Oil Ministry will approach Cabinet regarding the possible deregulation of domestic diesel pricing as local prices could soon reach parity with global levels, two ministry sources told Reuters.India regulates diesel prices to protect the poor and curb inflation and deregulation could bring the return of private firms such as Reliance Industries and Essar Oil to retail sales.Such companies do not receive federal support for selling diesel at discounted rates and currently sell via state refiners despite having their own sales infrastructure.Any decision to deregulate retail prices would require a mandate from the Cabinet, one of the sources said.A rising subsidy bill and strained public finances in a sluggish economy forced the Cabinet in January 2013 to allow state retailers to raise retail diesel prices marginally each month.Fuel retailers have been hiking pump prices by 40-50 paise or less than a cent per litre each month since."It (the January 2013 decision) was silent on whether the prices will be deregulated after (they reach parity)," this source said."For a final decision it has to go to the Cabinet," the source said.The incremental increases along with falling global oil prices have reduced the diesel subsidy bill to less than Rs 1 per litre, a second source said."If there is no change in global oil prices and rupee exchange rate, maybe next month we will look at going to the Cabinet to have clarity on the issue," this source said.He said the January 2013 decision allowed retailers to raise prices each month "until further orders".Brent crude oil futures slipped below $103 a barrel on Friday, near a 14-month low, reflecting a strong dollar and plentiful supplies.($1=60.45 rupees)(Reuters)
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Finance Secretary Arvind Mayaram said on Thursday (21 August) he hoped diesel subsidy would be wiped out soon and prices would become market-determined if current global oil prices hold.India regulates prices of diesel, liquefied petroleum gas, and kerosene to keep them in check for the masses.Brent crude oil slipped below $102 a barrel on Thursday, near a 14-month low, on evidence of plentiful fuel supplies and Chinese economic data pointing to slowing demand.(Reuters)
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Like any other commodity, gas can be bought by different consumers at different prices. The question: “What should be the price of gas”, therefore, has more than one answer. The buyer who will replace LPG fuel with gas will be ready to pay a much higher price than one who wishes to replace coal with gas. If arm’s length price of gas is to be discovered by the market at the highest affordable gas price, there will be few buyers, with limited offtake. At lower prices, there will be many more buyers with much higher volumes.Price is controlled with the intent of servicing consumers with low paying capacity. If that controlled price is applied to sectors with higher paying capacity, it leads to unjust enrichment of buyers on one side and acts as a disincentive for gas producers, on the other. Both are undesirable outcomes. Gas has the potential of displacing liquid and solid fuels in almost all fuel and feedstock applications. In India, where the service sector contributes over 50 per cent to the GDP, it is technically feasible for almost 60 per cent of energy needs to be met by gas, subject to availability. However, India is yet to exploit this potential owing to lack of availability of both domestic and imported gas.India’s gas consumption in 2013 was around 51 billion cubic metres (bcm). That was around 8 per cent of the total commercially traded primary energy consumption. In 2006, when the Planning Commission conducted the last detailed exercise, the consumption of primary energy in 2031-32 was projected to be between 1,800 and 2,000 million metric tonnes of oil equivalent (mmtoe). Concurrently, according to another independent study conducted by PricewaterhouseCoopers under the aegis of PetroFed, gas demand in the same terminal year was projected to be between 243 and 405 bcm. For ready reference: 1 bcm is approximately equal to 0.9 mmtoe. That means in 2031-32, India is projected to possess gas demand of about 20 per cent of primary energy demand. This analysis assumed supply to be unconstrained, but business as usual on policy and infrastructure fronts.If “forced” gas (a terminology coined by the Planning Commission) policies are promoted by the government, sourcing, production, pipeline infrastructure, pricing policies and fiscal incentives will be taken by it in favour of supply and consumption. In such a scenario, gas demand as a percentage of primary energy can be higher. In 2013, primary energy in Iran was serviced up to 60 per cent by gas, in the US it was 30 per cent, in the UK 33 per cent, Japan 22 per cent and in Germany it was 23 per cent. These nations have experienced benefits of gas as a fuel while India saw a decline in gas consumption in the last four years. The very interplay of prices and availability of various forms of primary energy, including hydro, nuclear and renewable, decide the share of a particular energy type. In India, the costliest liquid fuels such as petrol and diesel are easily available to consumers, thanks to the freedom to import crude. Moreover, challenges in coal and gas production have made liquid fuel the compulsory choice for businesses and consumers. De-bottlenecking domestic gas production and allowing market and price freedom will help industries cut dependence on liquid fuels. Refineries use crude residue as fuel. Industries such as ceramic and pharma use LPG in heating applications. The transport sector uses gasoline and gas oil. All these sectors can make savings even if gas priced on a par with imported LNG is used. Arguably, domestic gas producers tapping these affordable sectors to market gas and, in turn, generating capital for further exploration of oil and gas would do no harm to stakeholders. Providing an opportunity to develop domestic oil and gas production will have unparalleled upsides. The resultant reduction in crude imports will save foreign exchange, stem trade imbalance, help manage fiscal balance, provide infrastructure development-related impetus to the economy and help manage the carbon footprint. Power, fertiliser and domestic cooking fuels are often mentioned as sectors that cannot afford costly gas. The incremental demand for urea and the domestic fuel market may range from 10 to 20 bcm in the next 5-10 years. For the sake of debate, one can propose that