Apartment Buying? Meet India’s Real Estate Ironies

After nearly a year of lull, Indian real estate is fighting back to its lost glory, driven by steadily increasing consumer demand for houses. But many things can still spoil the party, including a tendency to hike prices, and the still-to-pick-up demand for office spaces. A new real estate regulator is also coming to the scene, which can prove to be a real game changer. Where is India’s real estate market headed? Here are several hints from India’s hottest markets like Mumbai, NCR-Delhi, and Bangalore, on the direction.

Lehman Not Around for this Year’s Festivities
Navaratri to Diwali to Christmas is the time when real estate developers register over 30% of their annual sales. Starting from late September and extending till late December, this is the time that many Indian households consider as auspicious to buy a new apartment or villa. Except for last year, when Lehman Brothers collapsed, and pulled with it a slew of global banks, and even India’s credit markets. For the country’s already overheated realty market, the Lehman collapse was the proverbial last nail in the coffin. This time around, there seems to be no more Lehmans to fear – most of them are already buried or have resurrected powerfully in new avatars like Mahindra Satyam & Maytas Infra. The only thing that prevents this year’s festival season better than 2007’s – the best ever till date – is whether developers will hike prices or not.

Luring Pent-up Luxe Desires
What disappeared from realty markets – even faster than jobs - were luxury features. When everyone from columnists to bankers to policy makers blamed developers’ appetite to dish out unaffordable luxury features for the realty crisis, many developers – not all of them – had scrambled for cover by launching affordable projects. But with credit returning, stocks booming, and sectors like IT, banking etc again in growth mode, developers are again resorting to wooing customers with luxury features. They can’t be blamed too with customers with pent-up desires lapping up luxury projects like anything. The 65-storeyed Indiabulls Sky, Primero by Lodha, and Terraces by South Mumbai specialist Orbit Corporation are all witnessing strong demand according to these developers. A recent launch of 1250 luxury homes by DLF in NCR was also a quick sellout, even if it used an army of brokers to pre-sell before the launch.

Northwards or Southwards is the Real(ty) Question
Where are prices headed is the million dollar question. Some say prices will hold up to Diwali, some say up to Christmas, and some say it won’t, and it all depends upon what these developers are selling – new or stalled projects. Developers like Niranjan Hiranandani has put up a reasonable stand that prices may not go up for the next six months, while many others like DLF head Rajiv Singh has opined that it will be determined by pure market prices a.k.a. demand. A lot also depends on whether the projects are new or ongoing or re-launches. Most developers are expecting a 15-30% hike on new projects, while some like DLF are already claiming a 50% hike in select projects.

Land is Getting Freed Up, Again
In the country’s economic capital, it is more a question of where to build. That question has lately started getting game-changing responses with corporate houses like Hindustan Unilever, ICICI Bank, Mafatlal, and many others putting up coveted properties for sale. Deals have started finalizing with some of the biggest names like DLF & Unitech waking up to the opportunity, as well as many medium sized builders. But the one fear from this development is whether it will provide a natural excuse for hiking up final product prices, as the valuations for these corporate properties are already sky high. There are already feelers in the market that many of these properties are only fit for commercial development, if at all. But it remains to be seen how commercial development is feasible in an already oversupply situation of offices in Mumbai.

Realty Competition is About to Change
Last time many conglomerates missed the real estate bus. The boom that rode from 2003 to 2008 changed the entire corporate landscape of India with two development firms even entering the list of 30 most valuable companies – the BSE Sensex. But this time, many in India Inc are not willing to let go of this opportunity – of opening a real estate division. Following Godrej Properties and Mahindra Lifespace models, corporates like Raymond, Bombay Dyeing, & Century have recently forayed into the sector with mega residential projects. Expect the Hiranandanis and Nahars to compete with the Singhanias and the Wadias. And the new entrants are playing the game to the book, complete with Hafeez Contractor designs for the first Raymond project. First movers Godrej and Mahindra are also gearing up for the challenge.

RBI Monitoring Real Estate?
What has Reserve Bank of India (RBI) got to do with real estate developers? Everything, if recent directives from the country’s Central Bank are any indication. Jokes apart, Reserve Bank is zeroing in on those banks that have a flourishing business with realtors. First RBI came up with a directive for such banks to ensure that all publicity material from associated realtors should carry clear indication whether the property has any lien with the concerned banks. Quick on it heels, RBI has also come up with a detailed directive on preventing real estate projects becoming NPAs, and in case they do, what to do about it. This is a welcome move as RBI was largely credited with preventing Indian banks from following suit of Western banks during the recent financial debacle.

