The real estate sector in the country is
currently on an upswing but the industry will have to find a growth driver
to sustain the momentum, says KSec Views.
Will the mills turn into millstones? Is frenzy setting in? Some hard to
believe benchmarks in real estate valuations were set recently in biddings
for mill land in Mumbai.
The 4.9 acre Kohinoor Mill No 3 was auctioned for Rs 420 crore to a joint
venture floated by the son of former Lok Sabha Speaker Manohar Joshi,
Unmesh, and other Shiv Sena leaders. Mr Joshi’s Kohinoor Projects Company
along with Matoshree Realtors Private Limited, of which Sena leader Raj
Thackeray is a director, bid for the mill land financed by Infrastructure
Leasing and Financial Services Limited (IL&FS). Their venture, Kohinoor
Consolidated Transport Network (CTN) Limited, with a bid of Rs 421 crore,
was the highest bidder. The other two in the running were Varun
Industries, which bid Rs 411crore and Akruti Nirman Private Limited with a
bid of Rs 355 crore.
Kohinoor Mill No. 3 is located across the road from the Shiv Sena’s party
headquarters, Sena Bhavan in its stronghold of Dadar, Mumbai. Its part of
a huge mill complex in central Mumbai. But the other two mills, Kohinoor
Mill No. 1 and No. 2, would not be sold as the NTC had surplus land in
those mills.
Kohinoor Mill and Elphinstone Mill are the last two of the five NTC mills
that have been cleared for open sale. Tenders were also opened for
Elphinstone Mills in Parel. But the name of the highest bidder could not
be declared as the court case pending regarding the mill will come up for
hearing. A case was filed by the mill owner, Elphinstone Spinning and
Weaving Mill Company, in the Bombay High Court challenging the acquisition
of the sick mill by NTC in 1983. This mill was one of the 13 taken over by
NTC. Its understood that India Bulls Real Estate Private Limited was the
highest bidder for the 9 acre mill with a bid of Rs 442 crore. Five
parties had bid for Elphinstone Mills. A month ago, another NTC mill,
Mumbai Textile Mill fetched a record Rs 702 crore.
Glitches galore
Meanwhile, the Nationalist Congress Party MP from Mumbai Central, Sachin
Ahir, who also heads the Rashtriya Mill Mazdoor Sangh, has objected to the
sale of the Kohinoor Mill land, saying that there were 40 bids but only
three were short-listed. He demanded a re-bid as there was a lack of
transparency. He also claims that over a thousand workers were not paid
dues.
Would there be takers for the developed property: Some rough calculations
indicate that it could be a very tough ask for the winners to make money
out of the deals.
Though located in prime localities, making money could remain a tough
proposition. At the price paid for the property, it works out to
effectively Rs 17,000 per square foot. At the very least, development
costs and interest costs would amount to Rs 3,000 per square foot each.
Effectively, the developed property would have to be priced between Rs
25,000 and Rs 27,000 per square foot with the ground floor of the property
commanding up to even a 20 per cent premium.
At the moment there are hardly any commercial properties in the Mumbai
fetching such realisations. Besides, if the development of private mills
goes ahead as planned, there would be an addition of close to 12.5 million
sq.ft (including under construction and future development potential) of
incremental real estate in Central Mumbai. This would translate into Rs
1000 crore worth of real estate stock, which in turn could lead to
unoccupancy as the demand may not be enough to absorb supply.
Action is heating up
Apart from the aggressive bids for parts of Mumbai real estate with
builders from far and wide making a beeline, there have been attempts at a
consolidation of the construction industry.
Recently, three big real estate development companies formed a
conglomerate to benefit from their collective synergy, reports. The three
companies are G:CORP, earlier known as Gesco Corporation South of
Bangalore, Lancor G:CORP, formerly Lancor Gesco of Chennai, and Alpha
Buildtech of Delhi. They will maintain their identities, areas of
operation, and projects, but will collectively address the demand for real
estate development in the country in the future.
The setting up of the federation was facilitated by the shared corporate
history and professional association the core team members of the three
companies have had with Gesco, the erstwhile real estate division of The
Great Eastern Shipping Company.
Currently, G:CORP’s ongoing residential, commercial and retail development
projects entail real estate development over 10 million sq ft,
interspersed between Bangalore, Mumbai, Ahmedabad, Gurgaon, Chennai, Pune,
Jaipur, Karnal and Dehradun. Alpha Buildtech on the other hand is believed
to have performed well in its ongoing premium residential project,
GurgaonOne.
Has consumerism come of age?
Hitherto renowned for its sports goods and hosiery industries, Ludhiana is
fast emerging as a favourite destination for shopping plazas and
multiplexes with as many as half a dozen mega malls coming up at a cost of
Rs 600 crore.
Although the construction of the state-of-the-art malls and shopping
complexes has resulted in sharp rise in the land prices, market watchers
have raised questions about the success rate of these malls considering
several commercial buildings in the city have been lying vacant.