such a relatively small demand be met by costly gas and the payment of subsidies at the consumer end. The profit from petroleum gas (in kind or cash), the additional royalty, the incremental taxes paid by gas producing firms (together referred to as government take in exploration and production parlance) will make up substantially, if not fully, for the subsidies in a high gas price scenario, thereby reducing the exchequer’s burden. That is because investments and production have a better chance of growing over the years with the promise of import-parity-price-linked offtake of gas. With higher gas production, ad valorem components of the government’s take will be more. In countries with low-risk hydrocarbon finds, investors are inclined to invest with lower margin expectations. In India, hydrocarbon prospecting is yet to be fully established. Similarly, availability of underground data is a challenge. Investors cannot assess the underground risks in the absence of adequate data. It will, therefore, be hard for them to come in with low prices of gas or oil.The question that remains unanswered is: how we will decide the price of gas. How about letting consumers decide the price? The ceiling on gas prices comes from competitive fuels like crude and coal. They act as natural barriers to unreasonable pricing. Should gas production grow beyond requirements, producers will be forced to pare prices as consumers will have alternatives. The possibility of monopolistic behaviour is much less and, hence, consumer interests will be protected.Such a scenario was envisaged when, under former petroleum minister Ram Naik, the New Exploration Licensing Policy (NELP) was flagged off with a round of E&P acreages put on auction in 1999. The policy provided for selling gas at competitive arm’s length prices. Under such a mechanism, the government also envisaged the need to oversee pricing using a methodology and the services of a regulator. In the past, views have also been expressed on making gas available at low prices to sectors that cannot afford competitively determined arm’s length prices. Those views hold good only when gas is available. Until that happens, gas prices ought to reflect their true economic value. The author is director and leader, oil and gas industry practice, PwC India. Vivek Bhatia, manager, PwC India, contributed to this article(This story was published in BW | Businessworld Issue Dated 08-09-2014)
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Having questioned the Rangarajan Committee’s gas pricing formula and the UPA’s stand on the issue through five op-eds in leading dailies, I am encouraged by the NDA government’s decision to review the matter. It is unlikely that the high-calibre panel did not comprehend the conceptual and arithmetical errors in the basis it recommended for pricing dry natural gas at Indian well heads. Is it possible that it planted these anomalies in the methodology to deliver a desired price level?Let me begin by disabusing the readers, Rangarajan and his expert panel of all notions of a global market price for natural gas in any form. Even liquefied natural gas (LNG) does not have a global market price and export prices may vary by a factor of two, even from the same source. The world gas markets are fragmented and not linked to a common global benchmark. Natural gas can only be traded as compressed piped gas or LNG. These are two separate commodities governed by distinct and fragmented pricing mechanisms that often include geo-political and non-price considerations. Making global markets fully fungible requires massive domestic and cross-border investments. Only a functioning market can deliver a “market price”. The Rangarajan formula simply delivers another administered price.Only North America can claim to have a largely fungible market with multiple producers and hubs, and the required storage, transportation and distribution infrastructure that allows determination of a competitive market price. However, benchmarking Indian gas prices to this market would lower prices being realised currently by Indian producers.At the broad conceptual level, the panel concluded that the average spot price indices of two chosen international gas hubs and the adjusted net-back prices of LNG imports by Japan (as calculated under the panel’s methodology) for the trailing 12 months, weighted by the respective volumes of gas consumed in these three regions during this period, will deliver what it calls the ‘Weighted Average Price to Producers in the Global Markets’. This is wrong on several conceptual counts. Also, the formula makes glaring arithmetical errors. Given the sensitivity of gas pricing in the Indian context, such negligence is shocking.First, the National Balancing Point (NBP) Spot Price Index, which has been about three times the Henry Hub Spot Price Index in recent years, grossly overestimates the well head price realised by natural gas producers feeding the EU. This is so because the EU is dependent, to the extent of 60 per cent, on costlier imported LNG and Russian natural gas loaded with high pipeline tariffs and arbitrary geopolitical premiums. Thus, the two indices used by the Rangarajan panel price two very different products and hence, are internally incompatible. The NBP index should, at the least, be adjusted to net out the extra costs associated with LNG and Russian piped gas imports. The panel saw nothing wrong in using the extremely high unadjusted NBP index as proxy for the average well head price of producers feeding the EU.The Rangarajan formula erroneously prices the consumption of natural gas in Russia, other former Soviet Union republics and Eurasia (many of whom are major producers) at the NBP index, even though the prices in these nations, on average, are well below half that level.Thirdly, the panel overlooks the fact that the average US producer price for dry natural gas is at least 10 per cent below the Henry Hub index due to transportation costs. The price at Canada’s Alberta hub is 20 per cent below the Henry Hub price. Canadian producers could be realising 25 per cent less than the Henry Hub price for dry gas at their well heads.In dealing with Japanese LNG, the Rangarajan formula commits its fourth sin. It prescribes a net-back methodology that estimates the producer price of natural gas in LNG exporting countries by subtracting standard costs of local transportation, liquefaction, ocean transportation and insurance from the insurance and freight import costs. This merely establishes the effective free on board realisation of an LNG