and both the government and trade analysts have been taken aback by the intensity of the backlash. Coal minister Sriprakash Jaiswal added fuel to the fire by attending one such protest rally in Kanpur and likened government departments to "mosquitoes sucking blood"."Jewellers are not in a mood to open their shops; the artisans are even willing to wind up business," says Bachhraj Bamalwa, chairman, All India Gems & Jewellery Trade Federation.The budget stipulation for providing PAN numbers and imposing tax on all retail cash sales of Rs 2 lakh or more has also drawn sharp ire. "Effectively, this is a 0.3 per cent tax on all jewellery as the 1 per cent impost is on 30 per cent of annual production. For branded jewellery, that has the accounting systems and factory manufacture, this is a reduction; but for the small family businesses, it will be a huge compliance burden," says Bamalwa. Trade sources estimate that 97 per cent of all jewellery manufacture is in the small and unbranded sector.On gold, traders say there has been a double whammy in the space of three months with customs duty being raised from 1 to 2 per cent on 20 January and then again doubled to 4 per cent in the budget. Besides making gold products more expensive, the import duty hike will also encourage smuggling, says the Gems & Jewellery Export Promotion Council.Finance minister Pranab Mukherjee's statements in Parliament (after the widespread protests) indicate that he is ready to modify some tax proposals to do with unbranded jewellery. Mukherjee has, however, insisted there will be no rollback on his customs duty proposals considering that the huge import of gold has been the primary driver of the current account deficit in the economy.(This story was published in Businessworld Issue Dated 09-04-2012)
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The two clear trends evident at the three-day conclave of the media and entertainment industry in Mumbai last week were: first, the determination by government to push through digitization of the disorganized cable television industry; and second, the importance given to the print industry not seen earlier in these annual jamborees held by Ficci under the ‘Frames' brand. Stating that "we are on the threshold of a revolution", Uday K Varma, Secretary, Ministry of Information & Broadcasting, said the central government was committed to the ‘sunset' date of July 1, 2012 from when on the metros would shut off their analogue cable networks and go digital. By December 31, 2014, he was hopeful the last hamlet in rural India would also be part of the digital network making the transformation of 80 million cable homes "the fastest digital changeover in the world." Delivering his ‘vision statement' for the Information and Broadcasting Industry, Uday Varma said the digitization programme this time would go through because "all stakeholders including cable operators were supporting the drive." He also said the government was determined to broaden the communication footprint by releasing licenses for an additional 839 FM radio stations and setting up 1,000 community radio stations. To mark 100 years of Indian cinema, the government would be investing Rs 500 crore to set up a Film Restoration Mission "to save and archive the country's rich celluloid history. Echoing the I&B Secretary, J.S Sarma, the Telecom Authority of India (Trai) chairman said that much of India's growth was linked to the communication revolution that digitization would bring in its wake. He pointed out that in the developed world the growth in communication technology had worked its way systematically from a 100 per cent wireline telephone density, to cable TV, onwards to mobile telephony and finally the 4th layer – fibre optic broadband systems. In India, many of the stages such as full wired telephony, had been skipped while there were doubts whether mobile technology had the capacity to provide comprehensive communication. In this context, digitized cable TV had the capacity "to provide communication to the masses." In the discussion that followed, I&B secretary Varma indicated there would be no compromise or postponement in the sunset dates for analogue TV, and added that a Task Force of stakeholders had been set up to iron out problems and hear grievances. Sarma, on the other hand, acknowledged that it was indeed a challenging task for the cable industry to gather the financial resources necessary for putting in place 10 million set-top boxes in homes by the time the first phase of digitization kicked in July 1, this year. Interestingly, later sessions at the Ficci-Frames dwelt at length on the challenges of galloping digitization of the news and entertainment media on print. T N Ninan, Chairman, Business Standard, for instance conceded that the print media was "showing signs of stress". He said the print industry strangely was displaying trends of both proliferation and consolidation simultaneously. Advertising was drifting towards entertainment media while those who were advertising on news programming were moving towards the internet.Rajiv Varma, CEO, HT Media, on the other hand, said "the print medium has a bright future" and based his assessment on the market dynamics in the eastern part of the world – Japan, Korea and Singapore – where newspapers are thriving. While Rajiv Varma pointed out that in the U.S. print newspaper advertisements had declined from $ 60 billion in the late nineties to $ 20 billion in 2011, mainly due to the impact of the internet, Lynn De Souza, Chairperson, Readership Studies Council, noted that the Indian print market remained buoyant with ad spends during the last five years doubling from Rs 15,000 crore to Rs 30,000 crore. The share of the print media at 40 per cent has remained unchanged, she said.
