Real Estate Trends

Hyderabad real estate pounced like a tiger in the past 2 years apartment prices shot up by 300% in certain areas, People who bought early and developers made merry!, but then as the old saying goes you should make hay while the sun shines.

300% in 2 years? Does that ring alarm bells… well land prices in Hyderabad actually shot up by around 1000% in the out skirts to a high around 9 months back.

Owing to heavy pressure on liquidity and lack of direction to the market, the Hyderabad real estate market softened a little 9 months back but apartment prices remain steady.

But the situation today is much different compared to what was couple of months back owing to the lack of political direction towards separation of the state and the regular meetings and rallies in support of telangana raised an alarm in the minds of real estate investors. Net effect land prices in the outskirts of Hyderabad started softening.

Prices of undeveloped land near the srisailam highway which had touched peaks of 1Crore per acre are have dropped to 50 Lakhs an acre.

But will separating the state and forming smaller states lead to drop in the real estate prices?

Telangana integrally comprises of Hyderabad and Ranga Reddy Districts which are the economically developed areas, rest tier two cities include Mahboob nagar, Warangal, Khammam. But revenues for telangana would only be from Hyderabad. Now to analyse, lets think Hyderabad which recently has been converted in Greater Hyderabad adding many areas from R.R.District is proposed to be given to telangana, would a business established in Hyderabad by non Telangana people leave their assets and companies and shift to their native area? And why should one shift?? Is it a different country that is being formed?

There is a popular that forming telangana will reduce the development in Hyderabad but I would differ from this and say that smaller states are better for development and already the development in progress in Hyderabad cannot be stopped real estate majors have started development of huge projects in Hyderabad, and still they are on an acquisition spree only in Hyderabad, a smaller state is easier for them to convince the government into giving them more sops!!

In all probabilities my view is Telanagana would be announced before this elections and Hyderabad would be retained as an union territory making it the combined capital of the split states.

If you are investor keep your money ready as prices would drop further and you can strike real good deals!!

And to find the best deals on real estate and unbiased uptodate information login to http://www.fabacres.com

The author of the article Mayur Mullaguri is a seasoned real estate investor who has been investing the Indian real estate market for long and runs a construction company and real estate portals.

These are blissful times for commercial real estate investors. Having fallen into a deep slump with the ending of the Internet boom, the market has come surging back. In 2006 alone, prices rose 26% for apartment complexes, 21% for industrial properties, 14% for retail properties and 6% for office buildings, according to Real Capital Analytics, a Mumbai based real estate research firm.

And the market gives no sign of slackening. “We’re not seeing any slowdown at all,” says Raj Naik, chief economist for India Mall Group, a big commercial real estate services company based in Mumbai. “The numbers are great, not just for sales but for leasing, too.”

But not everyone is so confident. Over the past few months, a number of major institutional and private investors have been selling off large chunks of their portfolios of prime commercial real estate. These investors, which include Naik, the $186 billion pension fund, have been taking advantage of what they see as a frothy market. They are putting the sale proceeds into less expensive real estate or into other assets entirely.

The Ansal Company, a Delhi-based real estate firm, is one investor that has pulled its money out of real estate with the expectation that prices will come back down. Last year, the company sold nearly all of its office buildings for about $1 billion. “We thought the markets weren’t going to get much better and had a chance to get considerably worse,” says CEO Nadia Professor.

To be sure, for every seller there is a buyer, and other investors have rushed forward to buy these properties, often at record prices. But as the consensus builds that the housing market has become seriously overvalued, some are asking whether the same might be true of commercial property. The answer matters not just to the individual and institutional investors who are committing ever-greater sums to real estate, but also to the growing number of companies who are using their valuable property to obtain cheap financing.

Several forces are driving commercial real estate’s revival. Most obviously, the economy is improving and businesses are growing once more. As they expand their operations and hire new employees they need additional space. But real estate pricing has recovered faster than the economy itself. Indeed, while prices have rebounded nicely, rents have been sluggish: The average rent today is $15.42 a foot, down from $28.92 in 2004. A more important reason for real estate’s rise has been a flood of new investment capital. Some of this comes from individuals seeking better returns than they can achieve in the debt or equity markets. These investors have channeled great sums to investment vehicles such as REITs and TICs (tenants-in-common).

