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| March, 28 2005 | Monday | 17 Safar 1426 |
Corporate players in surging real estate market: Letter from Mumbai
FOR years, the Indian real estate industry was dominated by the unorganized sector, and there was a total lack of transparency in terms of funding, marketing and legal issues. Developers were unable to access funds from banks and other institutions, and ‘black’ money had a major role to play in most real estate transactions. The industry was seen as a milch cow by the land mafia, the underworld, even many politicians, bureaucrats and policemen. Consequently, ordinary buyers had to bear the burden of higher costs, opaque transactions, and shoddy products. Now, however, things have begun to change.
The last few years have seen the entry of several corporate players into the sector. Virtually all the major industrial houses – including the Tatas, the Mahindras, the Godrejs – have entered the business. Some of the homegrown developers – such as the Rahejas, the Hiranandanis, and of course, Shapoorji Pallonjis – have emerged as leading builders, able to face competition from the newcomers.
Foreign marketing and technical consultants have also set up shop in Mumbai and other major cities, and the government has recently cleared a proposal for foreign direct investment (FDI) into the sector.
The response from international firms has been lukewarm, though some from Singapore, Malaysia and the UK have shown interest in developing large townships. However, the lack of clear land titles, the appalling state of urban infrastructure, and rampant corruption in many departments, with officials demanding bribes for sanctioning water and power supplies, or for providing approach roads and sewerage facilities, still frustrate many of the international developers.
Banks and domestic financial institutions have all these years kept away from funding developers – though there’s a brisk mortgages market, with dozens of institutions offering housing loans – because of the inherent risks involved. The housing finance industry has been growing by a massive 35 to 40 per cent annually over the past five years, but most of these firms have refrained from lending to developers.
But recent days have seen some major changes. Last week, for instance, the Housing Development Finance Corporation Ltd (HDFC), the country’s leading housing finance company, announced the setting up of a realty venture capital fund, in a tie-up with State Bank of India, the country’s largest commercial bank. The new HDFC Property Fund will raise a whopping Rs10 billion to fund projects across the spectrum.
Says Keki Mistry, managing director, HDFC: “The venture fund is an extension of our core business and a value add to its bouquet of services in the real estate sector. This is a first step and going forward we hope this will encourage professionalism and provide depth to this industry.”
The venture fund is targeted at institutions, corporates and high net worth individuals, with a minimum investment of Rs50 million. Even foreign investors, thanks to the recent changes in FDI rules, can invest in the fund, which is a seven-year close-ended fund.
HDFC’s rival in the financial services sector, the ICICI group, already has a successful exposure to the real estate development sector. The group has been funding a lot of property acquisitions in Mumbai and other cities. Considering the hefty margins that are available in the business, ICICI is aiming to expand its portfolio.
The Indian real estate sector is growing rapidly, with developers putting up hundreds of shopping malls, IT parks, residential townships, and multiplex complexes in major cities including Mumbai, Delhi, Bangalore, Chennai, Kolkata and even tier-2 cities like Pune and Hyderabad.
The share of the real estate sector in the country’s GDP (gross domestic product) has gone up from 5.25 per cent in 2002 to 7.0 per cent a year later, and is growing. And for financiers like HDFC and ICICI, returns from the real estate sector are much higher than other alternative investments.
Notes Renu Sud Karnad, non-executive chairperson of HDFC Venture Capital Ltd: “Worldwide real estate represents a substantial share of fund allocations by institutional investors, but in India this has been hampered by the lack of credible mechanisms through which institutions could invest in the sector.”
But now with rapid changes occurring in the real estate sector, and also with the federal and state governments realising the tremendous potential that it has in creating new jobs and adding to their revenues, venture capital funds and other institutions can be expected to enhance their exposure to the industry.
IN elections to the Karnataka assembly held last year, he almost drew a blank, but Vijay Mallya, the Bangalore-based, jet-setting businessman, is on a roll so far as his business interests are concerned.
The ambitious liquor baron finally won a prolonged war with a key rival, and last week stitched up a Rs13 billion deal in Dubai, acquiring Shaw Wallace from the widow of Manu Chhabria, the late founder of Jumbo Electronics. Mallya and Chhabria were engaged in a prolonged, 20-year battle over the fate of Shaw Wallace, which Chhabria had himself acquired in the 1980s.
After Chhabria’s death, Vidya, his widow, took over the Dubai-based Jumbo empire. However, there were differences between her and some of her daughters, over the future of Shaw Wallace. The suave Mallya finally convinced Vidya to sell her 54 per cent controlling stake in the company. The industrialist-cum-MP – Mallya is a member of the upper house of the Indian Parliament – is now setting up a new company, United Spirits by merging all his liquor companies (including Shaw Wallace).
And the new entity, says the baron, will be the world’s second largest liquor company, accounting for 60 million cases. The largest, UK-based Diageo, has a 90-million case capacity. And in India, Mallya will be controlling 60 per cent of the organised liquor market.
But the ‘king of good times’ is on to bigger things. His Kingfisher Airlines will be taking off in the domestic skies soon, offering competition to existing giants. Mallya, who is often compared to Richard Branson of Virgin Airlines fame, retorts that Sir Richard should be described as the British Mallya, and not the other way round.
After returning to Mumbai from Dubai, Mallya relaxed casually in his billion-rupee luxury yacht, the Indian Princess, entertaining friends and journalists. Mallya, unlike most other politicians and businessmen in India, loves to lead a glamorous life, and has a passion for horseracing, fast cars, vintage cars, yachts, and aircraft (all of which he owns in large numbers). He also has a chain of publications in India and abroad.
WITH the summer setting in, manufacturers of air-conditioners are hoping for brisk business, especially in the major cities and towns. The air-conditioner business has been faring extremely well these past few years, as growing numbers of middle-class Indians are opting for these cooling gadgets.
In fact, so confident are air-conditioner manufacturers about the business prospects that most have decided to stick to their prevailing rates, instead of passing on the benefits of a lower excise and customs duty that were unveiled by Finance Minister P. Chidambaram in his budget last month.
Many of the manufacturers claim that the cost of steel, copper and other metals have gone up sharply, squeezing their bottom lines. They cannot afford to pass off other concessions to consumers at this stage. Prices have fallen by 15 to 20 per cent over the past two years, hurting the profit margins for many of the producers.
India’s air-conditioner market is dominated by Korean giants including LG Electronics and Samsung, and other international brands, including Whirlpool, Electrolux, Panasonic, Carrier, and Hitachi. Domestic giants include Voltas, Onida and Videocon. The unorganized sector, which used to account for a bulk of air-conditioners sold in the country, is losing its market share, thanks to the excellent distribution network and after-sales-services provided by the major brands.
Both the international and domestic giants are also spending millions on television and print advertising, which is plainly having its impact on the market. According to Suresh Khanna, secretary-general, Consumer Electronics and TV Manufacturers Association (CETMA), about 1.2 million air-conditioners were sold in India last year. The market is growing by 25 per cent annually, and this is expected to continue over the next five years, he says.
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