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January 11, 2000
COLUMNISTS
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India Property Market Survey: Watching the marketsBrooke International Research: November 1999 Background Indian Economy After months of political uncertainty and reduced economic activity, the Indian economy is showing clear signs of a recovery. Both sentiments and statistics suggest this. Industrial production is running at 7 per cent ahead of last year's levels; agriculture is set to yield a third consecutive bumper harvest; and services -- the third and largest sector of the economy -- is showing distinct signs of a rebound. If the corporate confidence index based on a survey by the Federation of Indian Chambers of Commerce and Industry (FICCI) is any indication, business confidence about the revival of the economy has received a boost with the formation of an apparently stable government at the Centre. The Reserve Bank of India (RBI) has marginally scaled down the GDP estimate from 6-7 per cent to 6-6.5 per cent, despite imminent signs of economic recovery in its mid-term review of Monetary and Credit Policy for 1999-2000. Reviewing the developments so far, RBI's mid-term review has expressed satisfaction over the developments in the real sector (agricultural as well as industrial), the foreign exchange reserves and the inflation front. Even after allowing for some increases in prices due to seasonal factors later in the year and the impact of the increase in diesel prices, the inflation rate for the current year, as a whole, is expected to be lower than that of 4.8 per cent in the previous year.
India's industrial growth rate during April-September 1999, as measured by the index of industrial production compiled by the Central Statistical Organisation, has been estimated at 7 per cent. It was 4 per cent in the first half of the last fiscal. The power and manufacturing sectors performed well during the period, propelling the growth rate. Industrial output rose 7.6 per cent in September 1999, against just 2.8 per cent in September 1998. Powered by a worldwide economic revival, Indian exports have grown by 6.5 per cent between April and June 1999 after a 4 per cent fall in 1998-99. The global recovery has also had a salutary effect on the long-depressed prices of commodities like steel, aluminium and petrochemical products. Foreign investments With the economy finally showing positive indications, the property markets have started to stabilize. With the new government in power, most of the pending issues related to real estate market are being addressed. The government is all set to clear for the first time, foreign direct investment (FDI) in retail chain stores. The core group on foreign investment is now putting together a Cabinet note paving the way for the entry of international chain stores such as Marks & Spencers, Sainsburys and the Borders chain of the US, among others. This move, once implemented, may also clear the way for foreign investment into Shoppers Stop, the Mumbai-based retail chain. Hong Kong-based Investment Company, Warburg Pincus planned to pick up a little over 25 per cent equity in Shoppers Stop. The Foreign Investment Promotion Board (FIPB) had rejected the proposal earlier this year. Policy matters A rate war has erupted in the housing-sector financing. Most of the HFCs have cut lending rates by 0.5-1.0 percent. Housing Finance sector has witnessed a 40 per cent increase in applications for housing loans from individuals in the last five months.
This coupled with increase in FDI and a positive stock market has resulted in increased activity in the real estate market. Although the prices continue to be low, there has been a renewed activity in all segments of the property market. The government is proposing to amend the National Housing Bank (NHB) Act to tighten the procedures of foreclosure. The amendments would pave the way for the opening up of a Rs. 20,000-30,000 crore securitisation market, will facilitate insurance mortgage, provide security to lenders, reduce NPAs, speed up loan recovery and enhance lending capacity in the system since it would increase the pool of lendable funds which is currently locked up in litigations. The amendments to the NHB Act are also expected to give impetus to housing activity, which is currently being seen by the government as a vehicle for giving a big push to growth. Empowering the NHB with only quasi-judicial powers as far as recommending the attachment of property is concerned, would ensure that the courts are taken along with this faster loan recovery process. Under the structure being envisaged, the courts will continue to issue the orders for attachment of property, but the NHB will do the groundwork for facilitating the courts to issue the order. The proposed changes would also open up the securitisation route for the housing finance companies, apart from reducing their level of non-performing assets (NPA). Besides, the amendments are expected to facilitate insurance mortgage in a big way to provide comfort to HFCs. Mortgage insurance has the effect of expanding the market, enhancing profits and reducing the risk for housing sector players. The Asian Development Bank (ADB) is already in consultation with the government for finalising the structure of the country's first mortgage insurance fund named, the Mortgage Insurance Fund of India (MIFI). The government's move to allow 100 per cent FDI in online services, including the call center market, is likely to spur the real estate market in the country. Each company's requirement ranges from 20,000 to 30,000 square feet to house 50 to 100 employees. A lot of companies consider India a cost-efficient base for establishing global or regional back office operations, so demand is expected to grow. Companies like AT&T, Wipro, Microsoft, GE Capital, British Airways, American Express, First Health, Health Scribe etc. have their offices in Delhi & Bangalore. With this decision a greater number of MNCs are expected to come in. Mumbai Property Market Mumbai Property market experienced a noticeable increase in the demand for residential and good quality commercial space. The fall in lease rentals in residential areas has been arrested with increase in demand from corporates. Many new projects were opened and announced in the retail and entertainment sector in the last quarter. The shift in demand for commercial space from Nariman Point to suburbs continued.
