Rajeev Malik, Head, India and ASEAN Economics, Macquarie Securities Group, gave his views on where to invest money. Well for me personally, real estate in some cases still looks more attractive. At the end of the day, it is very much an individual risk appetite and portfolio requirements as such. Equities would be an important point. Bonds look rather risky in the sense that even if you look at the US, it has already had a pretty good run with the broader dynamics, there, it is difficult to see why yields are not going to go higher, especially with the monetary cycle a few quarters down the line shifting gears.

In India, specifically you come into the broader issue that from a foreign investor perspective, equity markets remain the most open and they have had the best possible run. I also think specifically with equities in India, there is a sizable number of foreign investors who have not had a chance to gain exposure to the extent that they would want for a kind of a secular story and that’s emerging in India, which perhaps might explain why every time you see some correction, 10% or so, it always tends to trigger a bit more buying.

Sky high land prices, unclear titles and a clear need to conserve cash are forcing some real estate companies to do joint development deals with landowners rather than splurge money in buying and holding land at expensive rates. Bangalore-based developers, such as Nitesh Estates, Prestige, Puravankara, Brigade and Mumbai-based Godrej Properties are adopting this route to develop properties, aware of the keen need to save cash in a market that is becoming increasingly tight-fisted for real estate firms.

“Developers no longer want put cash upfront and invest inland. The JV works both for developers as well as landlords,” said Amit Mookim, director, transaction advisory service (real estate), KPMG. Under the arrangement being discussed by some firms, landowners team up with developers through a special purpose vehicle (SPV). The owner comes on board as an equity partner in lieu of the land he puts on the table. When the project gives returns, the landowner gets a fixed percentage of the revenue in proportion to his equity holding.

The developer invests in the construction and marketing costs, but avoids tying up his funds in land. Bangalore-based Nitesh Estates will use this model to undertake new projects. “This is expected to allow us to deploy our capital towards development expenses and the expansion of our operations,” a company official said. Currently, Nitesh’s six out of seven ongoing projects and four out of the five forthcoming projects are being undertaken through this model. “It reduces the upfront land acquisition and our total project financing costs, though it requires us to either share revenue generated from such joint-developments or a portion of the developed area with the landowners,” said the official.

The need to conserve cash appears to be the paramount motive for the real estate firms in adopting such route. The slowdown last year greatly crimped the ability of real estate firms to raise cash. Though there was a rebound in the middle of the year when some companies did qualified institutional placement in a buoyant market, many firms seem to have realised the need to play it safe. Recently, the Reserve Bank of India ruled out another round of restructuring of bad real estate loans, dealing a blow to property firms which had hoped to get their loans reclassified as performing asset. That would have boosted their credit rating and helped them raise more money. However, with this option ruled out, companies don’t have any choice but to save cash and cut down on unnecessary stuff.

“Joint development model works for us as it is capital light and also contains risk. We do not have large debt on our book as compared to many other real estate companies,” said Adi Godrej, chairman of the Godrej Group. Godrej Industries’ real estate arm has lined up Rs 2,000 crore of investments for developing five projects over 30 million square feet (sq ft) in Bangalore. The Prestige Group plans to offer around 50% of its proposed eight residential projects in the luxury and non-luxury segment under the joint model. “Land owners are more keen to go in for joint development rather than out right sale of land parcel,” said Irfan Razack, CMD, Prestige Group. Brigade Enterprise, which plans to develop 8-10 million sq ft in the commercial and residential spaces by March 2010 will have 30% of the portfolio under joint development. “In outright land purchase there are many intangible and it calls for 8% registration and stamp duty charges. But in joint development model, one has to pay only 2% tax,” said Kailash Advani CEO Brigade Group.

Some firms such as Puravankara Projects are not embracing this route completely. “Purchasing land outright is the best possible as the appreciation is in land and not in construction,” said Ashish Puravankara director Puravankara Projects. “We will go for joint development model only where project demand and it will depend on case to case basis,” he added.

If you are planning to buy a house, grab it before July, as realty prices are set to increase later. The service tax of 3.3%, announced in the Budget, will be effective on your home from July as the amendments to the Finance Bill will be put into effect in June. Moreover, banks have decided to increase interest rates in the range of 0.25-0.5 percentage points on home loans, which could further be hiked in the forthcoming credit policy. Companies including realty majors like DLF, under the aegis of Delhi-based real estate body National Real Estate Development Council (Naredco), will soon approach the FM for a rollback of service tax.