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After much debate, the modified Development Control Rules relating to construction and buildings in Mumbai have been implemented by the state government. These changes steered by chief minister Prithviraj Chavan aim to end corruption; but the provisions have left a divided community of builders, town-planners and architects. Among the major changes is the curtailment of the municipal commissioner's power to regularise conversion of flower beds, voids, terraces and lily ponds into covered areas that become part of the apartment. Earlier, these were shown as part of the sanctioned plan but were not treated as FSI (floor space index)/FAR (floor area ratio) of the building. However, they were built in a manner that they could be later merged. Builders sold these areas as part of the project to unsuspecting consumers. The new rules allow residential and commercial projects to increase permissible area by 35 and 20 percent, respectively, provided a premium is paid. The DC Rules (DCR 36) makes it incumbent on builders to provide more parking space in buildings by allowing three levels of basement parking. Municipal commissioner Subodh Kumar's circular also makes it mandatory for the building proposal department to clear all construction plans within 60 days of application. With as many as 20 clearances required, this department had become a cesspool of corruption. Though the clearance-in-60-days provision is part of the Maharashtra Region and Town Planning Act (MRTPA), it has now been reiterated as municipal fiat. Kumar is hoping to limit graft and speed up construction. PRITHVIRAJ CHAVAN ATTEMPTS TO CURB GRAFT In a joint statement, Ajay Piramal and Adi Godrej said the new provisions will create a "transparent and objective approval system". The Maharashtra Chamber of Housing Industry (MCHI), which had earlier opposed some measures, has supported the modified changes. Paras Gundecha, president of the MCHI, says the new rules will create a level-playing field and reduce the scope for arbitrary decision-making. However, Shashi Kumar, head (real estate and investment advisory), Birla Sunlife AMC, says that plans that were sanctioned before the new rules came into effect on 6 January but are not in tune with the new provisions, would have to seek fresh approval. This will leave many projects in a limbo, he says. Town planners such as P.K. Das fear that many provisions have been excessively watered down. For instance, the mandatory open space around buildings has been fixed at just 1.5 metres (5 feet) though the original recommendation was for 6 metres (20 feet). With high-rise buildings barely 10-15 feet apart, it will increase crowding. Despite such reservations, these changes are nonetheless a serious attempt to strengthen the rule book for an industry plagued by corruption. (This story was published in Businessworld Issue Dated 06-02-2012)
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In a rare deal in times of investor caution, IL&FS recently picked up a 9.36 per cent stake for Rs 200 crore in Indiabull's Bharat Mills Mumbai project located in upscale Worli. The deal pegged the residential realty project at Rs 2,136 crore, but initial media reports mistakenly projected this as "35 per cent premium" to the Rs 1,580 crore paid by Indiabulls in August 2010 for acquiring the 8.4-acre mill land. One cannot calculate ‘premium' by comparing the total value of a project — the projected realisation on sales on completion — with the purchase cost of land. In August 2010, the projected value of the residential project planned by Indiabulls was closer to Rs 3,000 crore assuming a conservative sale value of about Rs 30,000 per sq. ft. At Rs 2,136 crore, IL&FS has got a 25 per cent discount on 2010 valuations.As this private equity deal indicates, prices for land and built-up estate can only move south over most of this year. If there was any doubt that the real estate sector was in the grip of severe recession, recent data emerging on uptake of office space is an eye-opener. According to a CB Richard Ellis (CBRE) study, there has been a 12 per cent decline in the absorption of prime office space in the country in 2011 with leasing and purchases falling to 28 million sq. ft compared to 32 million sq. ft in 2010. According to a survey by DTZ Consultants, the cumulative absorption across India's seven largest cities was up a "modest 8 per cent to 36 million sq. ft." "We expect a further dip in demand in 2012 by 10 per cent. Absorption may fall to about 32 million sq. ft this year," says Anshul Jain, CEO of DTZ Consultants.With corporates, especially IT companies, pruning or postponing expansion plans, builders have cut back supply and completion targets, leading to a huge slowdown in the construction industry. The CBRE report indicates supply addition in "leading Indian cities declined by almost 50 per cent touching about 30 million sq. ft in 2011, compared to more than 55 million sq. ft added last year.That stagnation has hit the commercial and office space market is corroborated by DTZ whose extensive survey shows that total available office stock in 2011 has gone up 9.4 per cent from 335 million to 370 million. This is despite project completions falling 45 per cent compared to the previous quarter.Given the recessionary data, lease rentals and property prices should be falling faster than they are. "Builders have protected themselves by selling off chunks to individual investors or private equity players. It is these stakeholders who are taking the biggest hit," says DTZ's Jain. On the other hand, Pankaj Kapoor, CEO of property market tracker Liases Foras, says: "Residential prices have peaked and we will now see a gradual decline over three years." Given a sharp slowdown in sales and funding for builders becoming scarce, HDFC CEO Keki Mistry predicts "a 5 to 15 per cent fall in the property prices" over the next year.In this scenario, it is strange how government revenue authorities have jacked up the ready reckoner (RR) or property circle rates. These are used to compute stamp duty and registration charges for property transactions. From 1 January, in Mumbai the RR rates have been hiked 46 per cent while in the Delhi-National Capital Region, circle rates have gone up 250 per cent for residential property over one year. This has only stymied demand further. (This story was published in Businessworld Issue Dated 30-01-2012)
