With FY13 coming to a close, lets take a stock of how developers fared with launches. As influential brokerage firm Jefferies notes, real estate developers for seven years in a row have missed the launch and sales guidance provided by them at the beginning of the year.
As influential brokerage firm Jefferies notes, real estate developers for seven years in a row have missed the launch and sales guidance provided by them at the beginning of the year. Larsen and Toubro (L&T) is looking to change Chandigarh's retail landscape. Pune's biggest realty player Kolte Patil has its eyes set on Mumbai and Bangalore.
a) The collective bullishness of developers at the beginning of the year without any regard to market conditions.
b) Failure to plan for approval delays.
c) Lack of seriousness in growing volumes and focusing more on margins.
d) Also a lack of accountability and responsibility in meeting guidance be it for launches, debt reduction etc.
He says meeting guidance has become more of an exception rather than the norm.
Only Prestige Estates Projects among Jefferies coverage managed to meet its launch guidance with all other developers failing miserably.
Jefferies calls Delhi Land & Finance (DLF) the "serial offender" for missing guidance year after year. DLF's launches in FY13 stood at 5.3 million square feet. That's a 56 percent decline year on year (Y-o-Y) and a 50 percent miss on its guidance of 10-11 million square feet.
It is a big miss by Housing Development and Infrastructure (HDIL) as well. It met only 50 percent of its guidance of launches of 11.3-12.3 million square feet. However, it’s trying to pick up momentum by launching two projects in the very first month of the new fiscal.
This was the second successive year of zero launches from Oberoi Realty.
Bangalore based Sobha Developers met 64 percent of its guidance. That's a 59 percent Y-o-Y decline as big launches remained elusive.
The slowdown in launches clearly indicates the real estate sector is not out of the woods. Projects of all leading developers are facing significant delays.
Since 2011 angry consumers are seeking legal recourse. Last year the Competition Commission of India (CCI) said it had received 200 complaints against developers for delayed projects as well as for builders arm-twisting buyers. The CCI last year said it was investigating as many as 70 developers including Parsvnath Developers, Omaxe and Unitech.
One may have burnt fingers in the past, but leading law firm Jyoti Sagar Associates wants people to keep in mind going forward. Vivek K Chandy, Partner, Jyoti Sagar Associates says, “The first thing that one needs to check is about whether the property has been mortgaged. What we see in a lot of cases is particularly for newer builders and younger builders where they have one and two properties. They go and mortgage it with a bank or financial institution. Then while they borrow some money they are not able to generate further monies from the sale of apartments. So, they get stuck somewhere, the interest that is payable to the bank is mounting and they are not able to complete the project. In that case the buyers have a problem because the property is a mortgaged property, they can’t proceed against the builder and they land up in a lot of litigation”.
Builders say they sign the same agreement with all buyers and there is no room to negotiate. However, given the pressure they're under on account of high debt, poor run rate of launches and no large immediate pick up in sales.
“One needs to be penny-wise and pound-foolish. Spend a little money on going to a good lawyer and ensure that the agreements that one enters into are well drafted and that they protect the buyer. Also do a title check to ensure that the title of the developer is good,” says Chandy.
Chandigarh is an affluent town, but lacks a good retail destination forcing the moneyed to make a trip to Delhi. L&Ts real estate arm is hoping to change all of that.
This month it opened Elante, a new mall in Changirarh's sector 178. Spread across 1.15 million square feet. This is North India's second largest mall and houses global retailers like Zara, Guess, Promod, Hamleys in fact all of these brands are making their debut in Chandigarh.
Domestic retail giants like Shoppers Stop and Reliance have also set up shop here. Popular food chains like Chilis, KFC and Noodle Bar as well as PVR Cinemas have opened here.
With a parking lot for 5400 cars, this is the largest parking zone in any mall in the country. It is in fact bigger than even the parking zone of New Delhi's T3 Indira Gandhi International Airport.
Chandigarh is not the only catchment area L&T Realty is targeting. It hopes to woo shoppers in neighbouring cities like Ludhiana, Patiala and Simla.
Experts expect Elante to be a game changer as far as rentals in Chandigarh go. There are already talks of tenants wanting to renegotiate their lease at Chandigarh's most popular market in sector 17.