The property prices are expected to go up with real estate companies passing on the additional burden to buyers. Effectively, someone buying a house property in Delhi will have to pay a service tax of 3.3% on the price of the accommodation and also a stamp duty of 8% as a sale of immovable property. The 3.3% tax will not include the amount to be paid towards special charges like garden facing or community hall facility as these charges will be taxed at 10% of the total charges. However, Sanjay Chandra, MD of country’s second-largest realty firm Unitech says an increase in interest rates is unlikely to affect the demand as the increase is only in trigger rates and hence there is no change in effective interest rates.

“The service tax will have some marginal impact, but the market will absorb that for two reasons. One, the change in personal tax slabs will leave more disposable income in the hands of consumer and second, the better prevailing economic conditions are likely to result in at least 10% increase in the salaries of the working class for the next financial year. These two facts will more than offset the marginal impact of service tax, which is expected to be 2% to 3%,” he said.

When contacted, Naredco president and realty company Omaxe’s group chairman Rohtas Goel said, “We will hold a meeting of the association to discuss the Budget proposals, particularly levying of the service tax on housing, which will have a negative impact on the realty sector.” However, finance ministry officials have said they won’t entertain any request for change in the Budget proposal. Central Board of Excise and Customs member YG Parandhe said, “We are not taking up the issue as it stands now” when asked if there is a possibility to relook at the proposal.

Following the interest rate hike by a few leading banks and the government proposal to slap service tax on the realty sector, the country’s largest real estate developer DLF on Monday said properties would turn dearer as developers would have to pass on the service tax burden to end-users. “If the signal from the bank and government is to raise the price, then why prices will not go up? That means the economy is to ready take a price hike. It will be wrong to assume that developers should not raise prices. How can you have two contradictory signals?” DLF group executive director Rajeev Talwar said on the sidelines of a seminar in New Delhi.

While a few private sector lenders, including ICICI Bank and HDFC Bank, recently increased home loan rates by up to 100 basis points, the Budget proposed to impose service tax on the realty sector both on commercial rentals as well as on sale of under-construction housing units. The service tax would come to be about 3.5 per cent of the cost of the apartment that includes the value of the land and also the cost of construction, realty body Credai said.

“Which tax has been absorbed in our country? It has only been passed through. Somewhere the new levy must be adjusted, how can you hope that the new levy will be adjusted and yet there will be no increase?” Talwar asked. However, Talwar did not quantify the likely jump in the prices, saying, “it will vary from location to location, project to project,”

The levying of service tax is only going to hit the consumers as they have to bear the burden, Talwar of DLF said, adding the increase in intrest rate and imposition of service tax are just the opposite of what a consumer would like. Since the levy of tax is across the board, it will hit all the segments of the real estate including commercial and retail, he added.

A glut of new properties in Spain shows that the real estate industry is unlikely to recover quickly as over supply still clogs the market. The most recent figures from The Ministry of Development show that 387,000 new homes were finished last year despite a property market crash already into its second year. This compare with 220,600 new home sales recorded by the National Institute of Statistics for 2009.
‘This means there is an oversupply of around 166,500 new homes that joined the glut of new homes already languishing on the market in search of a buyer. It illustrates the severity of Spain’s construction boom and bust,’ said Mark Stucklin of Spanish Property Insight.

‘What is worse, there is no quick solution as much of the trouble is stored up in a new homes glut that will take years for the market to digest,’ he added.

When the figures are added together it means the market is now facing a glut of 1.2 million new homes. The Spanish developers’ association and the Ministry of Housing are more optimistic in their figures and estimate there is somewhere between 700,000 and 750,000 new homes on the market but even at that level it will take years for the market to absorb the over supply.

Stucklin says the industry has consistently built too many properties over many year and ignored falling demand. ‘Last year, there were around 225,500 new households formed in Spain, down from 300,000 plus per annum in the boom years. New household formation surged as immigrants flooded into the country and changing demographics and life-style choice, for example and increasing divorce rate, pushed up the demand for housing. But even at the boom level of 300,000 new households a year, it is now clear that Spain was building way too many new homes,’ he explained.

‘In 2006, for example, there were 865,500 planning approvals, though not all of them went on to become housing starts. And in 2007 there were a record 641,500 housing completions. Now even if you assume that demand for second homes was a generous 200,000 per year, Spain was still building something like 200,000 or more excess homes per year. Now they are idling on the market, tying up capital, and dragging down the Spanish economy’s productive potential,’ he added.

Although supply now seems to be adjusting to demand there is still a huge glut in the market.  But this doesn’t help the economy as a collapse in new building is just as bad for the economy as too much building, Stucklin reckons.

Real estate professionals expect the number of distressed properties coming onto the market to increase in 19 out of 25 countries with the US, Japan, China, Germany and the United Arab Emirates seeing the most sector growth, according to a new report published today.