exporter for its natural gas and not the well head producer price for dry natural gas in the exporting country. Qatar, the world’s largest LNG exporter, is the biggest supplier to Japan, EU and US. Applying the methodology to LNG imports by these three regions yields a Qatari producer price anywhere between $4/mmbtu and $10/mmbtu. Can the panel tell us the right Qatari producer price in this range? The truth is that average well head producer price for dry natural gas in Qatar is well below $4/mmbtu. As already noted, the Rangarajan formula forgets to apply a similar net-back methodology to the NBP Spot Price Index.The fifth sin is the exclusion of about 35 per cent of global natural gas consumption from the formula for estimating the global well head producer price of dry natural gas. Consumption in the Middle East, South and Central America, Africa, Australasia and Asia (except Japan) is excluded. Prices in many countries in these regions are well below the two indices used by the formula. Sixth, the Rangarajan formula makes no correction for high value natural gas liquids typically present in natural gas and LNG traded across borders. The six sins combine to deliver an erroneously high and indefensible ‘Weighted Average Price to Producers in the Global Markets’. The knockout punch is the seventh deadly sin whereby the second half of Rangarajan’s formula abandons all conceptual and intellectual integrity and adopts a simple average (as opposed to the volume-weighted concept of the first half) to determine the producer price of dry gas at Indian well heads. This shift to a simple average of the weighted global producer price estimated in the first half of the formula and the net-back price of India’s LNG imports effectively gives an additional 50 per cent weight to high LNG-linked prices for determining India’s well head price for dry natural gas. Inclusive of the overstated Japanese (net-backed) and EU’s (unadjusted) LNG, the Rangarajan formula gives a weight of about 60 per cent to the high LNG-linked prices for determining India’s well head price of dry natural gas. This is inexcusable because Indian LNG consumption accounts for only 0.6 per cent of global gas consumption and LNG’s share in the global gas basket is only 9.75 per cent.In reviewing gas pricing and indeed the state of the entire energy sector, the new NDA government will do well to not rely on convenient energy experts patronised by the previous UPA government. The author is former principal advisor, power and energy, Government of India(This story was published in BW | Businessworld Issue Dated 08-09-2014) ]]> ]]> ]]>
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With the opposition stoking fears of inflation if there was an increase in gas price from $4.2 per million metric British thermal units (mmbtu) to $8.34 per mmbtu from June-end, the NDA government had little option but to defer the hike until the end of September. On 10 January 2014, the previous UPA government had approved the gas price hike, effective 1 April. However, it had to be postponed to June-end when the model code of conduct came into force in March ahead of the general elections.Come September, there will be a clamour once again. So, how much should the government allow gas producers to charge the domestic power, fertiliser and transportation sectors? Perhaps, there are clues to this question in what other gas producing nations charge their own consumers.There are 49 natural gas producing nations in the world: three in North America, seven in South America, 14 in Eurasia, 10 in the Middle East, four in Africa and 11 in the Asia-Pacific region. The price of natural gas ranges from $0.8 per mmbtu to $11 per mmbtu. Different countries have come up with different pricing mechanisms for their domestic industry, keeping in mind the long-term investment requirements of the sector as well as purchasing power of buyers. The hydrocarbons business is dynamic and every country has its own model. The price of natural gas itself depends on various factors, including the area of exploration — offshore or onshore — pipeline network, etc. The cost of offshore gas is five-six times higher than that from onshore fields.A look a what major gas producing countries charge domestic consumers: AlgeriaThe price for the domestic industry is $0.5 per mmbtu. As per the Oil and Gas Journal or OGJ, Algeria has 159 trillion cubic feet (tcf) of natural gas reserves — the tenth-largest in the world. According to the US Energy Information Administration (EIA), its production was 6.4 tcf in 2012, a 4 per cent decline from 2011. Gross production has been falling since its peak of 7.1 tcf in 2008. Algeria is in the process of developing its Southwest Gas Project, expected to start production by 2017. It is also an exporter of natural gas and was the first to export liquefied natural gas (LNG) in 1964. It has three transcontinental export gas pipelines: two supply gas to Spain, the other to Italy. Saudi ArabiaDomestic industry pays $0.8 per mmbtu — among the lowest in gas producing nations. According to EIA, Saudi Arabia had proven reserves of 288 tcf as of 2012, behind Russia, Iran, Qatar and the US. The majority of its gas fields are associated with petroleum deposits. The country is focusing on developing non-associated gas fields in the Persian Gulf. It neither imports nor exports natural gas. Production was 9.9 billion cubic feet in 2012.ArgentinaIn price-sensitive domestic sectors, natural gas costs around $2.3 per mmbtu. The South American nation meets 51 per cent of its energy needs through natural gas. This includes 9.4 per cent from LNG. Its norms require industries that can pass on the cost of expensive fuel to its customers to buy gas from producers and traders at the market price. For price-sensitive sectors and small businesses, the government decides the pricing. To boost production, the government started the Excess Natural Gas Injection Incentive Programme in February 2013, under which gas producers who ramp up production in five years get $7.5 per mmbtu for any additional volume of natural gas delivered to the local market. Any difference between the price paid by the customer and the $7.5 per mmbtu will be paid by the government.VenezuelaDomestic industry pays $2.3 per mmbtu. Venezuela, which follows the government-owned socialist model, came up with a Gas Hydrocarbons Law in 1999 to diversify the economy by facilitating non-associated natural gas development and expanding its role in the energy sector. This law lets private operators own 100 per cent of