Execution challenge in real estate industry

After a year of consolidation and successful fund-raising, the Indian real estate sector is looking at 2010 as a year to build on the foundation made. While concerns over liquidity and demand constraints have eased, developers are looking to execute the planned projects to maintain cash flows rather than raise more debt.

In 2009, the demand for property revived as buyers looked to benefit from low mortgage rates and lower prices. Real estate biggie DLF launched the two-phase Capital Greens project with a total developable space of 4 million square feet and it has been completely sold. Its rival Unitech launched over 24.4 million sq ft of residential projects, while HDIL launched 3.3 million sq ft of such projects.

Till now, the residential prices have remained stable or moved up nominally which has helped the demand to remain strong. But now prices in several cities have started appreciating significantly and, with rising inflation, higher lending rates and likelihood of a reversal in the government stimulus policy, demand is unlikely to strengthen further.

Analysts covering the real estate sector told DNA Money that a large quantum of supply coming up in the national capital region (NCR) is likely to prevent prices from moving up in the very near term, but rates would climb up later in 2010.

Developers such as Unitech, Parsvnath and DLF have been able to attract good demand for new projects, which were launched in April last year at a 30-35% discount to the prevailing market rates of that time. In neighbouring Gurgaon, new projects have been launched at a 5-10% discount to the launches in the previous six months.

However, in Mumbai, the country’s second-largest real estate market, prices have moved up 25-30% over the past six months, especially in regions of South and South-Central Mumbai.

Unitech, which has constructed 35 million sq ft of residential projects since it started off operations in 1986, launched 24.4 million sq ft in the first nine months of the current fiscal. This has led to concerns about the company’s ability to execute its plan within the time period.

The company plans to invest Rs 1,880 crore and Rs 3,520 crore, respectively, in construction activities in fiscal 2011 and 2012. It recently tripled its construction work force to over 20,000 workers.
“During the last 9 months, the company has ramped up construction activity at various project sites… it currently has over 60 projects under execution. Workforce employed at project sites has increased significantly and currently stands at nearly 20,000 workers. Structural work is complete in over 80% of the past projects and nearly half of these projects are in handover/finishing stages,” Sanjay Chandra, managing director at Unitech, said.

Even Parsvnath Developers, the sixth-largest real estate firm by sales, has announced plans to launch 10-12 million square feet of projects in the next fiscal.

“We would invest Rs 1,500 crore as cost for these projects, which would be met from internal accruals and customer advances. Our total goal is to launch 42 million sq feet in the next 24 months, but that is it — we are looking to execute these projects rather than launching new ones. 2010 and 2011 will be the execution years for us,” Pradeep Jain, chairman, Parsvnath, said.

This year might also see the ambitious Real Estate Regulation Bill, that aims to facilitate growth and promote a transparent, efficient and competitive real estate market in the country, being tabled in Parliament.

The government is keen on introducing a system of rating for builders and developers through the Bill. The move is expected to help improve transparency of their operations, and help the beleaguered sector regain the confidence of financial institutions and potential customers.

But everything is not rosy in the commercial realty space, which is yet to recover from the slowdown. Though demand has picked up in the third quarter, the absorption levels are still to catch up.
There is an estimated 62.3 million sq ft of leasable commercial space to be completed in calendar year 2010 and 45.6 million sq ft in 2011 across Mumbai, NCR, Bangalore, Pune, Chennai and Hyderabad, according to PropEquity, a real estate consultant.

The improvement in the commercial realty demand is directly related to IT growth in the country and, with Nasscom predicting 2010 to be better for the sector, the commercial demand may slowly follow the growth in the IT sector.

The real estate sector is hoping the Budget will introduce measures to boost demand and bring in more liquidity. “Measures like tax breaks for affordable housing/ integrated townships, increased tax exemption on repayment of housing loans, clarity on taxation of REMFs (real estate mutual funds) as equity oriented mutual funds, rationalisation of stamp duty, and clarity on FDI policy for the sector would give the desired fillip,” said Ajit Krishnan, tax partner-real estate practice at Ernst & Young.