Among the groups, which are infusing money into the mega mall projects are
Gold Souk, Ansal Plaza, Elite’s Arcade, Westend Mall, Flamez and Subhi
Mega Mall. These malls also promise to bring leading brands in fashion
wear, consumer and lifestyle products to the city. With the construction
of these malls, the land prices around these mega complexes have
skyrocketed ranging between Rs 5,000 to Rs 10,000 square per yard.
BPO or blowing prices out?
One question often asked is: Is the Bangalore real estate market
overheated? Is it a Mumbai in the making where supply is becoming
increasingly scarce? The unabated tech boom, bigger pay packets, plans for
a spanking new international airport and a modern metro rail system, have
only increased the appetite of migrants, investors and the desire of
non-resident Bangaloreans based in the west to grab a slice of land in the
city.
Customers, corporate as well as individuals, say prices are too high while
real estate consultants and developers argue that it’s a case of water
finding its own level. Office space is expensive, especially in the
central business districts (CBD) and difficult to get. Quality retail
space is not readily available as customers gobble it up almost as soon as
it hits the market.
Even residential accommodation is getting dearer by the day for the middle
order citizens, even though housing finance is easier than ever before and
more inventory is being created. In fact, developers increasingly want to
put their money in super luxury apartments and villas costing upwards of
Rs 5 crore each to deal with the increasingly visible community of high
networth individuals (HNIs).
Residential prices are up 50 per cent or more in prime areas over the last
12-18 months. The appreciation has been too fast possibly because land
rates are increasing, and many projects have met with strong response. The
demand is being stimulated both by investors (local plus NRIs) and end use
customers. While small parcels of capacity will keep getting added,
significant capacity infusion will happen from the second quarter of 2006
as more projects get completed. Some price correction may happen then with
rising supply.
There is also an increased supply in the mid-price segment. A more aware
and demanding customer has spurred builders to improve standards and do
value adds — for a price — to residential accommodation. Compared to other
markets, Bangalore had few luxury apartments till some years back.
However, higher incomes, desire to enjoy the best and demonstrate wealth,
is creating a demand for super luxury housing. There is a rush to address
this demand by developing more top end apartments and villas.
According to a recent Cushman & Wakefield report, an estimated 27,000
dwelling units are projected to enter market over 2005-06 in all
categories.
Getting more structured
The fund management arm of US investment bank JP Morgan wants to tie up
with an Indian developer to build offices and housing in India and invest
in Japan and China.
During a trip to Hong Kong to launch a fund investing in global real
estate investment trusts (REITs), JP Morgan Asset Management's property
chief said the firm hoped to start building in India in 2006.
Since India eased rules on foreign investment in a thriving property
market in February, several US property investors such as investment bank
Morgan Stanley, pension fund Calpers and private developer Hines have been
looking for deals.
Indian firms are keen for foreign capital and expertise because they want
to expand from their regional bases. In a fragmented market, developers
DLF Universal Ltd and listed Unitech Ltd are among the biggest names in
the north, K Raheja Corp and Hiranandani Group dominate in Mumbai, and RMZ
Corp. is building huge business parks in the south.
JP Morgan Asset Management is launching a “Global Property Income Fund” in
Hong Kong, Singapore and Macau that will invest in property trusts around
the world. It is targeting net dividend yields of 3.5-4.0 percent per
year. Initially around 65 percent of the fund will go into US trusts; with
Australia the next preferred market. But as Asia’s property trust market
grows from its current capitalisation of around $27 billion, the fund
would allocate more to markets such as Japan and Singapore.
The Asian REIT market still represents a minuscule portion of the $1.3
trillion of investment-grade property in the region. But some analysts say
the market will mimic growth over the last 25 years of Australia’s market,
where 60 per cent of A$103 billion of high-grade property is owned by
listed property trusts.
The prospect of rising interest rates is also not being perceived as a
major threat as its felt that economic growth could increase rental
incomes at buildings owned by property trusts just as quickly. On the
contrary, rising interest rates can be good for some sectors such as
rental apartments because fewer people will be buying homes.
JP Morgan Asset Management holds $30 billion of direct property assets and
$7 billion of property securities, such as REITs, which pay most of the
rental income from their buildings to investors in regular dividends.
Greater liberalisation could hold the key: The aggressive bids of the
recent past raise the spectre of an asset bubble in the near future as it
would be contingent upon the growth of the economy and a simultaneous
expansion of household surplus.
Supermarkets and malls could be a big driver but a thrust on FDI and
enhancing the cold chain facilities besides ensuring better price finding
mechanism for farmers would go a long way in boosting food and clothing
related malls (which anyway account for a major chunk of demand in this
space, currently).
It’s imperative to find a new growth driver for sustaining the interest in
real estate projects. Housing finance remains a key component of retail
lending for banks but its increasingly coming under the RBI lens on
apprehensions of NPAs building up in the portfolio. Under the
circumstances, a meaningful thrust to the agrarian segment for boosting
productivity and farm income would be imperative to make the aggressive
plans feasible.
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