non-associated (standalone) projects, in contrast to ownership rules in the oil sector. Venezuela has the second-largest natural gas reserves in the western hemisphere after the US. It had 195 tcf of proven reserves in 2012. break-page-breakUnited StatesThe price charged from domestic industry is $2.9 per mmbtu. It is the world’s most developed natural gas market and its prices are linked to Henry Hub. The government does not need to intervene in deciding prices as market forces keep them in check. EIA estimates 2,203 tcf of technically recoverable reserves. Going by the rate of natural gas consumption in the US in 2011, of about 24 tcf a year, 2,203 tcf is enough to last 92 years. In the US, gas is transported to and from nearly any location. The grid comprises 305,000 miles of interstate and intrastate transmission pipelines. The US produced 65.7 bcf of natural gas in 2012.RussiaThe price for domestic industry is $3.3 per mmbtu. Russia has the world’s largest natural gas reserves and is the second-largest producer of dry natural gas. According to the OGJ, Russia held 1,688 tcf of reserves as on 1 January 2013 and accounted for a quarter of the world’s proven reserves. EIA estimates that most of these reserves are in Siberia. About 74 per cent of the output comes from state-owned Gazprom, which controls 65 per cent of the country’s gas reserves. With limited scope for the private sector in the country’s upstream sector, Gazprom has enjoyed total monopoly in exports. Russia has a robust domestic and international pipeline infrastructure. Gazprom operates 104,000 miles of high pressure pipelines. AustraliaThe price for domestic users is $4.3 per mmbtu. The country is a major natural gas producer. Natural gas production in Australia reached 1.6 tcf in 2011. According to OGJ, Australia had over 43 tcf of proven reserves as of January 2013. Oil and gas prices are market-driven and not fixed by regulation. However, the Australian Competition and Consumer Commission regulates competition and promotes fair trade. It has a robust domestic gas transmission pipeline network covering 15,000 miles.ColombiaThe average cost for domestic consumers is $5.2 per mmbtu, as per data provided by consulting firm EY. According to EIA, Colombia had proven reserves of over 5.7 tcf as of 31 December 2012. It has attracted huge foreign investments in the hydrocarbon sector and witnessed a rise in natural gas and oil production in the past few years. It allows easy export subject to contractual and regulatory curbs. MalaysiaThe price for the domestic industry is $6 per mmbtu. Malaysia is vital to the global energy chain as it is en route to important energy trade destinations. It is South-east Asia’s second-largest oil and natural gas producer and the second-largest exporter of LNG globally. Malaysia’s tax and investment incentives, starting in 2010, aim to promote oil and natural gas exploration and development. These are part of its economic programme to become one of Asia’s top energy players by 2020. According to OGJ, Malaysia had 83 tcf of proven reserves as of January 2013, and was the third-largest natural gas reserves holder in the Asia-Pacific region. Upstream production is dominated by state-owned company Petronas. Any foreign firm seeking to participate in exploration and production must enter into a production-sharing pact with Petronas. BrazilThe price for the domestic industry is $10 per mmbtu. OGJ estimated Brazil had 14 tcf of proven reserves as of January 2013. In 2012, it produced 601 bcf of dry natural gas and 1.7 bcf of natural gas — less than India. The Campos basin in Rio de Janeiro accounts for the largest share of Brazil’s natural gas production. The country imported 470 bcf of dry natural gas in 2012, a 27 per cent rise from 2011. Government-owned Petrobras controls most of the reserves and also imports gas from Bolivia. The nation has a network of over 5,000 miles of pipelines.ChinaThe price for domestic users is between $9 and $20 per mmbtu. The country held 155 tcf of proven reserves as of January 2014. The government plans to produce 5.5 tcf of gas by 2015-end. While residential users paid $9 per mmbtu, public services, industry and transport sectors paid $12.48 mmbtu, $12.48 mmbtu and $20.79 per mmbtu, respectively, in 2011. neeraj@businessworld.in twitter: @neerajthakur2(This story was published in BW | Businessworld Issue Dated 08-09-2014)
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The resounding mandate for Narendra Modi and the NDA government has turned the negative sentiment in the real estate market, and the immediate perception is that home-buying will take off soon. The firm talk by the government in favour of pushing reforms and finance minister Arun Jaitley’s Budget giving importance to housing needs have further spurred sentiment. A recently released real estate ‘sentiment index’, developed by apex industry body, the Federation of Indian Chambers of Commerce and Industry (Ficci), and property consultant Knight Frank, shows a six- point rise in sentiment in the second quarter (Q2) of 2014 to 69, as against the previous quarter. The index is based on responses from realty stakeholders such as builders and financiers. The sentiment is high on expectations of speedy clearances and easier access to capital. The general belief is that home-buying will take off over the next six months, says the report. “The fact that political stability has a perceptible effect on the real estate sector is quite apparent from the optimism displayed by stakeholders after the elections,” says Shishir Baijal, chairman and managing director, Knight Frank India. But does the sentiment reflect in the actual offtake of homes in the country? Or is the stubborn recession in realty — a factor of unaffordable prices and excessive risk in delivery and finance sources — continuing despite the changes at the Centre?Sagging SalesMost surveys during the first half of the current calendar year indicate a slowdown in new project launches by builders as well as a drop in sales as consumers shy away from the market. According to online realty consultant proptiger.com, the property market in the National Capital Region (NCR) has deteriorated further in comparison to last year — launches have gone down by 50 per cent and sales volumes have declined by 22 per cent since 2013. The constant rise in costs, along with stagnation in income levels, has made the NCR unaffordable. More than 40 per cent of projects have been delayed, denting buyer confidence and subsequently dampening sales.Realty major DLF reported a drop in