The big money has come from institutions. Spooked by their losses after the dotcom bust and drawn to the reliable cash flows offered by property, these investors are now paying closer attention to commercial real estate. One is TIAA-CREF, a national financial services company with over $340 billion in assets under management. “We see this asset class as a great addition to our portfolio,” says Ansal Shah, the company’s managing director and head of real estate. “It’s a nice diversifier, has a current income stream and a potential for appreciation.” The company now owns $14 billion of real estate properties.

The resulting upswing in prices for the best properties has been a boon for the owners. In fact, a growing number of corporations are taking the opportunity to use their real estate as a financing tool. Through sale-leasebacks, companies can sell their property to an investor who will agree to lease it back to the company for a specified period. Many find this as attractive as issuing debt, since property values are high but rents remain affordable. Some of these deals have been gargantuan. Last year, ICICI Bank did a $770 million leaseback for most of its bank branches. McDonald’s (which has historically been an owner of property) also did one, valued at $340 million. Companies are using the money for different purposes, ranging from balance sheet improvement to acquisitions.

How sustainable are today’s high prices? Not very, argue some. “We feel that properties are overvalued,” says Pramod Hirandani, a research analystand promoter, who covers REITs for Hirandani Constructions Company. Pramod notes that the “euphoria” of bidding on certain commercial properties should give investors pause, especially since rising interest rates may soon make real estate a less attractive investment.

Another potential concern is that yields on property ownership are falling. Also known as capitalization rates (”cap rates” for short), yields have dropped over the past three years to near-historic lows. While this is the natural outcome of higher prices — cap rates are the ratio of a property’s yearly income to purchase price — it can also indicate that operating income hasn’t kept pace with the higher prices. This can make real estate less attractive to investors primarily interested in the cash stream.

But there are good reasons to believe that the market is actually quite strong. One is that the fundamentals are improving. Metropolitan office vacancies, for example, have fallen from 16.8% during the first quarter of 2004 to 15.4% today.

And improving occupancy levels mean higher income. “People often forget that income goes up faster than occupancy,” says Sanjeev Kumar Chad, a professor of real estate in renowned Institute. “That’s because as occupancy picks up you can boost your rents a little and you pick up more ancillary income from things such as parking and health clubs. I think this year will be good in terms of income for commercial properties, and next year will be great.”

Furthermore, the market does not suffer from excess construction. “There was huge overbuilding in the late 1980s which really hurt the market when we had a recession,” says Joseph Mathews, also a professor of real estate. “But for the most part real estate did not get overbuilt before the last downturn.” Nor do developers’ plans seem excessive. One reason is that banks have become more conservative in their lending, requiring developers to show that their buildings will be fully leased. Another is that the soaring price for concrete and steel (a product of China’s massive construction boom) has made new construction costly. The result, of course, is limited supply at a time of growing demand, which suggests that prices have further to rise.

Ultimately, say many experts, investors should be asking how commercial real estate compares with other investments. And next to stocks and bonds, it remains attractive. “If you do CAPM or other risk pricing models, you find that real estate remains 15 to 35% under priced based on its cash stream and its risk profile relative to other alternatives,” says professor. In other words, not only does real estate give investors a better current income than debt or equity, but it’s safer.

The reason is simple: commercial real estate is a lease claim on the same companies that make up the S&P 500. If a company runs out of cash, it will always pay its rent before it pays a dividend and will usually pay rent before it makes debt payments. “Real estate has a risk profile closer to bonds, but it’s trading as if it’s equity,” says professor.

Largely because of this comparatively attractive income stream, the institutional investors are unlikely to abandon the market. This may be true even if cap rates fall farther. Because institutional investors often pay with cash, they can accept lower cap rates: Without interest payments, their effective yields are higher that those of more leveraged buyers. Professor says that TIAA-CREF has no plans to reduce its exposure to real estate. “We don’t play the short game. For us, the question is, ‘What makes sense for our participants?’ And the answer is to stay well diversified and active in all markets.”

What about interest rates? While higher rates can dampen the real estate market by raising borrowing costs, rates remain at historic lows. The Federal Reserve has signaled its intention to increase rates gradually, about a quarter point per quarter, but this may not be enough to ward off buyers. “If we saw a 200 basis point uplift in the 10-year treasury over a year, that would have some effect on real estate pricing,” comments professor. “But remember that an abrupt jump in interest rates and the 10-year would affect other asset classes, too.”

