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Friday, July 28, 2017

RERA impact: Small developers look to partner larger firms to revive stalled projects

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A prolonged slowdown and the implementation of the new real estate law are forcing several mid to small size residential developers to seek partnerships with larger developers to help revive their projects stalled by funds shortage and regulatory hurdles.

Many local builders in Maharashtra, where the new Real Estate (Regulations and Development) Act (RERA) has been notified and a regulatory body has been formed, have approached large developers with deep pockets to take over their stalled projects. Some others are seeking partnerships for new projects which have not taken off.

In April, Bengaluru-based Ozone Group revived Vijay Raheja Group’s “The Gateway” luxury project at Andheri. The project with a development potential of 120,000 sq. ft, was stuck half way through due to financial reasons. Ozone invested in the project and is currently marketing it, said a person close to the development.

Aditya Birla Real Estate Fund, an investor in the project, confirmed that ‘The Gateway’ is currently being co-branded by Vijay Raheja and Ozone Group. A spokesperson for Ozone Group declined to comment.

Ozone Group, which is planning to ramp up its business in Mumbai, is evaluating seven to eight such projects by local builders. “After RERA comes in, there will be a lot of opportunity at the project level. Either the builder does not have the wherewithal to sell and construct, or sometimes, the projects are stuck for want of funds,” said the person mentioned above on condition of anonymity.

Navi Mumbai-based Terraform Realty Ltd is actively looking to partner with large developers to monetize some of its land assets or jointly construct five of its ongoing projects which are at various stages of development.

“We are looking to join hands with larger groups with better execution capability. While we have the wherewithal for holding land and taking care of the land asset per se, the development will be done by someone else,” said Santosh Santholia, vice-president, Terraform Realty. The company has signed memoranda of understanding with other bigger developers to start two of its projects, he said, but did not disclose names of the builders.

Large builders like Godrej Properties Ltd, Oberoi Realty Ltd and Hiranandani Communities said many local builders are looking to sell their entire project or seeking partnerships for new ones.

“There has certainly been higher levels of engagement with local players as compared to last year and we expect to see this phenomenon further accelerate in the near future aided by consolidation and exits happening in the market,” said Mohit Malhotra, managing director and chief executive officer (CEO) , Godrej Properties Ltd.

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Earlier this year, the company entered into a development management agreement with Shivam Realty to develop a housing project at Kandivali East in Mumbai.

“We are engaging with developers across the spectrum to either partner or purchase their land parcels,” he said.

Hiranandani Communities is also looking at the joint development model for the first time given that there are rising opportunities for distressed sale in the market.

Builders bet on affordable housing amid realty slowdown

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Bengaluru: A slew of developers have lined up robust expansion and investment plans for affordable housing this year, despite the prolonged slowdown in real estate.

Not only large realty firms, but also mid-sized ones are betting big on building and selling homes in the Rs20-60 lakh segment, propelled by demand from homebuyers and encouraging government tax incentives.

Shapoorji Pallonji Real Estate plans to invest Rs600 crore on buying land parcels this year to build a pipeline of projects. These are in National Capital Region (NCR), Hyderabad, Bengaluru and possibly a fourth, in Maharashtra. It is also planning to launch a project in Hinjewadi, Pune by the end of the year.

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“We have around 35-40 million sq. ft of housing projects under various stages of development. The focus is on mid-income housing in the Rs30-60 lakh category,” said Venkatesh Gopalkrishnan, CEO, Shapoorji Pallonji Real Estate.

Tata Housing Development Co. Ltd is also in discussions with multiple landowners across Kolkata, Pune, Mumbai, Chennai and Bengaluru and hopes to launch at least three large projects this year, a company spokesperson said.

“All our affordable housing projects will be upwards of 20 acres and will be launched under our affordable housing brand New Haven with a starting price of Rs25 lakh,” he said.

After some delay, Mahindra Lifespace Developers Ltd expects to launch a project in Palghar, near Mumbai, later this year under its Happinest affordable housing brand.

“We are also looking to buy land, primarily in Maharashtra,” said Sriram Mahadevan, business head for Happinest.

Housing shortage at the beginning of the 12th Five-Year Plan (2012-17) was estimated at 18.78 million, according to a report by the ministry of housing and urban poverty alleviation.

The 2017 Union budget proposed infrastructure status for affordable housing projects to facilitate higher investments in the sector and a 100% tax deduction on profits for building houses of up to 30 sq. metres in four metro cities and 60 sq. metres in carpet area in other cities.