But those in Brazil, India, Hong Kong and Australia are more optimistic and expect fewer distressed property listings, the Royal Institution of Chartered Surveyors Global Distressed Property Monitor shows.

Overall 70% of the countries surveyed reported an increase in distressed sales in the fourth quarter of 2009, a slight improvement on the 80% reporting three months earlier. The biggest pick up in distressed sales was reported in China, followed by Spain, Japan and the Republic of Ireland but the pace of increase moderated across the majority of markets compared to the third quarter. Indeed, Brazil, Hong Kong, Australia and India reported a decline in the number of distressed properties coming onto the market.

RICS members work on both sides of any distressed property transaction. Consequently, the survey asked surveyors whether the level of interest from specialist funds in distressed properties was increasing. Levels of interest rose across 21 out of 25 countries up from 18 in the previous quarter with Spain, Republic of Ireland, UK, US and Scandinavia seeing interest rise at a faster pace.

‘Some moderation in the pace at which distressed properties are hitting the market is to be welcomed although this in part reflects the fact that interest rates globally are still at record lows. With longer term borrowing costs set to move upwards over the course of 2010, there is the risk of a renewed increase in distressed property listings,’ said Oliver Gilmartin, RICS senior economist.

He said banks have a crucial role to play in the recovery of global property markets. ‘The orderly unwinding of property loan books at banks in the coming years is crucial to the sustainability and health of the budding recovery in some global property markets. As banks return to better health, it is critical that more aggressive foreclosure behaviour doesn’t prompt a second down leg in markets which appear to be regaining some composure,’ explained Gilmartin.

‘It is the major real estate markets of the world, namely the US and Japan, where agents expect the strongest growth in distressed sales in the first quarter of 2010. Significantly, whilst the US is seeing ongoing rises in interest from specialist funds, Japan is not the recipient of the same level of investor appetite for distressed property assets,’ he added.

Weakness and recession hit office property markets in every corner of the world in 2009 with South America and the Middle East performing best, according to a new global report.
Weakness and recession hit office property markets in every corner of the world in 2009 with South America and the Middle East performing best, according to a new global report.

While South America and the Middle East saw rental declines of just 5% the Asia Pacific region had a catastrophic year with declines of up to 53%, the report Office Space Across the World 2010 from Cushman & Wakefield shows.

Rio de Janeiro, Seoul and Sydney were big success stories in their regions rising closer to the top ten with Seoul and Sydney both achieving rental growth of more than 10%.
But at the other end of the spectrum Eastern European cities saw significant declines. Moscow fell three places in the top ten off the back of 33% rental declines and Kiev plummeted from 12th to 49th following a 52% rental value slump.

Tokyo topped the list but still suffered rental decline and weak demand in 2009. The city’s central business district saw prime rents on grade A offices decline by 21% as large corporations adopted policies of cost saving and the renegotiation of existing leases.
Across Japan rental levels declined sharply in the first half of the year but eased towards the end of 2009. Cost constraints continue to drive occupier demand, the report says, and landlord incentive packages have risen in line with occupiers looking for an increase in lease length.

London’s West End, knocked from the top spot into third last year, has edged up a place as a result of shallower rental declines. Rents declined in the West End by 25% over 2009, and in the City of London by 16%, a result of the collapse of the financial markets. Both areas are likely to benefit from a dearth of supply going forward, and a sharp bounce back is expected, the report points out.

Hong Kong, in third position, saw dramatic rental declines of 35% and the central business district was hit by tenants moving to cheaper submarkets such as Kowloon East. The increase in the level of sublease space, coupled with low tenant activity, has driven rents down.

Dubai came in fourth due to a minor rental decline in the Internal Finance Centre of 6%. But the huge oversupply of office space in Dubai is likely to put downward pressure on rents over 2010.

Mumbai in fifth position saw a severe decline in rents of 30% over the year, compared to an average drop across India of 20%. While in sixth place New York’s Midtown saw minimal rental decline over the year, falling by just 4%.

A massive rental readjustment took place in Moscow’s central business district in 2009 and the city is set for further declines, the report says. Moscow’s CBD rents fell by 33%, most significantly in the first half of the year. Though rents stabilised in the second half of the year the market is still fundamentally weak with speculative schemes completing this year set against low occupier activity.

In Paris rents fell by 10% as France suffered less severe declines than had been anticipated. Whilst demand dropped and supply increased across the country in 2009, improvements are expected in 2010.

Milan suffered a steeper decline in rent than Rome, a drop of 9% compared with 6%, largely as a result of public sector demand in the Italian capital. Though the market is likely to suffer further declines over 2010, it is expected that there will be increased stability, brought from a rise in occupier demand, towards the end of the year.