None of this is to say that some real estate isn’t perilously overpriced. In particular, speculation appears to be driving the prices of many apartment buildings and condominiums to unsustainable levels. “There some people who are being wildly aggressive when it comes to pricing cash streams for apartment buildings,” says professor. “They are looking at a building with 45% vacancy and saying ‘I’m going to buy it as if it’s 90% occupied.’” Similarly, condominiums — which offer virtually no income stream since they are owned, not leased — are looking shaky. Between 50% and 60% are now being presold to investors who don’t plan to live in them. Once buyers stop showing up to the presales, the prices will tumble.

A top realtor also sees weakness in certain office markets, especially in the suburbs of Mumbai and in Delhi. In those markets leasing costs are rising, net operating income is falling (due to leases that tenants signed five years ago but are now up for renewal, at lower rents), and investors are taking on what he considers excessive leverage. That should produce lower prices for some properties.

And there’s always the risk of some broader meltdown that would bring down the real estate market along with stocks and bonds. Professor argues that in this case, an investor would be wise to be in the asset that’s the least overvalued to begin with: commercial real estate.

Barring a calamity, investors should expect solid, if not spectacular, returns, says professor. He predicts that while the real estate market will continue to do well, the days of double-digit appreciation are over. “Relative to historic pricing, real estate is pretty expensive, and that’s something that should make everyone think hard,” he says. “Does it mean that prices are going to fall? No it doesn’t. But it almost certainly means that the returns will be lower going forward. The million dollar question is this: Will you be disappointed relative to other things you could have done with your money?”

G. M. RAO - VITAL STATISTICSG.                                 

Born July 14, 1950, in Rajam, Andhra Pradesh, India

Married with 3 children

Education: Graduated in 1974 with degree in mechanical engineering from Andhra University College of Engineering, Vishakhapatnam, Andhra Pradesh. Received honorary doctorate in philosophy in 2005 from Jawaharlal Nehru Technological University, Hyderabad, India

Career highlights

·         GMR Founder and chairman (1978–present)

·         ING Vysya Bank (formerly Vysya Bank)

·         Chairman emeritus (2006–present)

·         Director and chairman (1994–2006)

Fast facts: Serves as chairman of board of Hyderabad International Airport. Established GMR Varalakshmi Foundation in 1991, which focuses on education, health and hygiene, community development, and empowerment of rural youth. In 1997 the foundation launched GMR Institute of Technology (GMRIT), an engineering college in Rajam, Andhra Pradesh.

AN INTERVIEW WITH A LEADING INFRASTRUCTURE BUILDER

Active in airports, roads, and power, India’s GMR, led by founder and chairman G. M. Rao, is right in the middle of the country’s efforts to build up a weak infrastructure. While Rao expects the economy to remain vibrant, he worries that it can’t be developed fast enough to support current economic-growth rates. The chairman, whose roots are in the countryside, is also concerned that not enough has been done to strengthen the rural economy, which above all needs education, roads, and jobs to give villagers a chance to participate in the newfound prosperity.

GMR began almost 30 years ago as a single jute mill in the village of Rajam, in the eastern state of Andhra Pradesh. “Our journey to today’s GMR happened just accidentally,” Rao says. “Whatever opportunity came up, we have taken that opportunity.” Along the way, GMR has been active in banking, insurance, and breweries but left these industries to consolidate around infrastructure.

Along with minority partner Fraport, which manages the Frankfurt airport, in Germany, GMR is leading the effort to modernize Delhi’s international airport. It is also building a new international airport in Hyderabad and expanding the Sabiha Gökçen International Airport, in Istanbul. In addition, it owns three power plants, with projects under way for several others, and has completed 270 miles of highways.

Meeting in the GMR headquarters, in Bangalore, GMR’s chief G M Rao and HNN’s chief M H Ahssan, discussed India’s economic prospects, GMR’s experience with public-private partnerships, and Rao’s passion for best-practice management of family businesses.

Can India sustain its recent economic-growth rates?

In India the whole system is set up for 5 to 6 percent annual GDP growth. The sudden growth of more than 9 percent has surprised everyone, and sustainability is a very big question now. I have doubts that we can sustain this type of growth if two areas, the rural economy and infrastructure, aren’t taken up more seriously.

