PUNE REAL ESTATE - THE ADVENT OF INNOVATIVE FINANCIAL STRUCTURING

Mohammed Aslam, Head - Pune, Jones Lang LaSalle Meghraj

The slowdown in for real, and it calls for innovation among Indian real estate's primary stakeholders. In Pune, we have witnessed some truly innovative financial structuring schemes - schemes that, by addressing the needs of clients rather than merely the developer's business aspirations, truly add real value in a changing world.

Mont Vert offers potential buyers the option of renting a 2BHK at a minimum rent of Rs. 12000 per month and with a deposit of Rs. 1 lakh, and buying the rented flat at a later date. The payments made should purchase of the flat ensue are then treated as down-payments. A lock-in period of three years is also part of the agreement. This allows occupants to either continue on a rental basis or to buy a flat they have grown familiar with at a date when the rates would conceivably have sunk to more rational levels.

Rohan Builders takes a down payment on an under-construction flat in any of six ongoing projects and offers to pay back the difference in the current and future market rates should the market correct further at a later stage. Yet another entity agrees to shoulder part of the interest rate on the buyer’s home loan for a year, but again introduces a lock-in period of three years. Such offers are, quite simply, aimed at encouraging fence-sitting buyers to either absorb existing ready inventory or to book flats in under-construction projects.

Pune represents a very individualistic real estate market for various reasons, and it comes as no surprise that we should see the genesis of such proactive measures in this city. However, it is our opinion that the customer-centric movement being launched there would do well to spread beyond this city's borders, as well. To a certain extent, it has.

In the metros, we are seeing a unique phenomenon among established development houses like DLF who are willing to pay buyers back the difference in price brought about by market correction. To a large extent, this is to prevent such buyers from demanding an outright refund. Certain builders also offer to shoulder the financial burden of Stamp Duty and registration due on the purchased property, and to pay the buyer's EMIs right until actual possession, these funds to be refunded at that stage.

Across the country, buyers find their negotiation power vis-à-vis the price of the property increasing when they bring 50% of the price or more to the bargaining table. These are the first responses to the clarion call for taking the lead on making home purchase a more financially feasible proposition for buyers. We applaud it and await the spread of this movement of innovation - especially since it makes sense both to buyers and sellers. In the current market scenario, the focus must often be re-directed from profitability to loss-cutting. While the primary objective has always been to turn a profit, this consideration takes a back-seat in the current slowdown scenario, when projects are not moving fast enough on the market to enable builders to meet their own financial obligations. Whether or not the builder is making an actual loss, there is certainly a loss on previously anticipated margins involved.

So far, these schemes are being witnessed only in the residential segment, and the more innovative ones may soon be evident in cities other than Pune. Commercial real estate is still a straight transaction segment in which negotiation potential is based on the stage of the project construction. Unlike residential, it is typified by customers who have the required buying power and/or funding avenues, and whose cost-sensitivity is only limited to their interest in securing the best possible deal.

The response to such financial structuring schemes has been varied, with the final asking price, location and exact specifications of the properties remaining important criteria. Where the location and client catchment for a project is good, such financial schemes have proved to be real market movers and have made a difference of up to 25% in a project’s selling potential. However, it is clear that the ultimate differentiators will still be a rationalized price and the builder’s overall market standing and credibility. Another model that works well even in the slowdown scenario is linking the payment instalments to the stage of construction.

Return of the REITS? Malaysian market poised for innovation

Cityscape Asia to throw the spotlight on policy settings in regional property markets

Suntec, Singapore. 19-21 May 2009

With Malaysian REITS down but not out in the face of an economic downturn the Malyasian Government has bolstered this popular investment class with a 2009 Budget allowing REITs to open their investor register to up to 70% foreign ownership.

With some M-REITS being 10-45% off their 2007 peaks the move has been welcomed by the sector says Elvin Fernandez, a Malaysian property valuer and Managing Director of the Khong & Jaafar Group of Companies who is a speaker at the upcoming Cityscape Asia conference in Singapore on May 19-21.

“The incentive is ‘right on the button’ as it was awaited by REIT managers and the market for the industry to leap into a period of sustained higher growth and hopefully stake a claim as a regional centre for the REIT industry,” Mr Fernandez said.

While political uncertainty and rising unemployment has impacted market confidence in Malaysia, some key indicators remain sound. Prime office real estate is still generating yields in the region of 7-8%, while the residential market, although currently subdued, is supported by the youthful country’s extremely high rate of new household formation who demand about 80,000 units of houses from the primary market per year, according to Mr Fernandez.

“For Malaysia as a whole, the key relationship between house price increases and income increases has also been tracking in unison over the past 12 years, suggesting a basis for reasonable price support in the market,” Mr Fernandez said.

Malaysian house prices increased at a compounding annual rate of 5.09% over the 12 year period, while household income was up by 5.14% per year over the same period.

“With property (from construction and services) directly contributing some 6.5% of Malaysia’s economy, but impacting as many as 140 other industries and services indirectly, the health of the property sector is a matter of national importance and this explains the Government’s helping hand to the REIT sector,” Mr Fernandez says.

A strong contingent of Malaysian developers is also showing at the Cityscape Asia exhibition to be held at the Suntec Convention Centre. Confirmed exhibitors include Mah Sing Group, EPAD, RS Capital, East Ledang, Danga Bay, Mulpha, NASA TTDI, Camko City, and a number of developers from the Iskandar Development Region which is backing up its successful foray at Cityscape Abu Dhabi with the opportunity to access South East Asian and Chinese investment at the Singapore event. They will also come together during the exclusive Cityscape Asia Investors & Developers Networking Reception to forge international relationships and discuss business and investment issues.

The role of other regional Governments will also be under the spotlight at Cityscape Asia.

The Singapore Government pleasantly surprised the local property sector with a 40% rebate on property taxes in its January 2009 stimulation package, while the Vietnam Parliament is debating changes that could increase sales volumes to overseas based Vietnamese by as much as 1000% per year from September 2009.

In Jakarta, major Government-backed infrastructure projects such as a Monorail, MRT and Airport link are boosting the property sector while stronger regulations for property valuation have improved transparency in debt finance and capital markets over the past few months.

Cityscape Asia
Cityscape Asia - part of the world's largest business-to-business real estate event brand - is an annual exhibition and conference focusing on all aspects of the real estate development cycle. The three day event will run from 19 – 21 May 2009 at the Singapore International Convention and Exhibition Centre (Suntec Singapore).

Top deal-makers from leading developers, banks, institutional investors and investment authorities, as well as senior officers from the foremost private equity funds and investment advisory firms, will gather at Cityscape Asia to discuss the key issues and investment opportunities.

Conference highlights include: surviving the global financial crisis; the future for real estate funds; Asian REITS; markets to invest in for long-term growth and returns; country spotlights in trouble times; the Asian retail decade; and green investments.

Cityscape Asia is an extension of the phenomenally successful Cityscape Dubai exhibition, organised by IIR Middle East, which also include Abu Dhabi, India, Saudi Arabia, Russia, USA and Latin America.

UK-based Scala Land Group is a Gold Sponsor at Cityscape Asia. Scala Land Group presents overseas investors with alternative opportunities to buy land in the UK. CNN is the international broadcast partner.