Office sector Office sector has continued the trend of movement towards suburbs. This has resulted in a rise in rental values in these locations; the rates prevail in the range of Rs 60-80 per sq. ft per month with some premium building commanding as high as Rs 120. This is almost equal to rentals prevailing in many buildings in prime areas like Nariman Point. The capital values in the secondary areas of Worli, Bandra- Kurla and Andheri, however have not moved in tandem with the lease rentals and have stabilized at 6000 to 7000 Rs/ sq. ft. The values in the prime areas of Nariman Point and Cuffe Parade haven't seen significant movements and have stabilized at Rs10000 to Rs15000 per sq. ft. The average rentals prevailing here are Rs 100-135 per sq. ft. per month. Residential sector
The residential sector witnessed some positive activity. Prominent developers in Mumbai have reported increase in demand compared with the corresponding period last year. The corporate demand for leased properties in the suburbs has significantly increased resulting in firming up of lease rentals in secondary areas. The capital values in prime areas of Malabar Hill, Napean Sea Road, Colaba, Cuffe Parade and Pedder Road continued to be stable and are prevailing in the range of Rs 9000-14000. Capital values in secondary areas of Worli, Bandra and Juhu are prevailing in the range of Rs.5000-8000. Lease rentals for the prime areas were in the range of Rs 100 to 150 per sq. ft./month and for the secondary areas in the range of Rs 40 to 60 per sq. ft./month. Retail sector
The retail market in Mumbai seems bullish as retail business has caught fancy of many. Fast food chains and international brands dominated the retail market with areas like Linking Road and Churchgate continued to be the favorites. However there has not been any significant change in the Mumbai retail market in the last quarter. The rentals in the prime areas like Churchgate, Napean Sea Road, Bhulabhai Desai Road and Linking Road continue to be Rs 200-250 per sq. ft per month. Secondary areas like Juhu and Lokhandwala Complex commands rentals of Rs 60-90 per sq. ft per month respectively. The average capital values have now stabilized in the range of Rs 18,000-22000 for primary area and Rs 10,000-15,000 for secondary area. Transactions Delhi Property Market Real estate prices in Delhi today are perhaps at the lowest in recent times. There are indications that suggest that the markets have bottomed out and the prices and rentals would stabilise. Fresh lease of life has been injected by the acceptance of Malhotra Committee recommendations, which allow for increased Floor Area Ratios and legitimizing the use of Basement and second floors. Hence, the supply in both sale and lease market has increased. Office sector
Few corporates have shifted from the secondary locations to the CBD taking advantage of the falling rental values. The capital values in the prime areas of Connaught Place and Barakhamba Road were Rs 8000-10000 per sq. ft. and the average rentals were Rs 70-100 per sq. ft per month. The capital values in the secondary areas of Nehru Place and Bhikaji Cama Place were Rs 5000 to Rs 8000 per sq. ft. and average rentals were Rs 40-60 per sq. ft per month. Oversupply remains a critical factor in Gurgaon market. Commercial space is available in the range of Rs 40 to Rs 60 per sq. ft. per month. Gateway Tower by DLF and Signature and Global Business Park by UNITECH have further added to the supply of commercial space in Gurgaon. Residential sector
The residential lease market in Delhi has shown some activity in the last quarter. In secondary areas, there were requirements for lease from Indian and foreign corporates. In Gurgaon market, flats in the high rise residential buildings were purchased in the re-sale. The economy-housing segment saw good activity as leading Delhi based developers offered apartments in this category. The capital values in prime areas of Aurangzeb Road, Golf Links, Jor Bagh and Vasant Vihar continued to be stable and were prevailing in the range of Rs 6000-9000 per sq. ft.. Capital values in secondary areas like Greater Kailash, Panchsheel and Friends Colony were prevailing in the range of Rs.3000-4500. Lease rentals for the prime areas were in the range of Rs 40 to 55 per sq. ft/month and for the secondary areas in the range of Rs 25 to 30 per sq. ft/month. Retail sector