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Ten years ago, builders were a shadowy lot. Very few realtors were listed and the property market was a mystery. Under threat from dons, builders routinely sought police protection, and most retail transactions had large cash components.Over the past decade, the real estate sector has opened out. Many builders have raised money for their companies through public listing; incessant media coverage has lifted the veil of secrecy; land acquisition is usually conducted through open auction; and cheque payments have become the norm.In this turnaround, realty is seeing a new, go-getting pack of sons, and daughters, of big builder families driving the modern ethos. For an industry traditionally run by close-knit families, GenNext is providing continuity, but with a difference. Usually educated abroad, they have entered with a modern outlook and have been willing to experiment with greater transparency. But can they break away from the past?Cutting The Umbilical CordIn real estate, Niranjan Hiranandani is a big name. Not only was he the first builder to give Mumbai quality construction, he also emerged as a prominent spokesperson for the much-reviled industry.Earlier this decade, he succeeded in coaxing the then Union minister for urban development, Ram Jethmalani, to repeal the Urban Land Ceiling Act. A first-generation builder whose family was earlier in the textile business, Niranjan's first realty project was in 1981 — a clutch of 11 skyscrapers in Versova, Mumbai. Puravankara Projects - First Gen: Ravi Puravankara Next Gen: Ashish Puravankara Ashish brought in technology usage and consumer communication. He is also advocating using carpet area as the selling norm. (BW pic by Jagadeesh NV) But the big splash was a 250-acre Powai development — 15 million sq. ft of high class residential and commercial construction. Hiranandani Constructions is not listed, but conservative estimates peg it as a Rs 12,000-crore company today. "We were the first to look for high quality. The object was to build homes that were better than what I lived in," he says.Both Niranjan's son and daughter — Darshan and Priya — stepped in early but followed different courses. Young Darshan cut his teeth as an independent entrepreneur when he found himself in Dubai in 2004 at age 23 with independent charge of group company Hircon. "I found out how difficult it was to get things done. I had to build the company from scratch," says Darshan tracing his early days.His was no mean achievement. Hircon, in partnership with Dubai-based ETA Star, completed 23 Marina, a 90-storey, Rs 1,000-crore luxury housing project. Fortunately for the group, a lot of the advance sales were executed before the 2008 recession struck West Asia. With the slowdown, Darshan now shuttles between Dubai and Mumbai, as he devotes time to business ventures in India as well.The history of 30-year-old Priya Hiranandani has been more chequered and less spoken about. She headed out to London to take charge of the family-promoted, AIM-listed real estate investment firm Hirco a few years ago, with husband and investor Cyrus Vandrevala. But Hirco's performance has always been under a cloud and minority shareholders Laxey Partners had called for the ouster of Niranjan and two of his nominees from the board. Meanwhile, the relations between Niranjan and the Priya-Cyrus duo came under strain. In September 2010, Priya stepped down as CEO of Hirco."Priya has been a recluse," says father Niranjan, but adds: "She and her husband Cyrus continue as private equity investors." Cyrus Vandrevala is a technology investor and started Intrepid Capital Partners.Ravi Puravankara is another first-generation developer. But he moved to Bangalore from Mumbai in 1983 "for the cleaner and more transparent business atmosphere". The Rs 500-crore Puravankara Projects now has 19 million sq. ft in the pipeline, and reported a net profit of Rs 145 crore in FY10. Unlike others, Puravankara has stayed with low-cost housing in the long term even after recessionary conditions abated. Ashish, the only son, joined in 2001, took a break to complete his studies, and returned just before the company went public in August 2007."What I am adding is the best practices — consumer communication and technology — to ramp up quality," he says. The young 32-year-old joint MD gives the example of going for digital ‘Yale' locks that are Rs 8,000 a piece for flats as they provide better protection, though at double the price of the traditional bolting systems. break-page-breakAshish has been nominated to the board of the national real estate apex body, Confederation of Real Estate Developers Associations of India (Credai), where he is pushing for using carpet area as the selling norm. "It is not easy. It may take years," he concedes.But if sheer scaling up of business is the criteria, then the award must go to Ajay and Sanjay Chandra of the Unitech Group. The company, started by a group of civil engineers led by their father Ramesh Chandra, began as a small construction and contracting firm in 1972.Though it diversified into real estate with the 300-acre South City project in Gurgaon in 1986, Unitech was still a small operation at the turn of the century. The big leap came over the past decade, soon after younger son Sanjay joined the company in 2002 as head of marketing and sales, followed by Ajay in 2003, as head of business development. The group's foray into amusement parks, diversification into telecom in 2008 and, finally, spinning off Unitech Infra into a separate vertical followed in quick succession. Hiranandani Constructions - First Gen: Niranjan Hiranandani (with father Dr Lakhumal Hiranandani) Next Gen: Darshan Hiranandani Other than heading the family's real estate business in Dubai, Darshan is also looking after the new business of power generation (BW pic by Subhabrata Das) Unitech today has an annual turnover touching Rs 3,000 crore with businesses spread over office space, hospitality and mall development. From Gurgaon, the Chandras expanded to Delhi, Kolkata and Bangalore. Says father Ramesh Chandra of his two sons: "Pan-India growth would not have been possible without them. They have provided more bandwidth.""In just 7-8 years, they ramped up the market cap to Rs 16,000 crore — the fastest we have seen," says Anshuman Magazine, chairman and MD of property consultants CB Richard Ellis India. Magazine ascribes the growth to the brothers quickly developing a strong backroom and professionalising operations. "Ramesh Chandra had little personal money. It was a classic case of stock growth," says HDFC Property Ventures' CEO K.G. Krishnamurthy.Of late, there has been speculation that Unitech Infra has been set up to divide the group for the eventuality that Ajay and Sanjay can't work together. But Sanjay denies this. "On the contrary, Unitech is still the largest shareholder in Unitech Infra. In terms of management, we have made it independent under one CEO." Lodha Group - First Gen: Mangal Prabhat Lodha Next Gen: Abhisheck (right) and Abhinandan Lodha While Lodha senior is in charge of land acquisition, the brothers handle brand building, project management, finance and marketing (BW pic by Satheesh Nair) As of now, the areas of control between the two brothers are fluid, and father Ramesh continues to play a hands-on role as the executive chairman. "The three of us are not involved in any day-to-day activity or deal-making. That is for the professionals," says Sanjay.What is startling is the appetite the brothers had for risky gambles. Entering Mumbai realty only in 2008, they floated a 50:50 joint venture with Lehman Brothers for a Rs 1,500-crore slum redevelopment project near Goregaon. Slum rehabilitation, even by Mumbai developers, is considered high risk given the political ramifications. Similar forays in alliance with Indonesian Salim group to acquire thousands of acres of rural land in West Bengal also failed.As is the case with high-risk