bookings, to 380,000 sq. ft in the first quarter of FY2015, from 440,000 sq. ft in the same quarter last year. Its net profit for the quarter ended June 2014 too fell 30 per cent to Rs 127 crore. Liases Foras Real Estate Rating and Research, a real estate research firm, reported a 9 per cent sequential decline in area sales across six major cities in the country. According to a report generated by the firm, NCR led the laggards with a 20 per cent decline, followed by Chennai and Hyderabad with 18 per cent and 13 per cent falls, respectively. The Mumbai metropolitan region was, however, almost stagnant with a 2 per cent drop in sales. The only market that bucked the trend to an extent was Bangalore. The city registered a 10 per cent growth in sales for the April-June 2014 quarter, claimed the report, while according to proptiger.com, the sales volume rose 6 per cent year on year. “Confidence is at a low. Some projects have just disappeared. For instance, 25 investor-driven projects were launched in Kanpur in 2007. They don’t exist anymore,” points out Pankaj Kapoor, managing director, Liases Foras. And as sales continue to drop, inventories are at an all-time high. In NCR, the inventory overhang (months taken to liquidate stock) increased from 39 to 53, while Hyderabad saw a rise from 43 to 47 months. The Pricing PuzzleRealty prices have followed a peculiar trajectory. Despite a stagnant market and poor sales, residential prices have moved up for most of the recessionary period between 2007 and 2013. According to National Housing Bank’s Residex, a residential index tracking the six-year period, housing prices increased in 24 major cities. The highest rise was recorded in Chennai (230 per cent), followed by Pune (135 per cent), Bhopal (123 per cent) and Mumbai (122 per cent). Only two cities witnessed a fall in prices — Kochi (-15 per cent) and Hyderabad (- 7 per cent), with both seeing a surfeit of supply with a rash of new projects.Mumbai-based developer Rustomjee opened its 127-acre township housing project Urbania in Thane in 2011 at Rs 6,800 a sq. ft. “It appreciated 20 per cent year on year, and we are now selling at Rs 10,500 a sq. ft,” confirmed Saurabh Naik, deputy general manager-sales, Rustomjee. The Liases Foras quarterly review shows that the weighted average price for the first quarter was largely stagnant, except in the case of four cities where it moved up marginally. Chennai showed a 4 per cent increase, while there was a marginal fall in the case of NCR. What is, however, interesting is that new launches across markets have been priced lower compared to last year. “Investors clearly have no appetite for new purchases. Sales are low, and prices are not rising. There is nothing in it for them,” says Kapoor of Liases Foras. “However, cities that are showing some activity and sales — Bangalore, Chennai and Pune — are witnessing fairly intense private equity (PE) investment, most of which is going into land-buying,” he adds. break-page-breakThere are several theories on why developers don’t slash prices to stoke fresh demand. Builders say that 60-80 per cent of a project’s cost is just the cost of the land. This makes flexible pricing difficult. Mumbai-based builder Paras Gundecha says the approval procedure for construction escalates costs by up to 20 per cent. While that is the builders’ side of the story, others believe they are never really under pressure as investors are willing to wait; and construction, in any case, is paid for by the periodic booking of flats. “It is the government that discourages any downward movement of prices. Ready reckoner rates for property, based on which stamp duty is determined, continue to be pushed up whether or not it is justified by the market; and former finance minister P. Chidambaram’s policy was to treat the difference between reckoner rates and actual realisation as ‘income’ in the hands of the seller,” says Kapoor. Besides this, there is always an element of risk in advance booking as policies can change and laws can be redefined at any time. The order to not issue construction certificates to buildings falling within the 10-km radius of the Okhla Bird Sanctuary has put projects by Jaypee Infrastructure and 40 other builders in NCR in limbo, while in north Mumbai, residents continue to live in a state of uncertainty, as the dispute over their land, which is said to be ‘reserved forest’, continues. Light At The End Of The TunnelIs the fairly bleak landscape likely to brighten up in the near future? The proptiger.com report predicts that the second half of calendar 2014 will witness a revival in the market. But except for a few peripheral markets, it is unlikely that there will be any price cuts in residential housing. Besides, the real estate market is not driven by sentiment. It is, therefore, a long haul, and the economy will have to see a revival in manufacturing and income, and a higher gross domestic product before there’s any substantial increase in home-buying. Some analysts see commercial realty picking up first. Property brokers and consultants DTZ sees greater leasing activity from corporate groups leading to a turn in the fortunes of the office segment. NCR saw the demand for office space fall 18 per cent over the previous quarter, but it rose 11 per cent year on year. Mumbai held its own with 1.03 million sq. ft taken up in the second calendar quarter as compared to 1.05 million sq. ft in the first. “The uptake of office space in Bangalore grew sharply in Q2, with a number of large deals acround Outer Ring Road and Whitefield. The total office uptake in Q2 was 3 million sq. ft, representing a 32 per cent rise quarter on quarter,” says a DTZ report. Baijal concedes that though sentiment has improved, and there have been “more calls”, it hasn’t translated as yet into transactions. For home-buying to take off, current economic indices will have to see major changes. “Interest rates will have to go down; for that, inflation will have to be bridled. More jobs and higher GDP growth are key ingredients. It is only then that the market will take off. It will be 12 to 14 months before we see a real pick-up,” says Baijal. gurbir@businessworld.in twitter: @gurbir110(This story was published in BW | Businessworld Issue Dated 08-09-2014) ]]> ]]>