The prices and rentals in Delhi retail market have remained firm due to the limited supply and sustained demand for prime retail space by many leading Indian and foreign retail brands. Markets like Connaught Place and South Extension were the regular favoured locations. West Delhi is emerging as a promising retail market due to a sizeable population with high disposable incomes. The capital values in the prime areas like Connaught Place, South Extension and Karol Bagh continue to be in the range of Rs 14000-18000 per sq. ft. and that in the secondary areas like Green Park and Lajpat Nagar were Rs 9000-10000 per sq. ft. The lease rentals in the prime and secondary area continued to be in the range of Rs 180-200 and Rs 100-140 per sq. ft. per month respectively. Transactions Bangalore Property Market The Bangalore real estate market continues to be on the upswing in terms of activity. I T companies continue to be the largest consumers of commercial space. Residential sector has also witnessed increased end-user interest. Even investors are slowly returning to the market. The retail sector continued its upward trend. Office sector
The Bangalore commercial real estate market is primarily driven by IT sector. Lease transaction continues to dominate the market. Bangalore witneseed the signing of largest ever. Pre-construction lease of about 160,000 sq.ft. with provision for leasing another 80,000 sq. ft. by Philips Software at Raheja Millenium. Large supply has entered the market both in prime and secondary areas. The capital values in the prime areas of M.G. Road, Brigade Road, Cunningham Road, were Rs 3000 to Rs 4000 per sq. ft. and the average rentals were Rs 30-40 per sq. ft per month. The capital values in the secondary areas Airport Road, Indranagar, Koramangla, Hosur and Bannerghatta Road were Rs 1500 to Rs 2000 per sq. ft. and average rentals were Rs 15-20 per sq. ft per month. Residential sector
In the residential sector, budget apartments continued to be popular with buyers. Spurred by the attractive prices, good quality supply and the tax incentives offered in the Central budget, end-users have been buying apartments in the range of Rs 10 lakh to Rs 25 lakh. Rahejas, Brigades, Skyline Group etc. who are catering to this segment of the market have all reported good sales. The capital values in prime areas like Richmond Town, Langford Town, and Cunningham Road continued to be stable and are prevailing in the range of Rs 2400 to 3000 per sq. ft. Capital values in secondary areas like Koramangla, Indira Nagar, and Malleswaram are prevailing in the range of Rs.900-1400 per sq. ft. Lease rentals for the prime and secondary areas were Rs 10-14 per sq. ft. per month and Rs 4 to 8 per sq. ft/month respectively. Retail sector
The retail sector in Bangalore is getting more organised and designated shopping streets are gradually accommodating large departmental stores which offer the 'shopping experience'. The retail activity is gradually moving to, some upmarket residential areas like Jayanagar, Indiranagar, Koramangala etc. The capital values in the prime areas like MG Road, Commercial Street and Brigade Road continue to be in the range of Rs 3000-5000 per sq. ft and that in the secondary areas like Jayanagar, Koramangala and Indranagar were Rs 2000-3000 per sq. ft. The lease rentals in the prime and secondary area continued to be in the range of Rs 80-100 and Rs 30-40 per sq. ft. per month respectively. Transactions Hyderabad Propert Market The city was not affected by the general real estate slump witnessed by the major Indian cities till about a year back. The real estate situation in the city improved after 1993. The property prices in the city started picking up in mid 1995 & the development activity picked up in the following years. Hyderabad office sector continues to be sluggish on account of the oversupply in the market. The retail segment is poised for a jump as new retailing formats are expected to hit the city. With the previous ruling government back in power, general sentiments are high and expectations of further development are expected.
