DTC Bill: SEZs Look OK -

Changes to the Direct Tax Code (DTC) Bill introduced in the parliament last week should retain the attractiveness of (new) Special Economic Zones (SEZs) for both developers and tenants at least for the next 3-4 years.

Profit-linked tax exemption (100% for a block of 10 years in the first 15 years) for developers for SEZs notified before April 1, 2012.

Profit-linked tax exemption (100% for the first five years, 50% for the next five years, and 50% of invested profits for a further five) for tenants (such as IT companies) commencing operations before April 1, 2014 (April 1, 2011 in earlier draft).

One disappointment was not in the original draft – imposition of Minimum Alternate Tax (MAT) at 20% for both tenants and developers. MAT credit can be offset over ensuing 15-year period.

The new proposals in the DTC Bill should address industry concern about the invested capital, such as land acquisition, in (small format – 10-50 hectare) SEZ projects and should ensure better occupancy. Large format (a few thousand acres) SEZs (e.g., Worldcity Jaipur) could face challenges beyond the medium term to attract tenants, if these rules remain unchanged.

Prime Residential Prices in Delhi + Mumbai + Bangalore

Here is the pricing of Prime Residential Real Estate in the following Cities. All prices in INR / SFT

Mumabi
South Central (Altamount Rd., Malabar Hill, Napeansea etc) 44,000
Central (Worli, Prabhadevi, Lower Parel / Parel) 22750
North (Bandra (W), Khar (W), Santacruz (W), Juhu) 20000
Far North (Andheri (W), Malad, Goregaon) 10500
North East (Powai) 7500

Delhi NCR
South East (New Friends Colony, Kalindi Colony, Ishwar Nagar) 16500
South Central (Safdarjung Enclave, Sarvapriya Vihar, Panchsheel) 20000
Gurgaon 5900
Noida 4450

Bangalore
Central (Brunton Road, Artillery Road, Ali Askar Road, Cunningham Road) 6000
South East (Koramangala, Jakkasandra) 3250
Off Central (Vasanth Nagar, Richmond Town, Indiranagar) 4750
North West (Malleshwaram, Rajajinagar) 4600
East (Marathalli, Whitefield, Airport Road) 3000

Residential Absorption Rate

Carefully study the Residential Apartments absorption rate and available inventory to see where the prices will go next. Government policy likely to be fairly stable.

Gurgaon recorded average monthly absorption of 2,242 units/months in 2Q10. This is 13% higher than 1Q average and largely stable at CY09 average. Months of unsold inventory (~6 months) continued to decline in the market and is currently at its two year low thereby keeping pricing relatively strong.

Absorption pick up in Noida/Greater Noida has been astonishing as run rate over Apr/May tripled from 1Q levels. New launches by Jaypee Infratech and local developers have contributed a lot to this. Key launches Supertech's Ecovillage in Greater Noida and Jaypee’s Kensington project in Noida.

Average monthly sale run rate (4,816 units/month) in Mumbai (including Navi Mumbai and Thane) in 2Q stabilized (up 2% Q/Q) after witnessing a 13% volume decline in 4Q10. Months of unsold inventory continued to decline in the market and is currently at its two year low of 9 months.

Average monthly sales run rate (1,725 units) over 2QCY10 in Bangalore were largely flat after witnessing 13% decline in 1Q. Decline in 1Q was primarily on account of seasonal weakness. Months of unsold inventory has been coming down over the last one year; however it still remains high at 15 months thereby keeping the prices under check.

Chennai is witnessing steady pick up in absorption with average sales run rate (1,307 units) over Apr/May increasing by 23% from 1Q10 levels. Months of unsold inventory has been declining over the last one year.

Office Space Recovery Gaining Traction

Leasing activity picked up during the quarter with 7.3msf of office space being absorbed in 2Q10 vs. 6.3msf in 1Q10. 2010 is expected to witness 52msf of office supply as against estimates absorption of 29msf. This will further push the vacancy levels higher to over 20% from 18% currently.

Majority of the supply expected to be added in 2010/2011 is at advanced stages of construction.

Delhi NCR2Q10 witnessed increased level of transaction activity especially in Gurgaon & Noida given availability of quality supply at affordable rentals and flexible lease terms. Overall 2Q10 absorption stood at 2.2msf (up 126% Q/Q) with SEZ accounting for 50% of the total.

Supply for 2Q10 stood at 1.5msf (vs.0.8msf in 4Q) on account of completion of significant projects during the quarter. The entire supply was concentrated in the suburban locations. 3.3msf of supply is expected to be added in 3Q.

Rentals remained largely stable across most markets. C&W expects rentals across majority of the markets to strengthen in the medium term.

Mumabi - Mumbai witnessed absorption of 1.7msf in 2Q10 with fresh leasing picking up meaningfully during the quarter. SEZs in Thane Belapur accounted for >20% of total absorption for the quarter.