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To buy or not to buy? That is the question most buyers across the country are faced with when it comes to real estate. While there are indications that the economy is on the mend, with a stable government in place at the Centre, there are still no signs that the positive sentiment among buyers will translate into a buying decision. Besides, prices remain high and beyond the reach of most buyers.Buyers have seen at least two cycles of boom and bust in real estate in the past eight years. In 2005-2008, when the economy was booming, so were real estate prices. But when the economy began slowing down again in 2010, prices refused to come down. Even as real estate developers cribbed about falling sales throughout 2012 and 2013, the biggest cities in the country saw prices in the residential segment remain static in most areas, and dip a bit in some. With a new government in power and a host of sops announced in the Budget, the real estate sector is expecting customers to return to their buying ways. But it’s a long journey, especially with most developers facing huge pressures on their balance sheets as debt is still not under control.But the sector can take heart from the substantial demand-supply gap in housing that India faces. With demand expected to be around 12 million units by 2017, supply will only be around 55 per cent of that number, says a report by Cushman & Wakefield, a real estate consultancy. That is a gap of 45 per cent. The report says around 2.8 million units will be required in just the top eight cities. Strangely, developers seem to be catering only to the top of the pyramid as far as the residential segment is concerned. While most of the demand is at the bottom of the pyramid in terms of number of units, supply is the least in that segment. The developers’ focus on high-income housing is driven by the lure of higher margins, while middle- and low-income housing are low on their list of priorities.Debt TrapAs matters stand today, the biggest problem real estate developers face is of debt on their balance sheets. As of July 2014, the total debt on the books of the 57 real estate companies listed on BSE/NSE is more than Rs 40,000 crore. The overall debt of the sector, which has many unlisted players as well, is in the region of Rs 9.3 lakh crore. Real estate accounts for 16 per cent of banks’ lending.DLF, which is the biggest real estate company by market capitalisation in the country, had a debt of Rs19,064 crore in the first quarter of the financial year (June-end). Industry trackers are blaming lower cash flows due to slowing sales for the high debt of the realty players. Some of the other real estate players who have high debt on their balance sheets are Anant Raj, Godrej Properties, HDIL, Hubtown and Indiabulls with debts of Rs 1,388.69 crore, Rs 1,665.28 crore, Rs 3,143.34 crore, Rs 1,432.66 crore and Rs 1,052 crore, respectively. In terms of debt-equity ratio, DLF, Ansal and Puravankara are on the higher side amongst the big real estate companies, say industry trackers.The whole cycle of debt began during the boom of 2006-07 when many realty players decided to get aggressive. While big players like DLF and Unitech harboured aspirations of going national, and bought land parcels in cities like Mumbai and Bangalore, others, including unlisted players, too entered new territories. A company’s net worth began to be measured on the land bank it possessed. Hence started the trend of acquiring as much land as possible as that would determine the company’s valuation. Many a real estate developer, eyeing a listing on either the BSE or NSE, bought land parcels in the hope that it would result in a better valuation. But what actually happened was that the debt acquired to buy these land parcels kept piling on the books of developers. The latter then turned to private equity players. This happened as banks became cautious about lending to the real estate sector. The PE players entered the segment quite aggressively. Most of the deals were structured at the project level — through special purpose vehicles (SPV) — in a bid to ensure the PE made a exit.PE players began funding projects that were either too ambitious or faced hurdles to raising initial investment from banks. Of late, many PE funds have floated NBFCs to offer rates that are lower than those required of a PE investment. Typically, PE players expect returns of around 24 per cent from their real estate investments while NBFCs tend to lend to the sector at around 15-18 per cent. “We (PE players) cannot compete with banks in terms of interest and return expectations. Around two years ago, we started an NBFC platform for the real estate sector, and now we have combined it with our PE platform to offer construction finance and PE investment,” says Khushru Jijina, managing director, Piramal Fund Management. In May this year, Piramal merged its real estate private equity business — Indiareit — and its NBFC Piramal Finance. break-page-breakWhile debt remains a concern for the real estate sector, the Budget has got all the players excited. Many are hopeful that they will be able to substantially reduce their debt by the end of fiscal 2015. “There has been a change in sentiment among buyers and we are hoping that this will result in sales, especially around Diwali. Sales will first increase in the residential segment and the commercial segment is expected to grow as economic growth increases,” says Rajeev Talwar, group executive director, DLF. The Way OutThe big boys of the industry are focusing on reducing debt, with many exiting non-core businesses. DLF, in February this year, sold its luxury hospitality chain Aman Resorts for $358 million (Rs 2,230 crore). The company has sold land parcels bought in Mumbai and Pune. DLF has also hit upon another interesting cash flow model — selling plots. Many other companies, including New Delhi-based Unitech, have adopted this strategy of selling plots. Real estate players based out of Mumbai too are adopting new strategies. Many of them have begun re-branding their schemes as luxury projects. A whole set of developers, including unlisted players like Lodha Developers, Hiranandani, Lokhandwala and Raheja, are now focusing on luxury projects. Again, many cash-strapped developers have converted mall development plans to residential projects in the past three years to increase cash flows. While some are focusing on high-end projects for better margins, other developers are looking afresh at affordable housing. “There is a huge demand for affordable housing but most developers are ignoring that as margins are wafer-thin. We have been focusing on affordable housing with only about 30 per cent of our projects being in mid-income and luxury segments,” says Mohit Goel, CEO, Omaxe.Developers in Mumbai Metropolitan Region and National Capital