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.

JLLM - Anuj Puri's take on the Real Estate Sector

Anuj Puri, Chairman & Country Head, Jones Lang Lasalle Meghraj

What is the current situation in real estate markets?

There is overheating of prices in certain Northern regions, reduced liquidity among developers because of the credit crunch and a watch-and-wait stance among property buyers as they anticipate a blanket correction in the sector. The credit crunch and the US recession are not the only factors involved here. Interest rates have shot unrealistically high begin with. However, the current market dynamics notwithstanding, the property market in India will continue to thrive – albeit at a more realistic rate. Prices are stagnating, and we can reasonably expect a correction in certain areas over the next twelve months - depending on specific location sector and property typology. Meanwhile, demand for property in certain locations will continue undiminished due to the existing and upcoming market drivers there.

What are the opportunities and challenges for the Indian real estate sector now?

We do have a challenge situation on our hands, but it is one brought about by lack of faith and information. The origin of the challenge does not lie in foreign markets, but our own. Nor is the challenge anywhere as big as its is being made out to be. India is nowhere as vulnerable to fallout of the US recession as its is being fashionably assumed. The international credit rating agency Standard and Poor’s has clearly stated that India and China are in the category of ‘not vulnerable’ countries.

India is still among the biggest growth drivers. Foreign players will continue to invest in India and go slower on low-priority markets, especially the developed ones where investments take longer to pay off. There are, for instance, immense opportunities in Indian retail. The segment of India’s more affluent shoppers is 6 million strong – a segment that spends approximately $28.36 billion annually. India still maintains its ranking as the 5th most attractive of all emerging retail markets in the world.

Has the slowdown in market affected the real estate industry in terms of property sales?

There has been a slowdown in domestic transactions and we are indeed witnessing a correction, but this is brought on by the sharp 200-300% rise in property rates seen over the last two years. It is perfectly natural and expected that there would be an adjustment of such irrational growth. The sales volumes previously predicted for 2008 now need to be second-guessed. However, lack of growth does not equal a setback – only a period of stagnancy. Indian real estate continues to be a good risk diversifier that generates excellent risk-adjusted returns.

What are the issues the sector is currently facing in India?

Lack of infrastructure, lack of transparency and unrealistic rate inflations brought on by speculation in many geographies across all sectors come readily to mind. Thankfully, the Government has taken various proactive steps to curb inflation and to drive out speculative investment. Regulators and progressive incentivization schemes for townships and SEZs will help steer the boom in more constructive directions. We are also on the verge of seeing the introduction of REIT-style investment routes to funnel in additional and sustained foreign funds into the sector.

How could one express the current scenario in figures, and what do they mean?

There is an existing shortage of 25 million residential units. The residential sector will continue to be the driving force. Almost 91% of all real estate investments are in the residential sector. Approximtaley two million residential units admeasuring an average of 1,200 square feet will be constructed annually.

In the commercial sector, each year sees the development of approximately 60 million sq ft of office space. There has been a slowdown in absorption but no sign of increasing vacancies. In the retail context, over 300 shopping malls are under construction and will be operational by the end of 2008. Each year sees the development of approximately 25 million sq ft of retail space.

How can the sector be strengthened?

There is a clear need for schemes specifically designed to put in much-required infrastructure, and further incentivization of affordable housing projects to encourage developers to address the monumental demand for residential space from the middle class. The sector also needs the benefit of single-window clearance provisions for progress-oriented projects.


Contributed By : Arun Chitnis

Tidal affects on Commercial Real Estate across the country

Mushrooming IT companies have given a big push to the rates of commercial property in the country. In past few years, the IT sector in India has grown manifolds and has reached to new heights which mean more work and more of human resource and which in turn makes multinationals look out for bigger spaces for their enlarged operations into a single large building. Such a growing trend among various national and international IT companies in India has lead to the growth of commercial real estate to such a great extent.

Commercial real estate is soaring and the statistics are incredible. According to the property data exhibited by DTZ, in 2006, 10.6 million sq ft commercial space came up in the NCR and out of which, 4.6 million sq ft was pre-committed. Trends in the commercial market are changing fast, earlier the companies used to own a building but now they prefer to lease it. Initially the developers were indulged in only those commercial constructions with pre-commitments but now they blindly invest in a commercial project as the market suggests that they will get business with time.

In the country’s capital the rates of commercial capital and rental properties are surging like anything which is slowly making the properties in of ‘A’ grade less available. Since these ‘A’ grade properties will be soon unavailable people in Delhi have turned towards the secondary market like Saket, Bikaji Cama, Dwarka etc for commercial properties.

Commercial real estate prices are not only escalating in the capital but in almost all major metros and other important cities. Silicon Valley, Bangalore according to a real estate consultant Cushman and Wakefield, occupies 33.75% of the total commercial land being consumed in India.

Chennai takes second position as it absorbs 6.4 million sq.ft commercial land; Mumbai occupies commercial space of 5 million sq. ft., followed by Hyderabad at 3 million sq. ft., Pune at 2.6 million sq. ft. and Kolkata at 1.5million sq.ft.




Contributed By : Manish Bhasin