Foreign Money Flowing, Despite Poor Transparency
India’s biggest three realty firms, DLF, Unitech, & Indiabulls, and dozens of others are attracting serious investments from US institutional investors. Listed property companies have attracted $3.5 billion in foreign investment this year, despite the fact that Unitech stock has multiplied 95 times within 52-weeks and Indiabulls is still to complete their first project. The reason is simple. A recent report puts India’s housing demand to cross 75 lakh units within the next 5 years.

Project Specific Escrow Accounts Arrive
In many western countries this was the norm, industry body Assocham recommended it for all developers not too long back, and Bangalore based developer Lalith Gangadhar Constructions Ltd (LGCL) has become the first in the country to offer a project where the customer money for developing that project will be kept in a separate escrow account that can be utilized only for constructing that project. LGCL promoter Girish Puravankara is implementing this for LGCL Ashiar, a 63 villa luxury project at Bangalore. LGCL has attracted investments of around Rs. 50 crore from Kotak Realty Fund. Many developers are expected to follow suit soon as diversion of customer funds for non-construction purposes, land buying, and completion of older projects, has been a major cause of dissatisfaction with customers, banks, and other stakeholders.

And Finally, a Real Estate Regulator
The draft bill to establish the much-awaited real estate regulator has come, and developers and their industry associations like CREDAI have not taken kindly to its terms. Which is a good sign to start with, as it shows that the draft bill would have addressed many of the longstanding customer concerns. At the same time, developers shouldn’t be squeezed too much, as they already have to obtain close to 30 permits to build. The proposed terms in the regulator bill include registration of the project with the regulator, documentary proof of land ownership, preventing collection of advance before sale deed, a 5% bank guarantee by the developer, provision for full refund with interest in case of failing to meet deadlines, provision for taking over the project by the regulator in case of default, prevention of cancellation of allotment, and many more. The complete verified details of each project will also be available from the regulator’s website. It seems that the principal aim behind the draft bill is to prevent a US style housing bubble that can take the Indian economy itself to its heels during the next boom.

Andhra Bank Facing Unique Problems?

Beneath Andhra Bank’s healthy numbers lie some challenges that are unique to this Hyderabad headquartered public sector bank led by veteran banker RS Reddy.

For the first quarter of FY 09-10, Andhra Bank came up with reasonable numbers. Though the 230% rise in net profit was largely driven by treasury income that is highly unlikely to be repeated, the bank’s net interest income (NII) growth was reasonable at 30%.

However, the bank has a tough road ahead, owing to its exposure to sensitive sectors, SMEs, capital inadequacy, workforce revolt, & Andhra’s unique drought situation.

Andhra Bank has one of the largest exposures – at 42.14% - to retail lending that falls under the sensitive sector. Even while a major retail player like ICICI Bank scaled back their retail lending quickly, Andhra Bank’s ratio of retail lending is even larger than the country’s largest bank, SBI.

Similarly, Andhra Bank has a huge exposure to SMEs, a segment that is said to take maximum time to recover in India. The bank was also in news recently for admitting that a section of its educational loans without collaterals are overdue, with possible slippages into the NPA segment.

Andhra Bank seems to be fed up with lending to PSUs, with Chairman RS Reddy opining that such lending is not viable for the bank. But Andhra Bank itself being a PSB that enjoys all government and public support, such a stand will be heavily criticized. Andhra Bank had recently lost around Rs. 2 crore in the Rs. 5.5 crore cheque forgery case involving the PSU, State Finance Corporation.

Andhra Bank has recently approached Government of India for recapitalization, so as to have a capital adequacy ratio (CAR) of 12%. The bank has asked for Rs. 1150 crore, even while peers like Allahabad Bank, Canara Bank, & Bank of India has indicated that they don’t suffer from the same issue.

Andhra Bank’s all 1500 branches were paralyzed for a day recently when its managers went for a strike alleging ill-treatment. The strike was stunning on two counts. Firstly, it was led by the bank’s senior managers, and secondly, another nationwide strike by officers of all banks had just preceded this strike, signalling that there are issues unique to Andhra Bank. The ill-treatment and overwork alleged by senior managers are said to be an outcome of avoiding fresh recruitments for long.

RBI has registered cases against some Andhra Bank managers for submitting fake currency notes, making the bank one of the five banks to have such cases registered against it.

There are also chances that the drought situation in Andhra – that CMD Reddy has termed unprecedented – may weaken the prospects of this mainly Andhra based bank.

Why Syndicate Bank Looks Promising

With most growth figures including Net Interest Income (NII) up, and most problem figures including high-cost deposits down in the first quarter, Syndicate Bank is refocusing its efforts on the remaining challenges like its Non Performing Assets (NPAs) and its Net Interest Margin (NIM). Beyond the conventional measures, the bank is kick-starting further growth with its single-window ‘Synd Yuva’ campaign as well as the upcoming mobile banking / mobile commerce facility across 2000 branches. The bank will also be a major beneficiary of this fiscal’s farm loan compensation. Syndicate Bank has a new Chairman in Basant Seth, a veteran banker from Bank of India (BoI), whose last assignment was as Deputy MD of SIDBI.