Region have an unsold inventory of more than 300 million sq. ft. This is expected to take at least 45 months to clear even if demand were to pick up, according to Liases Foras, a real estate consultancy. To lure buyers, many developers are now offering smaller apartments. “We are seeing the majority of our bookings coming for apartments sized between 600 sq. ft and 1,200 sq. ft. There is certainly a jump in demand for middle- and lower-income houses but it will take at least a year or two before buyers return to high-end projects,” says Hari Prakash Pandey, vice-president, finance and investor relations, HDIL.Such is the extent of optimism among some developers that they are even contemplating raising more debt. “We will be looking at buying projects and land parcels from desperate developers. Debt may increase on our balance sheet due to this, but it is not a worry,” says Goel of Omaxe. sachin@businessworld.in; sachin581@gmail.com (This story was published in BW | Businessworld Issue Dated 08-09-2014)
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With the central government estimating the shortage of homes in the country to be around 27 million, the need of the hour is mass, affordable housing for the middle and working classes. To encourage investment in this segment by the private sector, the government has over the years offered a slew of sops for ‘integrated township’ projects, including foreign direct investments. Integrated townships must have a layout of a minimum of 100 acres to qualify for government clearance. Typically, these towns offer education facilities, commercial complexes and sometimes even malls within the campus. With planned open areas and sustainable ecosystems, these usually offer a better quality of life than stand-alone buildings. Rajasthan and West Bengal have relaxed the minimum 100-acre norm for township development to encourage more residential construction. On the other hand, Maharashtra has made it mandatory for all projects to reserve 20 per cent of the built-up area for homes for the economically weaker sections (EWS).Lately, private equity funds have been showing great interest in the residential areas of these townships for their sheer scale, quick uptake and the relatively low risk. However, it is not the gated communities of the rich but the mass, affordable products that will be the future of housing in India.BW | Businessworld visited a few sites and tried to understand how developers are approaching the task of housing millions with some ground-level reporting. Upwardly MobileUrbania is clearly targeted at the upwardly mobile. The Rs 4,000-crore Rustomjee project, developed on what was once agricultural land on the outskirts of Mumbai’s suburb of Thane, has just 19 one-bedroom apartments of 432 square feet each. Priced at Rs 65 lakh, they all sold out in a jiffy. Most of the 4,000 units the project will deliver are aimed at young professionals working in corporate outfits on the periphery of Mumbai or Navi Mumbai. At the top end of Urbania is a cluster of 12 buildings with two- and three-bedroom apartments priced between Rs 1.5 crore and Rs 2.25 crore. A NEW MODEL: Nanded City, near Pune, will hold 18,000 homes when complete (Photographs by Umesh Goswami)The 127-acre proposed township is split in half by the Thane-Nashik Highway, but it has all the trappings of a self-reliant township with 50,000 sq. ft of commercial and retail shopping in the pipleline, a dedicated water-supply system with a massive water reservoir, a police station and an alliance with the UK-based Cambridge University to set up a school in the complex. Such offerings make the project very attractive. However, it is moving slow. Work on Urbania commenced in 2007, whereas it opened for booking only in 2011. Saurabh Naik, deputy manager-Sales, Rustomjee, says that about 500 flats have been handed over, while 770 are expected to be completed this year. The sales are slow, perhaps, because of the high prices and strong competition from similar projects nearby. Besides, the prices too have been steadily going up. The project opened at Rs 6,800 a sq. ft in 2011, but the booking rate today has crept up to Rs 10,500 a sq ft. “Yes, sales velocity has dropped. In April, we sold zero,” admits Rustomjee chairman Boman Irani. He says costs have climbed, but insists that slow uptake is because the customer has endless choice today. “The home buyer has many more options today. He takes time to choose the location and ambience he likes,” adds Irani. Irani takes umbrage at the suggestion that builders only construct middle and luxury homes, leaving the masses to fend for themselves. Pointing to his Rs 3,500-crore joint venture with the Evershine Group in Mumbai’s suburb of Virar, he says he is developing 4,000 homes spread over 218 acres. “We opened bookings at Rs 2,000 a sq. ft a few years ago; it has now gone up to Rs 5,000. We are offering value-for-money homes in Virar,” says the Rustomjee chief. The bulk of the offerings is in one-room category — between 360 and 412 sq. ft — that initially opened at Rs 8 lakh. Today, these flats are sold at Rs 32 lakh, whereas a 580 sq. ft two-bedroom flat is sold at Rs 50 lakh. Two-pronged StrategyAt the other end of the spectrum is Vastushodh Projects, a developer marketing ‘affordable’ homes. Over the past four years, the company has developed two brands of housing projects in and around Pune. The housing units at Anandgram are priced between Rs 5 and Rs 15 lakh, while units at Urbangram are in the range of Rs 15 lakh and Rs 30 lakh. BW visited two Urbangram projects on Pune’s periphery. Approaching the cluster of buildings at Kirketwadi was a nightmare, with bumpy roads and narrow alleyways, but once there, the 226-apartment layout was a neat, well-paved set of buildings that had just been occupied. There is even a small, non-functional swimming pool awaiting water supply. The most expensive flat in the project, a crunched three-bedroom, hall and kitchen (BHK) measuring 1,200 sq. ft, costs Rs 42 lakh. The one and 2 BHKs are cheaper at Rs 24 and 32 lakh, respectively. “When we opened for bookings, we sold out in 24 hours,” says Nitin Kulkarni, director-Technical, Vastushodh Projects. “We don’t believe in benchmark pricing; our pricing is cost-plus, and we keep costs under control by personally monitoring the sites,” he says. Pointing to the genset for power back-up in the compound, he says: “At the same time, we don’t skimp on quality.”Vastushodh’s first project, Anandgram, at Yevat, about 45 km from Pune, was aimed at those further down the