Ours is an agrarian country, and a lot of things have to happen in the rural areas. In villages there is not much connectivity, proper infrastructure, or educational facilities. Not even a scooter or a motorcycle can go on some of the roads; forget the tractor or the jeep. There is not an adequate supply of qualified teachers, and the infrastructure is not there. Many schools teach in local languages, and that’s not enough to move upward. Rural people need English schools and vocational schools, and we have to start moving aggressively with public-private partnerships. People in the rural areas are therefore moving to the cities, which are already very crowded. Education is very, very poor. The government must do better at addressing the rural economy.

Growth will also be difficult to maintain without large improvements in infrastructure. The government is putting a lot of focus on that, but there are still a lot of challenges. For instance, getting skilled labor is a very big problem now for infrastructure projects. Because of this, most of the projects are being delayed. We should look at something like Singapore’s Building and Construction Authority Academy, which was set up by the government to ensure that there’s a continuous supply of skilled labor for all the projects. At GMR, we’re also thinking about setting up our own training center, with courses of 90 days or six months.

Has the government been effective in addressing these problems?

The government has initiated several positive changes, and private players are also more and more interested in participating in infrastructure development. However, we need increased momentum to maintain these high growth rates. For example, the demand for housing, cold storage, and power outstrips supply—even considering planned capacity additions.

There are also problems with disbursing funds and implementing these improvement projects. The government is spending a lot of money to improve roads, but, ultimately, a lot of that is not reaching the people, and this has been happening for the past 60 years. Unless you change this, that allocated money is not going to do much good.

Implementation is also a problem. The government is not organized for this kind of growth or for speedy implementation of projects. It has to strengthen the whole system. For example, the National Highways Authority of India has one system for the whole country, but it should be regionalized into four sectors: south, north, east, and west. They could each call for their own tenders and monitor their own projects, while reporting to delhi. Under the current system, we have so far only completed about 10 percent of the planned national road improvements—for instance, widening roadways from two lanes to four.

What can the government do to improve the rural economy?

The government should encourage manufacturers to set up their factories in the villages. I read recently that a big multinational mobile-phone maker designs its phones here in India but manufactures them in China. This company makes millions of pieces a year, and about 2,000 people have jobs there. Why can’t we have the manufacturing as well? One reason is the Labour Act.1 We cannot expand the manufacturing industry without the right to hire and fire. We have the capability to manufacture, but we have to change our labor policy.

We also need to expand micro financing further into rural areas. So many people in villages fall into the debt trap. Their family land is subdivided among brothers into plots too small to cultivate effectively. Then they go to the moneylenders to get by. When they can’t make payments, the moneylenders take away their land. Families that were once respected landowners are now laborers, and they migrate to the cities.

   What is GMR’s role in building India?

The government is targeting investment of more than $475 billion in infrastructure over the next five years, and I am sure that GMR will contribute significantly to this nation-building program. Today we are present in both agribusiness and infrastructure. We want to play a major role in all three infrastructure sectors that we’re in today—energy, highways, and airports.

On the energy side, we generate 880 megawatts of power using liquid fuel. But we also have coal and hydro projects under way. We are also looking to enter transmission and distribution, and whenever nuclear opens up, we want to move into it. On roads, today we have built 270 miles of roads, and we want to go more aggressively into this sector. But as I said, there is a problem getting skilled labor.

Our final core area is airports—not just the buildings, but also the facilities. At Hyderabad we want to bring in international best practices for cargo, ground handling, and even the fuel farm there. And today all Indian aircraft are going to other places—Singapore, Dubai—for maintenance and major repairs, so we’re setting up a maintenance hub in Hyderabad as well. In Delhi we want the airport to be like a city, an “aerotropolis.” Everything will be available around the airport: convention centers, residential complexes, a hospital, and entertainment facilities.

Is it realistic for the government to expect the private sector to participate heavily in building the country’s infrastructure?

I don’t think the government is asking too much. Today we are involved in two public-private partnerships with the airports in Delhi and Hyderabad, and our experience has been very positive. The public side has the capabilities—the technical capabilities—but the speed is not there. We are bringing the speed, as well as the best technology, the best financial engineering, and the best talent in the world.

Take the Delhi International Airport as an example. Building that type of airport—five million square feet—with high standards would take a minimum of six or seven years anywhere in the world. But we’re helping to expedite the project, and we’ll build it within three-and-a-half years by implementing global best practice. The government is giving us its full support. It’s helping to get us all the clearances that are needed, like utilities, power, evacuating the land.

What has made the partnership so successful?