ventures, many hit a stone wall. Not anticipating the recession, the group's over-leveraged position landed it in heavy debt estimated at nearly Rs 11,000 crore at peak. To recoup, Unitech had to sell off many of its non-core assets such as Gurgaon's Hotel Courtyard in 2008, and more recently its own office complex in Delhi's upmarket Saket area. Trimming debt by 40 per cent and with sales again picking up, the brothers have managed to stem the slide.Aggressive StyleGenNext wants to get things done, and is more aggressive than their fathers. But as family-run units, the father figure always looms large.Rapidly expanding the Mumbai-based Lodha group — largely built by Mangal Prabhat Lodha — are Abhisheck (31) and Abhinandan Lodha (29). "The boys are mature and balanced, but they are more aggressive than the previous generation," says Krishnamurthy of HDFC, which recently invested Rs 500 crore in the builder's Srinivas Mills project.Lodha Senior, an active BJP legislator from Mumbai's Malabar Hills, mainly drives the sticky agenda of land acquisition and lets his sons work the daily grind in the company. Abhisheck, as part of brand building, has a large annual Rs 40-crore advertising budget. Five years ago, such spends would have been seen as criminal.Another big Mumbai developer — the unlisted Runwal Group, estimated to have an annual turnover of about Rs 1,000 crore — is run by father Subhash Runwal and sons Sandeep (39) and Subodh (35). The father still sits in on all important decisions, but the work is divided amongst the three project-wise. Their styles, however, differ. "Dad wanted to do everything himself. We have learnt to professionalise, to delegate authority so that we can get more done," says Subodh.For young Gaurav Mittal (32), director of the mid-size realty company CHD Developers, it has been a long journey from Bathinda to Bhikaji Cama Place in Delhi. His father, R.K. Mittal, saw no future for the family's traditional legal practice in Bathinda. He branched out on his own as an MES contractor but Bathinda was too small for his dreams. In 1989, Mittal senior caught the Punjab Mail to Delhi, booked a Delhi Development Authority plot in an auction, and became a developer.CHD Developers was incorporated in 1990, and was among the early real estate companies to go public — it listed on the Bombay Stock Exchange in 1995. Gaurav joined the business in 2000, by then it was established in Tier II cities such as Karnal, Haridwar and Varanasi. break-page-break"I have built professional teams to scale up the business to around Rs 150 crore. For that, I have changed focus from our Tier II city projects to the upper-middle class market in the Delhi NCR region," says Gaurav. His signature project is Avenue 71, a 1.6 million-sq ft upscale housing venture in Gurgaon, which aims to deliver 867 units over the next 2-3 years.Gaurav says he had broken with the past by insisting on transparency. "Every visitor at a project site can go through our ‘Blue Book' — a 500-page compendium of all our permissions, layout maps and copies of the title of the property — so that his doubts are cleared."First Generation HeroesIf there were marks for style and suavity, builder Vikas Oberoi would be among the front-runners. He wears crisp formals, works out in a gym, likes Japanese sushi and knows his wines. He has recently shed his S-Class Mercedes for an Aston Martin and has graduated to sport flying having acquired a Cirrus single-engine aircraft.But his USP is his success as a first generation builder. Standing in his plush Weston tower office overlooking Mumbai's Western Express Highway, Oberoi is a man in a hurry. Oberoi Realty, incorporated in 1999, saw an 84 per cent rise in net profit — Rs 460 crore on Rs 805 crore sales in FY10. With Morgan Stanley as a minority shareholder, Oberoi completed his IPO in October 2010 raising Rs 1,000 crore. Runwal Group -First Gen: Subhash Runwal Next Gen: Sandeep (right) and Subodh Runwal The brothers have professionalised operations, and delegate authority so that more can be done(BW pic by Subhabrata Das) "I had to scale up faster than others because I had no land bank, no family to back me," says Oberoi, the 41-year-old MD of Oberoi Realty.As a latecomer, his land acquisition has been frenetic. He joined the big league when he acquired pharma company Novartis's 60-acre campus in Goregaon, Mumbai, for Rs 107 crore, in 2002. Today, the layout boasts of the Weston Hotel tower; a 500,000 sq. ft-mall; and Oberoi Garden City, a 11.2 million sq. ft-housing complex. Oberoi's most lucrative project, however, is a 3.1 million sq ft-layout in Mumbai's heartland of Worli, where he is setting up a hotel and commercial and residential buildings.Before the Reserve Bank of India tightened the screws on bank lending to builders, Oberoi was among the first to use bank finance to buy land. The acquisition of Glaxo's 23-acre Mulund property, for instance, was financed by Axis Bank. "I was among the first to monetise my receivables," says Oberoi.Talking of breaking away from tradition, the young builder says: "Developers earlier tried to do everything themselves. In the municipal corporation, you would meet them liaising; if you went to Hafeez Contractor's office (a prominent Mumbai architect), they would be sitting there. After 8 p.m. they would meet customers. Ten years ago, there was no HR, no CFO." To scale up, Oberoi brought in professionals at all levels. He is currently looking for a CEO, too.But not everything has gone as planned for him. Both the Glaxo properties — in Mulund and Worli — are mired in problems and have not been developed yet. Glaxo Mulund has been stalled because of claims of the forest department, while the municipal corporation has refused permission to build in Glaxo Worli till the developer pays a 50-per cent transfer fee.Oberoi's father, Ranvir Oberoi, started off as a small real estate investor and broker. In the 1970s and the 80s, from a 300 sq. ft-office in Maker V in Nariman Point, he would book flats in advance sales, putting down 10 per cent of the cost. As prices rose, he sold at a profit, and went through the reinvestment cycle again. Today, his son, with a personal wealth of Rs 7,000 crore, has come a long way. Pradeep Jain, chairman of Parsvnath Developers, is also a first-generation developer, but is at the other end of the spectrum in terms of style. He runs a simple office on the 6th floor of the rundown Arunachal Bhavan on Barakhamba Road in New Delhi. His demeanor, too, is understated. But years of experience has made him a smart, conservative judge of the realty market.A penniless Jain migrated to Delhi in May 1984 and managed to set up a property brokerage selling apartments for Delhi's big brands such as the Ansals. He then moved on to work as a land acquisition and assembly agent for some other developers. He started construction contracting, too, and, by 1990, with all his experience, graduated to incorporating his own integrated company, Parsvnath Developers.His first big projects were not in Delhi. He launched a shopping mall in Moradabad in 1994 followed by a 120,000-sq. ft commercial complex in Saharanpur, both in UP. His first big housing project in Delhi region was Parsvnath