Mumbai-based Poddar Group plans to launch three projects in suburban Kalyan with homes priced at Rs25-40 lakh.

Emgee Group, also based in Mumbai, is gearing up to launch its largest ever project in the distant suburb of Neral, in the next few months. The 80-acre project, which will build around 14,000 homes of Rs8-16 lakh, will see an investment of around Rs1,600 crore over the next 7-8 years.

Not only developers, investors too are confident about returns on investment in mid-income projects

The project is under the government’s Pradhan Mantri Awas Yojana (PMAY) and buyers can avail its credit-linked subsidies.

“We are also planning to build another 1,000 homes in Asangaon but that will launch that in early 2018,” said Mudhit Gupta, chairman and managing director of Emgee Group.

Earlier this week, the government amended the PMAY scheme and extended it to private land to increase the scope to build affordable housing projects.

“We feel this is a much-needed reform and will provide a great platform to showcase sustainable partnership between public and private sector. Our member developers showcased immense support to affordable projects post budget by committing to 375 affordable projects in April 2017. With this new amendment, we expect this number to grow twice or thrice,” said Jaxay Shah, president, CREDAI, a builders’ association.

Not only developers, investors too are confident about returns on investment in mid-income projects. Brick Eagle Capital Advisory LLP plans to launch its first affordable housing alternate investment fund to raise Rs700 crore some time soon. “The need for capital may be around Rs10-50 crore in a project but there are thousands of projects that need money,” said Rajesh Krishnan, founder and CEO, Brick Eagle Group, which funds and incubates affordable housing firms.

Kotak Realty Fund will also raise a $100 million fund that will invest in smaller-sized apartments both in large and tier-II cities.

GST – An optimistic Imprint on the Indian Realty Segment

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In the last couple of years, if there is one topic apart from the much talked about passions like cinema and cricket, it has to be the Goods and Service Tax (GST). This area seems to have dominated the news cycle and is plugged to be the major taxation reform in the country’s history.
The Indian real estate sector has witnessed a remarkable progress, thanks to the current policy reforms brought about in the Indian property segment. This development unsurprisingly has been perceived not just in Tier 1 cities, but also in Tier 2 and 3 cities and towns. Regulatory alterations such as ease in FDI restrictions, Real Estate Investment Trust (REIT), Real Estate Regulation and Development Act 2016 and Goods and Service Tax (GST), to name a few are touted to bring along with themselves significant modifications that are beneficial for the efficient functioning of the Indian property sphere.
The indefinite and ambiguous system of taxation in the real estate orbit with the gamut of charged levis such as stamp duty, service tax, value added tax (VAT) etc, leads to overlying of tax bases and unwavering clashes over the tangible rate of tax to be imposed. Such imprecision’s have triggered loopholes in the practices monitored by real estate developers within each state. In such a scenario the implementation of GST clearly proves to be a win-win situation for both the players – developers and potential buyers alike. This is because with the execution of GST all numerous taxes will be substituted with a single tax, thus culminating taxation discrepancies all across India. With GST, property developers can get the advantage of gaining from free input credits on GST for goods and services procured by them, thus plummeting costs while passing the same doles to buyers. The acceptance pathway and the ensuing execution of GST has been through plentiful of twists and turns already, with much more in store.
The realty industry that is facing issues related to multiple taxation that accounts to about 25% in the form of indirect taxes, will get a sigh of relief through the Goods and Services Tax. The unchanging tax will aid developers to enjoy free input credits on the GST that has been paid for amenities and goods acquired by them. This will definitely lessen the cost and can be passed as discount to buyers. This reform surely looks at bringing along with it a great amount of liquidity for the sector and may curtail devious transactions. GST will have a flowing outcome for the homebuyers, as realty developers with more margins in their hands will be in a situation to reorganise the product cost in favour of buyers.
Currently, when we talk about purchasing a flat that is under-construction, the home buyers are required to pay both service tax and VAT. Added ancillary taxes are paid by the developer at the time of procurement, which further gets fabricated into price of an apartment. The direct impression of GST on real estate, in terms of tax discharge for developers and buyers, will be based on whether the final rate of GST is more or less than the current taxes being paid. Apart from the momentous reduction in expenses of tax management due to a solitary unified tax, the cost involved in compliance will drop down. It is important to note that the real estate sector shares a constructive synergetic relationship with more than 250 other segments such as IT, steel and cement segment. Hence the welfares or downsides of GST on each sector is sure to have an indirect influence on real estate and vice versa. At this point in time, we may perceive very restricted concrete profits on the real estate industry but the gushing results will unquestionably be higher.
Impact of GST on real estate?
With great expectations from GST to actually reduce the overpriced project cost, developers will definitely yield positive benefits from the move since homes will become inexpensive. On the procurement side, a developer has to pay a gamut of duties and taxes like excise duty, entry tax, central sales tax and custom duty to name a few. These consequently get transferred to the final valuing of the units and, thereby, to the potential buyer. With GST’s proposition of rolling numerous taxes into one, the construction cost will come down. This will bring more fluidity into the realty market and will enhance home sales. Developers will get the benefit of a free flow of credit which in turn will transform into an upsurge in the margin. During the project construction process, the developers are required to spend a lot on products which comprise of double taxation in current times. The price they bear for these comes up to 20 to 25 % of the total cost of materials they are buying. With the GST rate coming less than about 20 % will diminish the production cost for developers. This in turn will benefit buyers with developers being able to pass on a part of profit to them.
Undoubtedly, the GST reform will be game-changer for Indian property industry, by including more than sixteen major taxes and tariffs into a lone united tax. What’s more, this integrated tax regime will halt the undesirable double taxation practise hurting end-users involved in the real estate sector. Further it will generate a level playing arena for organised entities with unorganized players being brought under the ambit of taxation. By imposing translucent transactions throughout all spheres, this will indeed be a blessing in disguise for real estate developersand buyers alike.