income ladder. It is designed to serve autorickshaw drivers, blue-collar workers and even street vendors who can’t produce income documents. Having handed over 622 units, with the bulk selling at Rs 8 lakh, Anandgram has become a brand for good budget homes on the periphery of a city. It is being replicated with townships coming up in Baramati, Kolhapur and even Boisar, a town on the Mumbai-Ahmedabad trunk line. break-page-breakAnandgram at Yevat was funded at the special purpose vehicle-level by Avenue Venture Fund, which took an 80 per cent stake in the project for Rs 22 crore. The promoters, however, have the option to let the VC go at twice its investment — Rs 44 crore — in three years. Going by their growing business, the promoters are confident of being self-sufficient to exercise the option. In 2010, Vastushodh had one site and 600 homes under construction. Four years later, it has grown to 14 locations with 1.3 crore sq. ft and 15,000 homes under construction. “When we touch one lakh homes, hopefully in a year’s time, we will be ready to divest equity in the parent company and go for scale,” says Kulkarni. Illustrating the ‘affordable’ model at another site in Kondhedhawde, a Pune suburb, where Vastushodh has handed over 165 flats, Kulkarni says: “When bookings opened, it was like a fish market, with people hurling cheques at us. We closed in four hours, but we were forced to create a waiting list of 575 applicants.” The reason was simple: affordable price and good quality. The Kondhedhawde project offered 1BHKs at Rs 14 lakh and 2 BHKs at Rs 20 lakh in the vicinity of Pune. A visit to the project revealed spacious corridors, functional but crunched interiors to allow more bedrooms, and a functional swimming pool, too. The downside in both its projects was the excessive paving in the compound area that prevented development of more green patches and water run-off areas.A Self-contained CityNear Pune, a different model is being developed to target the middle class. Seven hundred acres — adjoining a village called Nanded — is being developed as Nanded City, a 49:51 joint venture between farmers and the Magar family of Magarpatta City, by the Nanded City Development Corporation. With over 5,000 flats handed over, the project now has the feel of a large, independent town. A drive along the 5 sq. km layout reveals under-construction commercial complexes, two schools and a dedicated fire brigade unit. The roads have been laid out with street furniture at corners, and excellent landscaping of thick, manicured shrubbery that forms a pollution filter between the roads and the building compounds. Sales officer Xerxes Amin took us to Shubh Kalyan, a 22-storey building, and the tallest in the project. It offers 3BHKs (1,557 sq ft), priced at Rs 84 lakh. The construction and interiors are without frills, but the flats offer fair quality, are functional, and with spacious common areas at the ground level. HIGH END: Urbania is a self-reliant township on the outskirts of ThaneAt Nanded City, the options for customers are many. The smallest, 570 sq. ft flats, are available at Rs 35 lakh. A comfortable 2BHK in Madhuvanti, measuring 937 sq. ft, costs Rs 52 lakh. Currently, bookings are on at Rs 4,500 a sq. ft, and one can see robust interest. “We are doing around a 100 transactions a month,” claims Amin. When completed, the project will hold 18,000 homes. ‘Buy a Flat, Get a City Free’ proclaims a marketing slogan at the site office. The one downside is: there is no transfer of common areas and maintenance tasks to residents’ societies, as should be the natural process. Nanded City will continue to hold the land and common areas in perpetuity and remain in charge of maintenance. A fixed fee of around Rs 3 lakh for ‘lifetime’ maintenance is also collected at the time of booking. It’s only a matter of time before the Magars face a challenge on this front.Eastern PromiseIn the east, another large corporation is implementing India’s largest mass housing project. In 2007, Shapoorji Pallonji & Company was allotted a 150-acre plot at Rajarhat for developing a township of budget homes. Disputes kept the project inactive until last February when the state cabinet approved the terms, and SP Sukhobristi in New Town, Rajarhat, finally got going.Executed in alliance with the West Bengal Housing Infrastructure Development Company (WBHIDCO), the Rs 1,500-crore project is on its way to deliver 20,000 homes. Of these, 12,000 units will be one-bedroom flats (320 sq. ft) aimed at low-income earners and priced at Rs 14 lakh, while 8,000 units will be 2BHKs of 480 sq. ft for middle income earners and priced at around Rs 25 lakh. Shapoorji claims the open space in the township will be as much as 73 per cent of the project area. As an integrated township, the builders are required to provide sports clubs, community centres, amphitheatres, primary schools, a health centre, as well as commercial complexes and corner stores. Good BusinessTwo significant developments have taken place in the ‘affordable’ segment. Developers are realising that building budget homes, far from being a punishment or a CSR activity, is a viable business model. Significantly, those like Vastushodh have have undertaken more such projects after their initial foray in the budget segment. Vastushodh’s Kulkarni says the cost-plus mode of pricing, with a 40 per cent outlay for land purchase, has also given the company a 20 per cent margin. Listed realtors are also lining up to tap this opportunity. Mahindra Realty, for instance, has launched a budget brand called Happinest that will offer one- and two-bedroom homes ranging from 350 sq. ft to 650 sq. ft in Chennai and elsewhere. These will cost no more than Rs 20 lakh. The other development is the availability of housing finance. Earlier, banks were wary of lending to low-income segments because of the perceived high risks. They have, however, now learnt that these income groups are less prone to defaults. Besides, a whole crop of private housing finance companies has emerged with its sights on low-income groups with loan requirements in the range of Rs 5 to Rs 15 lakh. These include Micro Housing Finance, India Shelter Finance, Shubham Finance and Aadhar Housing Finance. These lenders don’t insist on detailed documentation and have their own ‘informal’ methods of determining ‘safe’ borrowers. Clearly, the future lies in ‘affordable’ homes. gurbir@businessworld.com twitter:@gurbir110 (This story was published in BW | Businessworld Issue Dated 08-09-2014) ]]>
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