You must be transparent and communicate with the government properly about any issue that comes up. I’m not facing any major problems now. One has to regularly communicate. Every month we have meetings with people from the Ministry of Civil Aviation, with the state government, with the lieutenant governor, or with cabinet secretaries, and we discuss what is happening on the project. But if what you say and what you’re doing are different, then the authorities in the government will become skeptical. If you’re honest and transparent, then you’ll get the clearances you need.

But the private side also has to do a little more than just communicate clearly. One has to be perseverant to get things done. Once the officers or bureaucrats are back in their offices, their time is not their own. They get preoccupied with meetings with internal and external constituencies. You’ll no longer have their attention. It’s up to you to keep things moving. I might need A, B, or C, but once an official is back in the office and is distracted by meetings and appointments, it could take 5, 10, 15 days—a month—to get what you need. So somebody has to follow up. You cannot have a passive relationship; you have to be very actively engaged.

In July GMR and two partners won the bid to build a new terminal at Sabiha Gökçen International Airport, in Istanbul. What made you expand abroad?

With India’s government and the Left opposing further privatization of airports, it will take a lot of time before new opportunities come up in India. We already had a good airport business-development team and we had good skills. We had very little time to prepare for the opportunity in Turkey, but we geared up and won the bid.

We are open to other opportunities abroad in any of our sectors. We’re not going to go after all the tenders, though. We would prefer to be selective, ensuring that we deliver what we promise.

How have you been so successful in these highly competitive tenders?

With the Delhi airport, it was really the opportunity of a lifetime. We worked for two years on the Delhi airport proposal, focusing on the ultimate goal of winning the bid. We concentrated on improving the financials, evaluating various options to combat the challenges. We visited different airports, set up a separate business-development team in Delhi, and examined all the parameters. We followed the same process for Istanbul.

What organizational changes have you made as GMR grew?

I started business all alone. Then in the course of time, some friends joined me. It has been a long journey since those days, and we’ve taken advantage of opportunities as they came along; for example, when the government opened the power sector to private investments, we made the strategic decision to enter energy. Starting from a single jute mill in 1978, we now have more than 2,000 employees, a radically different focus, and annual revenues of almost 2,000 crores.

Two recent changes are worth noting. First, we’ve launched a detailed performance-management system throughout the group and have introduced variable pay linked to performance as part of the process. Until now we’ve just had fixed compensation at all levels. Regular performance appraisals with clear-cut goals and talent-pipeline management have been introduced in a new human-resources-management system. This was very difficult to initiate. People were treating the appraisals as rituals that they had to go through. Then we included performance targets, and people started taking them seriously.

Next, about two years ago we formalized our strategic-planning process. And after identifying high-priority areas, we implemented a balanced-scorecard system to keep track of our progress. These scorecards are deployed down to the manager level and are reviewed at least twice a year.

Can you tell us what you’ve done to ensure GMR’s health as a family-owned business?

When I was a director at Vysya Bank, one of my tasks was to talk to people with nonperforming assets who were about to default. I saw a lot of family businesses in trouble. I remember one well-respected family with two brothers. The younger would never sit down before the older one did, as a mark of true respect. Three years later the same brothers were fighting in the streets with knives. Once family members start fighting, their energy is diverted. They are no longer focused on the business, but on the fight. That was a big lesson for me.

Later, I went to a conference on family businesses and heard M. V. Subbaiah, of the Murugappa Group speak. That was a real eye-opener for me. I started attending international family business summits, and I brought in top experts to look at my business. Then I called a meeting of my family and, very reluctantly, all eight members came. We had a lot of differences, and everyone was allowed to talk freely. We all started talking very animatedly, emotionally—arguing and what not. It took time to get everyone to reach consensus. I put it all on video so that the next generation gets to see how we executed it.

In the end we agreed to a family constitution model that outlines succession, conflict resolution, our values, and our mission. It says what qualifications are needed to enter the business, as well as our media and political policy. It even talks about what happens in case of a divorce. All these things needed to be addressed in detail to protect and delink the business from the family.

Today 65 percent of the top companies on the National Stock Exchange of India are family-owned businesses. We need to think about their governance. These companies are becoming so big that if the family gets estranged, it could impact the national business environment.

What would you like to see GMR become?

We want to be a good player in infrastructure and a great institution. All of my family members share this idea. We want to be a value-driven institution. That is the type of brand that we want to create. I’ll know we’ve reached this point when something happens in the business and no one bothers me. Other people will take care of it, so I can go on a long vacation and nothing happens.

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