Estate in Greater Noida in 2000, where he built 300 quality homes. Parsvnath, in many ways, pioneered the IPO revolution in real estate, becoming one of the first builders to go public in November 2006 with a Rs 900-crore issue.Over the years, Jain has ramped up his business by snapping up every opportunity. He got the concessions for developing malls at Delhi's metro stations; bagged licences to develop 11 SEZs in the second half of 2006; set up Parsvnath Telecom in 2007 and bid for licences for 22 circles; and by the end of 2007, was in partnership with the West Asian Al-Hassan Group for offshore real estate projects.Speaking about the learning from the two rounds of real estate crises — the first in the latter half of 1990s and then in 2008 — Jain blames the problem on the mad scramble for land by developers. "With their focus on land acquisition, no one was trying to understand the execution and delivery process. If you develop a project in a time-bound manner, people pay and there is no cash flow problem." Project completion is sacrosanct, says Jain. "Kill the developer if he does not complete the project he takes advances for." CHD Developers - First Gen: R.K. Mittal (left) Next Gen: Gaurav Mittal Gaurav changed the company's focus from Tier II cities to Delhi NCR. He also insists on transparency(BW pic by Bivash Banerjee) However, in the past few years, one can see the appetite for rapid expansion and for over-leveraging expected receivables. The drive for growth at any cost pushed the Parsvnath group into the very position Jain warns against. By end-2008, it had debts mounting to Rs 2,600 crore, and he was forced to sell numerous non-core assets. Jain's most expensive failure has perhaps been the Pride Asia project in joint venture with Chandigarh Housing Board. Having bid and paid an advance of Rs 567 crore, the Chandigarh project has not taken off and is mired in a web of legal and environmental controversies.Uncertain FutureSo has GenNext overtaken the old guard? "Without a doubt," says Anuj Puri, CEO of Jones Lang Lasalle. "On their side, they have market opportunities that did not exist earlier, and the aggressiveness to tackle these head-on."Agreeing that things have changed for the better, Darshan Hiranandani says: "Earlier, dad (Niranjan Hiranandani) did not have access to capital. That problem is not there now."Also, good education has given them a modern outlook. Unitech's Ajay Chandra is a civil engineer from Cornell University while Sanjay has a Master's in business administration from University of Boston. Vikas Oberoi went to Harvard Business School and has an executive MBA. Ashish Puravankara has a Master's from Willamette University, Oregon, US. Gaurav Mittal of CHD Developers is a graduate from Bradford University, UK.On the ground, though, operational difficulties continue to be crippling. The suspicion that the consumer and political class has for builders, persists. In turn, the builder community, despite the newly-acquired spit and polish, still thinks short-term and employs unethical practices.Says Magazine of CB Richard Ellis India: "In a volatile market, the young builders continue with a short-term view — launch a mall or a housing project, take in as much of pre-sales as possible and worry about completion later."In fact, some, such as Subodh Runwal, feel things have worsened. "There was always lack of clarity, but now things are even more blurred. Expectations have gone through the roof. Land acquisition is tough. Permissions are tougher. Norms get changed overnight."It is, therefore, little wonder that many young builders want to branch out into new businesses, which may be unknown to the previous generations but that offer more stable practices.Darshan Hiranandani, for instance, is anchoring his family's diversification into power generation. Conceived in August 2009, the 2,500-MW natural gas-fired power plant is being set near Pune at a cost of around Rs 10,000 crore.The Puravankaras, too, have long-term plans. "We are seriously looking to enter healthcare and education. Not in the short term, but over the next 3-5 years," says Ashish.Despite the pessimism and the scams, most feel things have become better for the GenNext. "There has been a clean-up by default through consolidation. Public listing has got rid of 95 per cent of benami firms. They have been merged with the main company for better valuation," says HDFC's Krishnamurty.But ‘dirty' money is still a big problem, and nobody is looking for solutions. Most admit it is an issue, but few speak of actual numbers. ‘Speed money' is conservatively estimated to account for as much as 20 per cent of turnover. Will GenNext be able to bell this cat?gurbir(dot)singh(at)abp(dot)in(This story was published in Businessworld Issue Dated 31-01-2011)
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In a move that has sent ripples down the international diamond community and the mining industry, the Oppenheimer family has sold its 40 per cent share in diamond mining giant De Beers in an all-cash deal to Anglo American for $5.1 billion. The buyout will take Anglo American's holding to 85 per cent from 45 per cent. The deal gives the diamond giant a $12.75-billion valuation. The Oppenheimer family has been associated with diamond prospecting and mining in South Africa since virtually the dawn of the industry. Says the current De Beers chairman, Nicky Oppenheimer: "This has been a momentous and difficult decision as my family has been in the diamond industry for more than 100 years and part of De Beers for over 80 years."Vasant Mehta, vice-president, International Diamond Manufacturers Association (IDMA), says the exit "was a complete shock". He added that since De Beers had its "systems well in place, we are not expecting any major policy changes for India or elsewhere". There are few indicators of what caused the exit. Industry speculation is that Nicky Oppenheimer's son, Jonathan, was not keen to continue the business of mining roughs. He has been investing in synthetic or man-made diamonds, and industry sources expect some of the proceeds of the stake sale to go into that business. Anglo American has inked the agreement with CHL and Centhold International, who represent the family's interests. The government of Botswana, which holds 15 per cent in De Beers, has pre-emption rights and can increase its holding to 25 per cent. If it does, Anglo American's acquisition would reduce to 30 per cent, taking its total holding to 75 per cent.For London-based Anglo American, one of the world's largest mining companies, more control over De Beers is part of its consolidation strategy. "This transaction is a unique opportunity for Anglo American to consolidate control over the world's leading diamond company," said Cynthia Carroll, the company's CEO. There has been some friction between the two stakeholders, and the buyout, according to Anglo American, would lead to "simplified ownership structure that will enhance performance". The recently appointed CEO, Philippe Mellier, is expected to continue. De Beers's share in the rough diamond market has been falling — from 80 per cent at the beginning of the 20th century to about 35 per cent now. It also recently faced anti-trust action from the European Union for its monopolistic practices with Australian miner Argyle. De Beers had also been excluded from the US market for decades, which has only been reversed after a hefty $10-million fine. As of 30 June 2011, De Beers had gross assets of $8.2 billion and reported an Ebitda of $1.2 billion."With a more aggressive management, Anglo American wants De Beers to reverse the trend of falling market share. They may come back into mines and markets that the earlier regime had exited from," says IDMA's Mehta. (This story was published in Businessworld Issue Dated 21-11-2011)