The results for the quarter ended June 30 was one that made India’s banks as well as financial markets nervous. Have the growth figures gone up? Have the loss figures gone down?

As the results for the country’s public sector banks poured in one after the other in recent weeks, two things were clear – first looks were good for all, while second looks exposed the chinks in their armor.

Karnataka based Syndicate Bank was, however, an exception. Of course, they too suffered from the too-good-first-look phenomenon – net profits were trebled to 261.56 crore – but they had good constituent numbers to report.

The extremely good first-look of a 198% increase in net profit was driven mainly by a ten-fold increase in treasury income over the past year’s same quarter. But the real excitement was from core constituent figures with net interest income growing by 16%, global deposits moving up by 27%, global advances by 30%, and credit-deposit ratio moving up by 1.84%.

The only good figure that moved backwards was Syndicate Bank’s net interest margin that moved down from 2.34% to 2.23%.

But the bank has reasons to cheer as even while most growth figures advanced, it could cut some key problem figures. The bank shed high-cost deposits by 44%, and the gross NPA levels declined by 93 percentage points to 1.91%.

Under the leadership of its Executive Directors VK Nagar and R Ramachandran, the bank is aware of treasury income’s help this time, and has embarked on bettering the financial performance with a slew of recent measures like mobile banking and faster single-window customer signup.

Headquartered at Manipal once, Syndicate Bank moved its corporate office to Bangalore some years back, reflecting its ambition to establish itself as a leading public sector bank in the country. But respecting traditions, the bank still holds its Annual General Meetings (AGMs) at the smaller town of Manipal, often called the cradle of Indian banking.

Syndicate Bank will shortly receive the remaining two-thirds from the Government’s net farm loan waiver to banks.

Keen to shed off the lethargic image associated with India’s public sector banks, Syndicate Bank recently launched the ‘Synd Yuva’ campaign. A unique scheme that will challenge even new generation banks in its rapid and single window service, Synd Yuva will provide a customer with instant ATM card, Internet banking account, SMS banking facility, and credit card application.

Syndicate Bank’s Executive Directors VK Nagar and R Ramachandran assumed office in late 2008. While Nagar is a Punjab National Bank veteran, Ramachandran has a similar experience with Indian Bank. Both have undergone training in several niche banking areas in reputed financial institutes in India and abroad.

On the NPA front, Syndicate Bank has moved decisively to strengthen its in-house infrastructure for loan recoveries.

Syndicate Bank traces its history to 1925, when Dr. TMA Pai, together with two socially sensitive friends, Upendra Ananth Pai, a businessman, and Vaman Kudva, an engineer, started a small bank in Udupi with a capital of just Rs. 8000. Their objective was to extend financial assistance to local weavers who were then crippled by a crisis in the handloom industry.

By 1928, Dr. Pai came up with the idea of mobilising funds for these weavers from encouraging the habit of thrift & small savings from among the local community. This tiny Udupi bank would send their agents to collect daily deposits as low as 2 annas from each doorstep. In this way Dr. Pai’s bank got the funds to finance the weavers, and the daily depositors started saving – many of them for the first time in their lives.

Dr. Pai named his innovation as Pigmy Deposit Scheme, and this is the same name, this bank which we now know as Syndicate Bank, uses to this day. The only difference is that Syndicate Bank nowadays collects through 3700 Pigmy Agents, from 12.32 lakh depositors, a total daily sum of over Rs. 2 crores.

Interestingly, Syndicate Bank still collects a daily amount as low as Rs. 1, but the current Pigmy Deposits of the Bank runs to thousands of crores.

Reliance ADAG IPOs Coming: Will Markets Soar or Crash?

With Reliance Anil Dhirubhai Ambani (Reliance ADA) Group trying to launch three IPOs this year, the moot question will be whether the markets will soar, or crash, as after the much hyped Reliance Power IPO in 2008.

India’s third largest private business conglomerate, Reliance Anil Dhirubhai Ambani Group (Reliance ADAG), is planning to launch the initial public offerings (IPOs) of three group companies – Reliance Infratel, Reliance Life Insurance, & Reliance Mutual Fund – this fiscal.

In tune with Reliance ADA’s and Chairman Anil Ambani’s larger-than-life ambitions, these IPOs promise to be big affairs, with Reliance Infratel pegged at Rs. 5000 crore, and the size of Reliance Mutual Fund & Reliance Life Insurance expected to be equally big.

But so was the IPO of Reliance Power last year. In fact, it was bigger – at Rs. 11,700 crore, it is India’s largest IPO till date.