Switzerland saw a minimal 3% rental decline over 2009. Zurich, with its concentration of financial companies, saw a 6% decline and is rental values are expected to remain flat over 2010.

Following the halt in construction of the long-delayed Ivory Tower, several property investors fear that they would lose money on their investments, reports The National.

Located in the International Media Production Zone (IMPZ), the Ivory Tower was completely sold off-plan in 2006. However, there has been no progress on the site, apart from the foundation works which began last summer at the site.

According to Khaled Mahmood, Consultant, Homes Real Estate, the project was stalled, as the investors had stopped paying.

The website of Sokook Investment Group, the developer of the project has also been closed and the message reads that the site is yet to be updated.

About 700 customers are said to have purchased units in the sprawling 20-storey Ivory Tower.

Mahmood said that he is to make a report to Sokook to check who is paying them and who isn’t. People who have paid 30 percent or more of their money can wait until the construction begins, but people who have paid less than 30 percent are likely to be forfeited, he said, while adding that the construction of the tower is on hold in the first place, as only 10 to 15 percent of people have made payments.

Mahmood says that the feasibility report is being done to check the number of investors who are ready to continue with the project.

According to Mahmood, one of the options before the buyers, is to switch-over to other projects in Dubai that are completed or are nearing completion. However, this will happen only through agreements with other developers, as for Sukook, Ivory Tower is the only project in Dubai.

The original delay on the project was caused over a land dispute with TECOM investments, the master developer of IMPZ. The row was resolved only with the help of Dubai Land Department in 2008 summer.

Following high mortgage rates, the Banks and Finance companies in the UAE are finally reducing lending rates for homes, say analysts.

The Banks are relaxing their lending criteria, a measure expected to broaden the buyers base and boost the sagging fortunes of the real estate sector in the country.

Several banks have reduced their charges and have increased their loan-to-value ratio, since the start of the year, said Dean Biddulph, Senior Mortgage Advisor, Independent Finance, a Dubai-based company offering financial services.

Although this comes as good news to property developers, who are to release thousands of completed property units in the UAE market this year, the changing economic scenario has kept the lenders and borrowers focused on low-risk investments, with completed properties being their first choice of investment, says Faisal Iqbal, Head of Secured Lending Business, Barclays.

Among the lenders that have slashed mortgage rates for new and existing clients are Amlak, one of the largest Islamic mortgage providers. The profit rate of Amlak has dropped to 6.9percent for few of its existing clients.

Both Amlak and Tamweel are currently ready to lose part of their profit margin to gain the advantage of reducing their non-performing loan figures as much as possible. The companies believe that by slashing mortgage rates, the mortgage holders can keep away from missing out on their monthly mortgage payment.

Few other banks offering lesser mortgage rates are HSBC Home Finance, Standard Chartered UAE, and Mashreq.

India’s residential property sector, by far the largest amongst the nation’s property classes, has begun the march towards recovery as home prices across the country have shown signs of stability and growth, according to an in depth report into the real estate market.

But developers and investors have for too long focused on markets in the northern and southern regions of India while ignoring the opportunities in the central region of the country, says the report, Residential Opportunities in Central India, from Jones Lang LaSalle Meghraj.
It looks in detail at residential markets in 10 cities in what is known as Central India. The report provides an analysis of the states of Rajasthan, Madhya Pradesh, Chhattisgarh, Orissa and Jharkhand.

It says that demographic and economic fundamentals continue to favour smaller residential markets in India. ‘Across markets all markets in the country, demand for residential units will continue to be driven by growing populations, rising incomes, increased urbanizations, and a shift towards nuclear families,’ it says.

‘Smaller markets, particularly those that have been underserved by national developers, will present increased opportunities due to the relative affordability and availability, along with unmet demand arising from an increasingly sophisticated set of consumers,’ it adds.

Those markets with a combination of relatively higher levels of affluence and lower residential capital values, such as Indore, Udaipur, Cuttach and Bhilai, are predicted to be poised for growth over the medium term.

The report also points out that while local developers do exist in smaller markets, they do not necessarily have the expertise, financial strength or trusted name brand that national developers can offer in India’s opaque residential sector.

But national developers need to take account of the variances in each local real estate market to maximize the returns on their projects. ‘These can include governmental regulations, consumer preferences, purchasing power and operational strategies,’ the report says.

Pioneering developers such as Entertainment Word Developers, Omaxe and Sahara City have already entered Central Indian markets, which are amongst the most under served in the country, it adds. ‘Others will undoubtedly try to follow as these leaders demonstrate the viability of their market strategies, a fact that bodes well for consumers and the industry as a whole,’ the report concludes.