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For the newly-elected West Bengal government headed by the Trinamool Congress (TMC) and its chief minister Mamata Banerjee, the recent tripartite agreement providing tea industry workers a wage rise of over 25 per cent has come as a feather in their caps. It is however not clear whether the weaker tea gardens will be able to give the benefits agreed upon; and whether the West Bengal government has the stomach to see through some of the more fiercely debated pending issues like Dearness Allowance.The recent agreement signed between 37 trade unions, 5 planters' organisations and the West Bengal government, covers the tea gardens in the Dooars and Terai regions, and provides for a rise in daily wages of Rs 18 to Rs 85 per day from the earlier Rs 67. The 3-year agreement effective from 1 April, this year, also provides step-ups in daily wages to Rs 90 and Rs 95 in the second and third year, respectively. With a massive 2.5 lakh workers spread over 278 tea gardens standing to gain from the agreement, the settlement is being keenly monitored. Subal Biswas, Additional Labour Commissioner, a key negotiator for the West Bengal government, told BW that the wage demands for the monthly-rated employees is yet to be settled. The prickly issue of variable Dearness Allowance, which could not be resolved even after months of bargaining, has also been left to the government to work out over a 6 month period, he said. The state-wide tea industry agreement was spurred by an earlier agreement in April for the more prosperous Darjeeling tea gardens that gave workers a daily wage of Rs 90 per day. Interestingly, though a slew of central trade unions were signatories to the agreement, a crucial role was played by the militant, Adivasi-backed Progressive Tea Workers Union (PTWU). With over 60 per cent of the workers in the tea gardens of Adivasi origin, the Akhil Bhartiya Adivasi Vikas Parishad had called on its members to quit the central TUs and promote the more aggressive PTWU."The Adivasi union played a crucial role. Bonus negotiations that normally drag on for weeks, was settled this year in a day. The central trade unions had discredited themselves. In the last agreement in 2008, they managed a bare Rs 2 rise in daily wages and that too after a 15-day strike, says Anuradha Talwar, the Supreme Court-appointed advisor for implementation of Right-to-Food Programme in West Bengal. On a wider level, the wage agreement has once again brought to the fore the woes of the Indian tea industry. Though it accounts for more than a quarter of the world output of tea, and directly employs as many as 1.26 million workers, the Indian tea industry has been recording an abysmal 2 per cent growth rate over the last three years. Many of the Dooars and Assam tea gardens are sick industries today or functioning with losses. Among the south Indian plantations, Tea Board executive director R. Ambalavanam estimates about 15-16 gardens have turned sick. "Some gardens like the Darjeeling plantations that produce high quality tea for export will not feel the pinch. However, for most gardens the stagnant price of tea in the domestic market coupled with declining exports, has created a desperate situation," Ambalavanam told BW. A recent study of the tea industry by Prashant Relwani showed average tea prices after peaking at Rs 76 per kg in 1998 actually declined to Rs 58 per Kg in 2005, before rising marginally to Rs 86 per Kg in 2008. Meanwhile, input costs including fertilizer have risen sharply. Ambalavanam sees a huge labour shortage looming in this industry and points out that in the South Indian gardens, even after wages being pegged at Rs 150 a day, workers are deserting the industry. "At the same time, higher wages will have to be linked to productivity if the industry is to survive," he says. As it is, some of the gardens in the south including Ooty and Kodaikanal have been transiting to real estate development, a dangerous trend, he acknowledges, for the long-term future of the industry.
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The sale of 135 acres of land of the now defunct auto company PAL-Peugeot has had an interesting course. In a recent auction of the company's land in Mumbai's distant suburb of Kalyan ordered by the Bombay High Court-appointed court receiver, Gammon India offered the highest bid of Rs 601 crore. Neptune Group, which offered Rs 600 crore, was pipped at the post. The Bombay High Court is yet to confirm the sale, but what is significant is that in the last round of bidding in April 2008, the highest price offered was Rs 676 crore by a subsidiary of Indiabulls Real Estate. Gammon then was No.2 with a bid of Rs 675 crore. The substantially lower price offered in the recent round of bidding indicates that land prices after the post-recession revival have still not touched the highs seen during the boom period.Interestingly, Indiabulls's offer of Rs 676 crore did not go through because the court receiver had fixed a reserve price of Rs 1,650 crore. The ridiculously high reserve price — equivalent to Rs 2,855 per sq. ft for kutcha (undeveloped) land — is a reflection of the staggering expectations that prevailed during the boom madness. With no reserve price fixed in this round, it is likely that the court will accept the sale terms. "The price in this auction is more realistic and will allow Gammon to make some margin of profit after development," Naresh Nadkarni, chief investment officer at HDFC Property Ventures, told Businessworld.There are interesting pointers in this for the general property market, and for the pumped- up residential market in particular. Despite volatility in the stockmarkets, and the continuing consumer resistance, property prices have steadily climbed through 2010. In fact, in many urban markets, they are now close to the peak 2008 rates. Simultaneously, we have seen a drying up of demand and builders saddled with increasing inventories.This is supported by the data collated by property market tracking agency Liases Foras. In Mumbai, the average cost of a flat has climbed from Rs 64 lakh in September 2009 to Rs 88 lakh in September 2010, and the average unit price rose from Rs 5,743 per sq. ft to Rs 8,887 per sq. ft in September 2010. In response, total stock sold in Mumbai declined 17.6 per cent to Rs 8,375 crore from Rs 10,168 crore in September 2009. Net sales in the city, too, fell sharply to 12,170 units in September 2010 from 17,400 units a year ago.Most builders concede consumer resistance is building up. "Demand has dried up in recent months," says