How does a buyer benefit from GST?
Since buyers are not accountable to pay indirect tax while purchasing properties that are ready-to-move-in, GST tends to have little impact on buyers. For transactions of under-construction property buyers are required to pay service and VAT tax forcing most buyers to opt for home loans to fund their purchase. Most buyers refrain from doing a proper study of the various taxes that they are required to pay additionally. With uniform taxation like GST, that comprises everything that they need to pay, the entire process of payment will become really smooth for the buyer. In such a case, even a higher rate would be more tolerable to him than an absence of precision.
With the long wait for GST almost wrapping up, its influence on the Indian property market is likely to be positively felt by property developers as a result of predictable free credit flow. GST is all set to pour its ability to deliver greater clearness into operation of real estate sector and will offer an audit trail for the better monitoring of the sector. This alone should help form a sturdy base for the country’s evolution and advance for years to come.

DLF sinking deeper into debt underlines dismal state of real estate sector

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Premium realty developer DLF Ltd’s woes are far from over as the dull residential property market continues to weigh on its performance. Even after selling some key assets a couple of years back to trim its borrowings, DLF’s consolidated net debt has surged from Rs22,202 crore in FY16 to Rs25,096 crore in FY17.

The key problem is its over exposure to a single market—Gurugram—where sluggish sales have led to a huge pile of unsold residential units.

The 63% decline in new sales during the March quarter from a year ago led to a similar contraction in the full-year figures, too.

Cancellations are adding to the woes. To top it all, DLF’s interest cost outflow of Rs738 crore was higher than the operating profit of Rs710 crore for the quarter.

So, on the one hand, it is stuck with an unviable residential property inventory. And, on the other, the huge debt overhang prevents infusion of funds into new markets. Add to this the fear of the Real Estate Regulatory Authority’s stringent norms and lack of clarity. All this is likely to keep the residential property market in limbo for some time.

Fortunately, DLF’s rental assets are doing well, alleviating the overall pain. Both rental rates and the period of lease are improving and the customer profile is becoming more diversified.

The firm is also trying its best to control construction costs and other marketing expenses to aid profitability.

But the much-awaited promoter stake sale in DLF Cyber City Developers Ltd has been hanging fire for several quarters. This sale would alleviate the debt burden to a large extent. The stock, therefore, has been trading in a band, rallying on rumours of the stake sale and falling, subsequently, as the sale does not fructify quarter after quarter. For instance, when the March quarter results failed to impress investors or address any of their concerns, the stock plunged 16% in three or four trading sessions. The stock has underperformed the BSE Realty index in the recent past.

For now, the prospects for the residential market are far from rosy. An Edelweiss Research report that evaluates the risks to DLF’s earnings says that home sales may remain dull until end FY18. Income from rental assets will improve for DLF only in FY19 when many ongoing projects would be completed. The pathetic state of the realty market also makes it challenging for DLF to sell its large land bank. Therefore, operating cash flows would remain negative for some more quarters.

Options are few and tough. Either the stake sale or a revival in the property market is necessary to prevent the firm from sinking deeper into the debt trap that it’s already in

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