Overall vacancy rate remained stable at 14-15% in 2Q 2010 as supply continues to outstrip demand especially in the Andheri, Malad and Thane Belapur micro markets. CBD vacancy levels however increased on account of tenant movement to new buildings in suburban locations (Lower Parel/BKC).

Rentals remained largely stable across most micro markets and the trend is likely to continue given sizeable supply addition expected in suburban Mumbai (7msf primarily coming in Andheri, Lower Parel).

Bangalore2Q10 witnessed absorption of 2.4msf primarily coming from earlier pre - commitments in buildings which were delivered during the quarter. Avg. transaction sizes also increased (>70,000sq ft) as compared to last quarter.

Bangalore witnessed 6.2msf of completion in 2Q10 with Whitefield accounting for ~77% of the total supply. 3Q is expected to witness 4.2msf of office supply.

Rentals have largely remained stable over the last quarter with the exception of CBD/off CBD location given limited supply addition in the micro market. C&W expects the rentals to start strengthening in select micro markets over the next 2-3 quarters.

Chennai + Hyderabad + Pune - Property Market

Supply has been smartly constrained in Chennai over the past two quarters while demand in 2Q CY10 was the highest since 3Q CY08. As a result, rents have stabilised although since upcoming supply is large, upsides to rents may still be further away. Due to the low supply, vacancies have shown a small correction and now stand at 22%, with most vacancies on the OMR and GST Road locations. Chennai could benefit from some increased IT demand in CY10 if the political situation in Andhra Pradesh (Hyderabad) does not improve.

Supply in Hyderabad continues to exceed demand leading to very high vacancies of 29%. Rents have not yet stabilised but have fallen 28% from the peak. We expect supply to continue and believe rentals could remain under pressure for two more quarters. Strong demand is unlikely until the political uncertainty in the state eases.

Demand has picked up in Pune over the past two quarters while supply has been constrained. Demand is now the highest in the past eight quarters while supply is the
lowest. Demand is picking up in the eastern part of the city rather than the more traditional western suburbs due to better social infrastructure. Following better demand and low supply, rents have started moving up while vacancies have declined marginally. However, supply pressure is expected to restart in 2H CY10.

Bangalore + Mumbai - Property Trends

Bangalore registered a large spike in supply in 2Q CY10, with Whitefield accounting for 77%. This is on very low supply in the previous four quarters. Vacancy levels remained stable, although in the 16% range, and demand remained moderately strong. Larger transactions have also started as confidence amongst IT/ITeS companies returns. Rents have also started showing signs of a pick-up and we expect them to strengthen, especially in the Outer Ring Road area and for IT SEZs.

In the past two quarters, demand has reached the highest levels since 1Q CY08. However, vacancies remain high, especially in the north-western and north-eastern suburbs. Vacancy levels in the central business district (CBD) in South Mumbai are increasing as tenants move to cheaper locations and larger and more modern buildings. As a result, CBD rents fell 14% y-y, while rents in the rest of the city were flat y-y. Rents have started picking up in the secondary business district (SBD) locations of Bandra-Kurla Complex and Lower Parel although rents in Lower Parel should remain stable now, with supply picking up.

FDI Regulations to be Relaxed for Greedy Developers

As per press reports, there is expectation that current regulations on FDI into the sector could be relaxed on two fronts (1) clarification that the three-year lock-in is applicable to only minimum capitalization (US$10 million for wholly owned subsidiaries and US$ 5 million for joint ventures with Indian partners) versus the current interpretation that the entire capital invested is locked in for that period and (2) reduction in minimum project area (for FDI investment) which, at present, is 10 hectares in the case of serviced housing plots or 50,000 meters in case of construction – development projects.

This means the Lazy Fat Developers who are ready to suck you will get more capital and won't sell the stock until you meet their unrealistic expectation. It is a pathetic situation that an organization like RBI is a puppet in the hands of the central government which will just keep quiet paving way for the Rich Developers to get Richer at the cost of Hard Working Indians Like You.

Chennai - Hyderabad - Apartment Prices / Sales Trends

The volume trend in Chennai after falling in Feb and Mar 2010 has recovered in Apr and May 2010 to resume its flattish trend. Average monthly volumes between Apr 2009 and May 2010 are at 1.5mn sqft, lower than the 1.8mn sqft between Jul 2007 and Jun 2008. Inventory with developers continues to decline with unsold stock at 18.7mn sqft. In terms of months of sales, it is at 11 months, which indicates levels usually seen in late 2007 and early 2008.

Hyderabad is the worst performing city among the top 6 urban agglomerations in India. Sales have consistently declined since Aug 2009 and they are now close to the 2008 crash lows. This follows the Telengana statehood issue and the consequent lack of clarity on Hyderabad’s status as the capital city. Although inventory with developers is declining, it is also very high at 50mn sqft and 30 months of sales. New launches have also reduced significantly since Aug 2009. We expect residential volumes in Hyderabad to remain muted in the medium term if the Telengana issue is not resolved.