Subodh Runwal, director of Runwal Group. Consumers believe prices have peaked and are likely to come down. A survey among potential home buyers by real estate website Makaan.com showed that 55 per cent expected residential property prices to fall by 20 per cent or more in 2011. This perception, coupled with an increase in home loan interest rates, has led to buyers postponing buying decisions."Pre-sales and underwriting trends are contributing substantially to the existing sales volumes. If we exclude such projects, the market looks extremely risky now," says Pankaj Kapoor, chief executive officer of Liases Foras.So far, builders had been clinging on to the price line, despite the build-up of unsold stock. Speculation in the industry is that the steady cash flow from private equity investors and earlier advance sales helped cushion the pressure on builders to reduce prices. These sources seem to have dried up now and we are seeing the high price points finally cracking.Builders often plead that they have little margin for reducing prices since the cost of land is abominably high. With land costs beginning to decline as the PAL-Peugeot sale indicates, builders hopefully will see reason and offer more affordable prices to home buyers. (This story was published in Businessworld Issue Dated 10-01-2011)
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The derisive response to real estate developers setting up a consumer redressal mechanism in Mumbai is understandable. Indeed, self-regulation by a scam-smeared industry can only be greeted by scepticism; but the move also underlines just how desperate the situation is for realtors. Releasing its code of conduct last week, the Maharashtra Chamber of Housing Industry (MCHI), an apex body of builders in the western region, said it had set up a mediation committee to resolve consumer complaints. The new code for builders will encourage full disclosure of the property titles, sale agreements based on carpet area, a clear time-line on possession, and disclosure of additional charges.It is, however, unclear how serious the effort is and how the MCHI expects to implement its code of conduct. Talking to BW, president of MCHI, and chairman and managing director of Mumbai-based Gundecha Group, Paras Gundecha, said: "Those not following the code of conduct will be immediately suspended." He was, however, unsure whether losing the MCHI membership was threat enough for recalcitrant builders. "We are not a court; we can only hope that 80 per cent of the disputes get resolved through mediation," Gundecha added. Click here to view enlarged image With Dussehra and Diwali round the corner, developers obviously want to tidy up and get sales going. Some are even considering a 10-15 per cent cut in prices to stoke crippled demand in the hope the coming festival season will help reduce their huge inventories. So far realtors have been grimly holding on to the price line and generating cash-flows either by bringing in high-networth investors (HNIs) or by selling land assets to reduce debt. Can this situation of both increasing inventories and prices hold on for long? Rising Inventories, Rising PricesThe housing industry faces a quixotic situation. One would have thought that the 12 interest rate hikes over 18 months and the consequent evaporation of home-buying would have led builders to lower prices. But recent data across six metros indicates a double whammy — falling sales and a steady rise in prices!Property market tracking agency Liases Foras' figures show that home sales in the National Capital Region (NCR) were stagnant since June 2010 and actually fell from 27 million sq. ft in the January-March 2011 quarter to 22 million sq. ft in the following April-June quarter (see ‘Building Blocks'). However, average prices soared 17 per cent over the six months — from Rs 2,679 per sq. ft to Rs 3,131 per sq. ft. In the Mumbai Metropolitan Region (MMR), sales have been steadily declining and fell from 9 million sq. ft in the January-March 2011 quarter to 8 million sq. ft in the following April-June period. However, average home prices in the MMR region inched up 5 per cent from an average of Rs 9,235 to Rs 9,716 in the same period. The correlation between sales and prices standing on its head can be best seen from the following Mumbai figures: In the first quarter of FY2010, Mumbai saw sales of 21,000 units at an average price of Rs 5,600 a sq. ft; in Q1 of FY2011, sales in the city were down to 12,300 units, but average price had gone up to Rs 7,742 per sq. ft; and for Q1 of FY2012, sales fell to 8,500 units but average sale price had marched on to Rs 9,700 a sq. ft. break-page-breakOnly Pune and Chennai recorded some growth since April 2010, driven by non-local, offshore demand from NRIs and others, says Pankaj Kapoor, CEO of Liases Foras. More than rising inventories, it is the falling ‘velocity' of sales that indicates recessionary conditions, says Kapoor. In a normal healthy construction cycle, a residential project should be constructed and sold over three years. This translates into an average ‘velocity' of 3 per cent per month. However, the current ‘velocity' of residential projects in most metros is around 1.5 per cent — indicating that a project will need a cycle of six years to offload its entire stock. "It is only Pune, with an average ‘velocity' of 2.75 per cent, which seems to be doing all right," says Kapoor."Home sales in the country are down by 75 per cent compared to April 2010," confirms Pranay Vakil, chairman of property broking company Knight Frank India. The commercial and office space market was probably in a worse bind with oversupply from projects that had been started in 2007-08 now coming close to maturity. "The oversupply is because of too many concessions to the IT sector," says Vakil. In Chennai, seven builders withdrew from the software technology park (STPI) claiming bankruptcy, according to Kapoor of Liases Foras. (From left) K.P. SINGH, chairman, DLF: Straddled with high debt, DLF is now selling some of its core assets (BW Pic By Tribhuwan Sharma)ARCHANA HINGORANI, CEO and executive director, IL&FS: Investment Managers The company has invested $1.7 billion in realty since 2006ANUJ PURI, chairman and country head, India, Jones Lang LaSalle: "HNIs have been fishing for big chunks at bargain prices"PRANAY VAKIL, chairman, Knight Frank India: "Home sales are down 75 per cent compared to April 2010" Unlike the residential market, the premium commercial or office space market has seen lease rentals decline over recent months. For instance, in Parel, Mumbai, yet-to-be-commissioned Indiabulls Finance Centre was sewing rentals at Rs 110-120 per sq. ft per month, which is a substantial rebate compared to the neighbouring commercial centre Indiabulls One, where rentals have been recently negotiated in the Rs 170-180 per sq. ft range. Holding The Price Line A variety of factors have contributed to this strange scenario of builders continuing to maintain or push up prices even as the Reserve Bank of India (RBI) and the banks have repeatedly advised them to bring down prices to generate sales. Developers cite an array of reasons for the high prices, including rising cost of raw material and