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Demand for office space, FIIs fuel market rally

Demand for office space, FIIs fuel market rally
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First Published: Fri, Jul 27 2007. 12 30 AM IST
Updated: Fri, Jul 27 2007. 12 30 AM IST
Mumbai: On Wednesday, the Bombay Stock Exchange’s realty index closed at 8131.93 points. In two weeks of its existence, the index has gained 754 points. The index, the stock market’s first dedicated to real estate growth, may seem to be behaving irrationally, given that interest rates on home loans have peaked and prices of residential properties that account for a large part of volumes in the sector have either stagnated or dipped, but analysts say there is no contradiction.
Demand for commercial properties continues to grow and one expert says investors are buying into the future of the Indian real estate story, not its present.
“On the face of it, there is an apparent contradiction between what the stock market is saying and the decline in real estate prices. The stock market has bet on the strong demand growth that has been projected, not on the current state of the industry,” says Akshay Kumar, managing director, Park Lane Property Advisors.
That’s evident in the stock market where stock prices of real estate firms have soared, especially since the early July listing of DLF Ltd, a real estate developer that made India’s largest ever domestic initial public offering (IPO) of shares. DLF raised Rs9,000 crore from its IPO.
Other real estate companies have taken note and acccording to Prime Database, a Delhi-based primary market research firm, these companies could raise between Rs15,000 crore and Rs25,000 crore—that’s assuming the other big real estate IPO of the year after DLF’s, that of Emaar-MGF Ltd, hits the market.
In the wake of DLF’s issue, several smaller real estate developers such as Omaxe Ltd and Housing Development and Infrastructure Ltd (HDIL) have sold shares to the public successfully and others such as Purvankara Ltd are in the process of making an IPO.
Much of the current interest in IPOs of real estate firms is coming from foreign institutional investors (FIIs), according to an analyst at a Mumbai-based consulting firm. FIIs have invested $5.8 billion in equities and $161 million in debt this month alone (up to 24 July), compared with $8 billion in equities and $881 million in debt in all of 2006.
Some of this investment has gone into IPOs and follow on public offers of companies such as DLF and ICICI Bank Ltd. “For investors who want a slice of the Indian real estate story, the public issues are a way of buying into the story,” adds the analyst who did not wish to be identified.
The market is a believer, says Ambar Maheshwari, director, investment at DTZ, a Delhi-based a real estate advisory firm. “The stock market has bought into the industry’s potential for strong growth and emerging opportunities in the sector,” he adds. That could explain why some share sales have been oversubscribed up to 15 times, mostly by domestic and foreign institutional buyers.
Not all segments of the realty market are growing. People are deferring purchase of residential property because interest rates on home loans have increased by around 200 basis points since January.
“The rise in interest rates has affected the residential sector the most as buyers put off buying, caught off guard by the rising interest rates,” says Kumar. “The dichotomy in terms of the confidence expressed by the stock market in the performance of real estate firms and the ground realities will remain until a booster in the form of an interest rate cut comes along,” he adds. Most developers, he says, are reporting fewer transactions compared with last year.
A recent report from Knight Frank India Ltd, a real estate advisory, says: “Residential values across the country will remain under pressure and… some markets may even witness a correction to the tune of 15-20% over the medium term.” The report adds that the National Capital Region witnessed a 15% correction in prices over the last year, attributable to lower buyer interest. In Mumbai, prices are expected to correct by 15-20% once the Urban Land Ceiling Act (Ulca) is repealed, releasing more land for development.
Pune and Hyderabad have seen a decline in home loan growth. Pune has seen home loan growth drop from 35% last year to 25% to date. Hyderabad has also witnessed some corrections in some areas, the Knight Frank report says without naming the areas.
The slowdown in the residential property market has been offset by growing demand for offices, especially from software services and back office firms. A recent report by investment bank JPMorgan says that growth in the software and back-office industry would result in demand for an additional 308 million sq. ft between 2007 and 2015 in the country’s IT parks.
“If this demand can be satisfied, the increase in available grade A office space would represent a compound annual growth rate to 2015 of 18.4% from the 2006 base,” the report adds.
Another report, from Citigroup, pegs demand growth in this segment over the same period at 430 million sq. ft. Occupancy levels in commercial buildings have been rising in spite of a steady supply of properties. The scale of individual buildings is rising and businesses are pre-booking space with long-term plans as reflected in the rise in demand for build-to-order spaces, the Citigroup report says.
Mumbai, the biggest real estate market in the country, remains a hot destination for investors, especially as the impending repeal of ULCA is expected to rationalize land prices in the city.
The extended Mumbai metropolitan region is emerging as a growth centre for residential townships targeting people in lower-income groups and commercial properties. While the city’s population has grown at 3%, that in city’s satellite towns such as Navi Mumbai, Vasai and Virar has grown at 7% plus because of affordable housing.
Navi Mumbai is being developed as a peripheral business district to decongest Mumbai—Reliance Industries Ltd, Aptech, Datamatics, Mastek and Tata Consultancy Services Ltd all have plans for this area. As rents rise in Malad—a western suburb with a concentration of back-office firms— these far-flung areas are being considered a possible option for BPOs.
The emergence of the Bandra Kurla Complex as an alternative business district is adding gloss to the portfolios of realty firms with developments there.
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First Published: Fri, Jul 27 2007. 12 30 AM IST
More Topics: FII | Money Matters | Real Estate |