Office sector
The office sector currently seems to be sluggish with office supply being in excess. Hyderabad suffers from lack of A grade office space in terms of construction quality and the availability of parking space. The constructions of Cyber Towers located at the now famous HI TEC city in Madhapur has spurred a lot of activity in the area. There are a few corporates like WIPRO, BAAN who have built their independent development centers in Madhapur. However the demand for the Cyber Towers is also quite sluggish with current occupancy at 50 percent. The Capital values and rentals in prime area of Sardar Patel road to Banjara Circle and parts of the Rajbhavan Road were of Rs 1800 - 2000 per sq. ft and Rs 17- 20 per sq. ft. per month respectively. The Capital values and rentals secondary locations like comprise Sarojini Devi Road, Banjara Hills, Himayat nagar were of Rs 1200 - 1600 per sq. ft and Rs 10- 14 per sq. ft. per month respectively. Residential sector
The residential sector continues to show little activity in all areas of the twin cities. The prime residential areas in Hyderabad are Banjara Hills, Jubilee Hills Somajiguda, RajBhavan Road & Adarsh Nagar. Banjara and Jubilee Hills are mostly bungalows which range between 3500 sq. ft. to 5000 sq. ft. Somajiguda, Raj Bhavan Road, Adarsh nagar offer flats which are centrally and conveniently located The secondary areas are located at Durganagar, Himayatnagar, Srinagar Colony, Begumpet, Ameerpet, Marredpally and Gunrock Enclave. The capital value in the prime and secondary area is in the range of Rs 1400-1800 and Rs 900-1200 respectively. The rentals are the range of Rs 7-10 per sq. ft. per month for prime area and Rs 3-6 per sq. ft. per month for secondary area. Retail sector The retail sector in Hyderabad is witnessing hectic activity. All units that enjoy good visibility have demonstrated full occupancy. New areas are emerging. Brand outlets are opening on to residentially high streets. Apart from regular garment stores, supermarkets and departmental stores are the formats becoming popular in the Hyderabad retail market. The stress is on new constructions, attractive external elevation and ample parking spaces. The main retail markets of Hyderabad is spread out in several locations namely Abids and Somajiguda in Hyderabad and MG Road and Rastrapathi Road in Secunderabad. In Secunderabad, the traditional retail areas are Mahatma Gandhi Road, General Bazaar, Rasthrapati Road, Monda Market, Ranigunj. Later these markets expanded to Sarojini Devi Road. The capital values in the prime and secondary area are in the range of Rs 6000- 8000 & Rs 4000 - 5000 per sq. ft. respectively. The rental values for prime and secondary area are in the range of Rs 50-70 & Rs 30-45 per sq. ft. per month respectively. FDI in Real Estate The present policy framework While various players in the real estate markets continue to debate on whether the foreign hand in housing is really required, we have tried to analyse the present framework stipulated by Government of India and how Foreign Direct Investments can be channeled into certain specific sectors of real estate industry. When we say real estate we imply the broadest context of real estate that goes beyond the conventional framework of residential and commercial property and include developments like retail outlets, malls, cinemas, hotels, software technology parks etc. Residential & commercial sector In 1993 Non Residents Indians and persons of Indian Origin were allowed to invest in immovable property with 100% repatriation after a lock-in period of three years. In the subsequent years, the same policy was extended to overseas corporate bodies. Overseas Corporate Bodies, companies at least 60% owned by non-resident Indian nationals, may invest up to 100% equity in Indian companies engaged in real estate development, including that of commercial property. Foreign citizens of Non Indian origin and foreign companies, including trusts, societies and associations incorporated / registered would be permitted to acquire immovable property only if All companies entering India, including liaison offices and representative offices, (after obtaining FIPB approval) are permitted to lease commercial premises for a maximum period of five years only. In case of lease exceeding five years, application should be made to Reserve Bank of India. Retail sector In case a foreign citizen of Non Indian origin and foreign companies wishes to acquire retail space the provisions mentioned above would apply. However they can enter through the joint venture route where presently only a technology tie-up is allowed. However pure equity investments are not allowed so far. Some companies like Shoppers Stop and few others did apply to the foreign investment promotion board for equity investments, the proposal was rejected by the government. The FIPB has referred one such proposal to a high powered committee whose decision is awaited. Franchise arrangements in India Franchise arrangements operates in different ways in India. In such an arrangement, the landlord is the beneficiary of the actual sales turnover. A fixed franchise fee is paid to the retail chain/ brand for the support and training. Joint venture possibilities While franchise is one method of entry, forming a joint venture is another way of penetrating a retail market. A joint venture offers a set of advantages to both the partners. It gives an international brand name, high quality product and better margins on the sale to the local partner. The international partner is a beneficiary of adequate and good space, local network and a close market watch/advice about the market behaviour. Hospitality Hospitality is a sector where govt. is making efforts to attract FDI. In normal course a Non Resident Indian and Overseas Corporate body can invest up to 100%. Foreign citizen of Non Indian origin and foreign companies could invest without any approval via the automatic route up to 51%. If they wish to acquire more than 51% they need to apply to the Foreign Investment Promotion Board. In recent past the FIPB has approved upto 100% FDI in hospitality sector. |
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