land. The premium markets are seeing few fresh launches, which is pushing up prices of high-end residential property. Says MCHI president Gundecha: "In Mumbai, we are seeing just two new launches a month compared to 8-10 projects opening every month a year ago." Agrees Bharat Dhuppar, head of sales and marketing at Mumbai-based Omkar Realtors & Developers: "Fewer launches have kept prices stable." Another reason is that the spiralling cost of construction leaves very little scope of reducing margins any further, argue developers. An internal assessment by Godrej Properties, for instance, showed that the price of steel had risen 26 per cent in one year between March 2010 and 2011, while that of cement had moved up 13 per cent in the same period. High cost of land acquisition, too, has made rentals and capital values inelastic. Anuj Puri, CEO of property broking firm Jones Lang LaSalle (JLL), says rentals for commercial property had fallen in Whitefield, Bangalore, to an average of Rs 30 a sq. ft per month; to Rs 28 per sq. ft in Old Mahaballipuram Road, Chennai; to Rs 32 per sq. ft in Greater Noida and Navi Mumbai. "These assume a construction cost of Rs 2,500 a sq. ft and land acquisition cost of around Rs 3,000 a sq ft. Rentals cannot fall below these levels if developers are to recover their historic cost of land and investment," argues Puri. Though bank capital has dried up, builders have been able to hold their heads above water by selling equity in project-based special purpose vehicles (SPVs) to investment funds and HNIs. The perception that real estate will give better returns than most other sectors in the long run has kept cash-flows moving and the builders liquid. For instance, mid-size developer Omkar Realtors raised Rs 200 crore from India Reit Fund Advisors for a 30 per cent stake in a slum redevelopment project in Worli, Mumbai. About a year ago in August 2010, in one of the largest private equity deals in real estate, Mumbai-based Lodha Developers raised Rs 500 crore from HDFC Realty Fund for a 10 per cent stake in its 117-storey residential tower World One in Mumbai. Other investors in the project include Temasek of Singapore and the Abu Dhabi Investment Authority. In recent months, even film actors have become investors in realty projects. For instance, Ajay Devgn has taken a major stake in a suburban project in Mumbai with developer JP Infrastructure.Explains JLL's Puri: "HNIs have been coming in as investors with developers. This is what is holding up prices. They have been fishing for big chunks at bargain prices."Archana Hingorani, CEO of IL&FS Investment Managers, continues to be bullish on real estate revealing that as much as $1.7 billion or 55 per cent of the company's private equity investment of $3.2 billion has been in realty projects since the mid-1990s. The two real estate funds — of $525 million and $895 million — were interestingly raised as late as 2006 and December 2007, respectively. "The jury is still out on these investments considering permissions and timeframe of completion are an issue. But the size of the investments has made us more involved, more alert. The second round of investments has been more educated," says Hingorani. She adds that the Pune, Chennai and Bangalore markets have proved to be robust. Which Way Will It Move?For realtors, all signs indicate that things will get worse before they get better. The National Housing Bank (NHB) has predicted that disbursal of home loans will slow down over the next few months due to high property prices. NHB chairman and managing director R.V. Verma, speaking at a media meet in Mumbai recently, said home buyers were postponing purchases and home loan growth was down one percentage point to 16-17 per cent (compared to last year). He predicted this would slip another 1 per cent by the end of the financial year. break-page-breakMany like Verma are blaming the developers' greed rather than high interest rates for the sluggishness. "If property prices come down, there could be an increase in demand even if the interest rates go up a little," he said.That might still happen. As the festival season opens, industry pundits are predicting a 10-15 per cent cut in residential prices. Knight Frank's Vakil predicts a "possible 15 per cent correction" in prices. Puri of JLL agrees, but warns that "cuts will only be in new launches". Speaking for developers, Gundecha told BW that builders were now considering a 5-10 per cent reduction in prices.In the meantime, holding out against melting demand is taking a toll on developers. Those straddled with high debt — such as India's largest listed real estate company DLF (its debt is over Rs 20,000 crore) — have been selling non-core assets like hotel plots and land earmarked for amenities such as schools. But this has not been enough. It is now the turn of core, residential plots to be put on the block. For instance, DLF has been marketing residential plots in Sectors 70-A and 73 in Gurgaon. These plots are being snapped up by developers or are being offered as plotted colonies for self-development by home buyers. Debt pressure is hitting completion schedules too. "Companies like Unitech are deliberately not completing some of their projects even in cases where they are 80 per cent complete. These projects are mortgaged to banks and financial institutions, and the moment these are ready for possession, the developers will face payment calls," says a senior executive with a realty company. In this scenario, it will be interesting to watch whether the lifeline thrown by private equity funds and HNIs, which has held up the industry so far, will continue. For developers who have defaulted on timelines and delivery, the future seems bleak. Says JLL's Puri: "Those developers who have allowed investors to cash out and exit at the end of a project's construction cycle, will attract a flood of investors when they go for a second round of raising funds. But those who have not been able to give returns in the first round, may not be able to raise funds." Those who have exited from successful SPVs with builders with cash in hand include IndiaReit Fund Advisors, Red Fort Capital and Kotak Realty. But at the same time, there are many who have burnt their fingers and may never return. At the peak of the realty boom in early-2008, it was estimated that Rs 20,000 crore in PE investment had come in or was in the pipeline, including from international majors such as Blackstone and JP Morgan. Interestingly, talk of launching mass housing projects is back in fashion. Niranjan Hiranandani, co-founder and managing director of Hiranandani Group, and known for his baroque-look, top-end residential complexes in Mumbai, recently announced the opening of a series of mass, affordable housing projects in Mumbai shortly. Speaking at the opening of a specialty hospital in Powai, Mumbai, Hiranandani said these new projects will "increase volume and help stabilise the realty market". When builders speak of mass and affordable housing, it is a sure sign that recession is knocking on their front door. gurbir(dot)singh(at)abp(dot)in(This story was published in Businessworld Issue Dated 03-10-2011)
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