Shifting the focus towards commercial market, it’s been a slow start to 2013. Cushman & Wakefield says new leasing activity in the January to March quarter declined 37 percent Y-o-Y despite of fresh supply of 7.9 million square feet in the top eight cities. Vacancies are still high almost at 20 percent.
Sanjay Dutt, Executive MD-South Asia, Cushman & Wakefield says, City Bank, Standard Chartered Bank, Motilal Oswal and some of the other corporate houses have purchased properties in Mumbai and many other key markets. They continue to do that because they think this is a great time to buy real estate, office real estate in strategic locations”.
The commercial capital, Mumbai remains subdued. In the January to March quarter total absorption stood at a little over 800,000 (eight hundred thousand) square feet. Companies from the pharma sector pre-committed to lease 383 square feet. With new commercial space coming up rentals are expected to remain under pressure.
“Lower Parel and Central Mumbai is the biggest new entrant in the market. It has given a lot of competition to the CBD, Nariman Point, Fort and Churchgate. It has also given BKC a run for their money. Simultaneously, Goregoan is giving competition to Andheri and simultaneously one sees Thane-Belapur Road, Vikhroli, LBS Marg also competing with the office space. All of these office markets are throwing approximately 20 odd vacancy in the city. Therefore, it’s a great opportunity for corporate end users, investors and buyers to take advantage of,” says Dutt.
Pune was the best performing office market in the quarter. It recorded the highest leasing activity at 840,000 square feet. This was driven largely by small sized occupiers in Grade B buildings. Cushman & Wakefield expects rentals to remain range bound.
Dutt says, “It is a great market but you have to be selective whether it is Kharadi, Hinjewadi, Baner, Balewadi. Those micro markets continue to attract all the people”.
Demand for new office space in the national capital region is expected to remain moderate due to cautious expansion plans of occupiers. As a result vacancy rates in Gurgaon and Noida may inch up and put pressure on rentals.
Dutt says that there was a time when corporates were totally focused on Gurgaon. That was only because that seems to give maximum comfort to the corporate sector. However, he would say lately Noida given the infrastructure development and some of the corporates developing that comfort is seeing reasonable amount of activity.
Therefore that is a very good opportunity if one wants to be the first mover in that micro-market. “Daily with the new things unfolding in terms of master plan, the new land banks being unlocked I think would give you a lot more opportunity and that is where I think some of the mature investors can leverage from. NCR continues to and will remain a very attractive market for investors,” Dutt adds.
New leasing activity in the IT capital Bangalore seems to have plummeted. It recorded an 83 percent decline Y-o-Y in Q1 of CY2013. With an estimated 5 million square feet coming up over the next 3 months vacancy rates are expected to rise and overall leasing terms may tilt in favour of occupiers.
Dutt believes that Bangalore is a victim of its own success because infrastructure has been a big challenge. Given the earlier standards of 13 million square feet that could get absorbed in that market, it has come down to 7.5 million square feet of absorption now. So, considerable slide vis-à-vis earlier situation, but still the IT capital and the house for major corporates who are growing and continue to consolidate in that market and take advantage of rental and capital values, which are so low and attractive.
Chennai is expected to remain conservative and a stable office market. The overall vacancy rate has gone up by a marginal 0.3 percent to 15.9 percent.
Definitely OMR is a big area of consideration for office market, but lately even GST Road seems to appeal to lot of corporates. The government is also very keen to develop that. So, there are opportunities within the city of Chennai. Dutt says that Guindy seems to be the most attractive micro-market where rental values and capital values for corporate office space besides IT seems to be the attraction for many corporates to take benefit from.
In Kolkata, new leasing activity dropped by 40 percent compared to last year. Rentals may see a slight correction in Salt Lake and Rajarhat.
“Whether this city will really grow significantly many folds I doubt it. Investors don’t like that market because of the news that one picks up from the government and the general body language of the government to promote corporate sector” Dutt says.Are you happy with your current monthly income? Do you know you can double it without working extra hours or asking for a raise? Rahul Shah, one of the India's leading expert on wealth building, has created a strategy which makes it possible... in just a short few years. You can know his secrets in his FREE video series airing between 12th to 17th December. You can reserve your free seat here.