Reliance Infratel Ltd is a subsidiary of Reliance Communications Ltd (RCOM), the flagship company of Reliance ADA Group. It is in the business of creating and maintaining wireless communication towers to RCom and other mobile operators. Reliance Infratel’s IPO was originally planned for 2008 to collect Rs. 6000 crore, but was abandoned due to adverse market conditions.

Reliance Life Insurance and Reliance Mutual Fund, the other two Reliance ADAG companies planning IPOs this year are subsidiaries of Reliance Capital Ltd, the Group’s financial business wing. Reliance Mutual Fund is India’s largest, while Reliance Life Insurance is the fourth largest private insurer.

As per existing rules, Reliance Life Insurance can’t go for an IPO now as there is a 10-year lock-in period before private insurers can divest their stake. Reliance Life Insurance has completed only 5 years in operation, but has applied for a waiver in this regard. Central Law Ministry is understood to have taken a favorable view in this regard, while Finance Ministry has referred it to the Insurance Regulatory Development Authority (IRDA). Though IRDA had earlier rejected Reliance Life Insurance’s application on existing rules, there is a high probability that the Government would clear it after coming up with a new set of rules for IPOs of private insurers.

But the debatable point is how these mega IPOs from the Reliance ADAG stable would impact the stock market.

It was on January 15th 2008 that Anil Dhirubhai Ambani Group opened the mother-of-all-IPOs to collect Rs. 11,700 crores of public money to do business. With BSE Sensex scaling highest ever heights of 21,000+ on January 8, the whole of India thought, why not? Regulators and authorities facilitated wholeheartedly with extraordinary tools for this fund collection, and by the time Reliance Power IPO closed on January 18, it had mopped up over Rs. 1,00,000+ crore from the market as application money alone, with investors submitting 72 times more applications to be a part of the Ambani empire.

But where did this money come from?

January 18th was a Friday. The very next Monday explained everything. On January 21st, the Sensex dipped the highest ever in its history – by 1408 points – and on Tuesday registered the highest ever intra-day fall of 2273 points, calling for a halt in trade twice, and FinMin intervention. The official reason for the fall? US recessionary reports, and not any liquidity-crisis due to IPOs in progress.

During February first week, Reliance Power refunded around Rs. 1 lakh crore to unsuccessful bidders. But within those two weeks Sensex had lost nearly 4000 points to trade at 17,000+. The rest was left to the listing of this scrip.

On February 11th 2008, Anil Ambani – before sounding the opening gong at BSE - apologized to around 4.5 lakh investors for being unable to consider their application to make them rich. But by the end of the day, they were thanking him, while the chosen 41.7 lakh were licking their wounds when Reliance Power closed its first day on the bourses at 373, down Rs. 77 from the issue price, with Sensex also registering an 834 point fall. Brotherly bears had been assigned to wrap up the task.

India’s biggest IPO today closed trade at 164.85. Its 52-week low is 82.

It wasn’t always like this with the Reliance Group. Before the Group split into two conglomerates led by brothers Mukesh & Anil, Reliance and its founder Dhirubhai Ambani had a reputation for wealth creation among lakhs of investors.

However, the ongoing tussle between Mukesh Ambani and Anil Ambani continues to be of concern to India Inc and the stock markets.

United Bank of India’s Make-or-Break Year

2009-10 will go down in United Bank of India’s history as the year that this Kolkata-based bank finally made it big. Or, the year in which it slipped further.

FY 09-10 will be a tumultuous year for United Bank of India, that poses challenges like recapitalization, capital restructuring, NPA management, and their initial public offer (IPO).

At 1.7%, United Bank of India has one of the highest gross non performing assets (NPA) among all PSBs, and United Bank’s recapitalization is a complicated process that involves capital restructuring too to make the bank look better in the IPO market. However, the last public sector banking IPO of 2008-09 was a disaster and so was the first public sector unit IPO of this year.

United Bank of India has also come under fire for the pathetic performance of one of its sponsored regional rural banks (RRB) – Manipur Rural Bank – which has the worst gross NPA at 40.35%.

It remains to be seen whether there will be takers to Chairman & Managing Director SC Gupta’s promise to double the business within the next three years.

Canara Bank Net Profit Declines QoQ

Is there anything hiding behind Canara Bank’s 352.7% YoY rise in net profit?

Unlike some of its peers, it is not just stupendous treasury income, or the corresponding last quarter’s poor performance. The sequential or QoQ growth has been, in fact, a de-growth of 22.7% at Canara Bank.

Though suffering from an exposure to the troubled carrier Air India, Canara Bank continues to be approached by the likes of Tata to help with their JLR blunder in UK.

Canara Bank’s recent changes in their home loan procedures have attracted flak for making customers run from pillar-to-post - architect-to-evaluator-to-contractor - multiple times.