Volume I Issue V

Chanakya
Strategic Planning Department

Marg Constructions Ltd

Changing Skyline
Commercial Real Estate Likely to Face Oversupply
On a city level demand supply analysis in
conjunction with macroeconomic
fundamentals considering a growth rate of 9% becoming apparent and Chennai it is the highest.
2
and an forex reserve of above US$ 200 billion (Million.ft )
and inflation of 5%, indicates that the office City Absorption Est. Est. Over
rentals would be nearing its plateau in the in 2006 Supply Absor- supply
next six to twelve months barring a few in ption %
exceptions. The oversupply in the market is 2007 in
likely to lead to a correction in the office 2007
rentals. Simply put, the correction will not be Delhi 10.60 15.90 13.2 20%
due to lack of demand but of oversupply of Bangalore 12.00 18.30 13.30 38%
build-up. Chennai 5.30 19.50 6.50 200%
Pune 4.60 14.30 5.80 146%
Contents There are various factors that had Kolkatta 3.90 8.30 5.00 66%
necessitated this correction. The thresh hold Hyderabad 3.80 6.10 4.60 33%
Changing Skyline 1 for this correction has been brought forward Mumbai 6.40 6.90 7.50% (8%)
Competitiveness of Indian by the monetary measures taken by RBI like
increase in repo rate from less than 5% to Overall Impact
Maritime Sector-II 2 7.5% and CRR from 4% to 7% and increase in
Fortune at the Bottom of the risk weightage of loans to real estate firms. 1. In cities where there is a significant over
supply the rental values will stabilize and
the Pyramid 3 The real estate in India saw its last crest in undergo a correction in others this effect
Story of SEZ 3 1995-96 with pricing soaring by more than will be reflected only in some micro
200% over the previous years, the following markets.
Chennai RE Outlook 4 year saw a correction. This also saw the first 2. An oversupply situation will also result in
Team Chanakya 5 wave of evolution of the market. The change larger gestation period for absorption for
was brought by the new foreign occupiers and bigger projects/multi phase projects like
corporate and IT firms that were establishing SEZs.
in India. A pronounced change of this 3. Rising interest rates means higher cost of
evolutionary phase was the redefinition of A capital and reduced project net present
Grade office space and CBD. value assessments. This will lead to lower
project and land valuations and extended
We are now entering the second crest of the break even of projects.
real estate cycle. The change drivers for this 4. The drive towards quality will dictate the
phase are the foreign capital that is finding its winner
way into the Indian real estate market. This
phase as well brings in significant changes and The above factors will completely redefine the A –
industry participants will go through a fast and Grade office space and CBD again. As demand grows
somewhat painful learning curve. and supply tapers off the situation will change in the
long term. Till such time the stake holders needs to
A study conducted by DTZ reveals that across re define their strategies for accepting and thriving
all metros the oversupply situation is in this market reality.
Page 2 of 5 Chanakya

Competitiveness of Indian Maritime Sector – II …..Continues from last

In the last issue it was discussed what will make the
issue
ports, particularly Indian ports competitive in the PSA to be active in the Indian market.
global market. In this issue the emphasis is placed Integrated Logistics Convergence:
on what is happening in that direction. A tariff Convergence of businesses like shipping and
comparison is also undertaken to understand the port maritime to logistics to supply chain
efficiency of tariff structure of Indian ports. The management is happening in India. SCI and
trends that are emerging in India that will raise the CONCOR’s seriousness to get into the terminal
business worthiness of Indian ports are as follows: business is a step towards this direction. In
Corporatization: The process of corporatization of the future this will develop into Port
the port is being undertaken both nationally and companies entering into Railways and Road
internationally. The entry of big corporate like Tatas sector to reach their customers in hinterland
and Reliance is likely to change the face of the port and development large format SEZs within
business in India. Today port trusts generate around their vast land holdings. The integration of
Rs.1000 crores of combined net profits which can Mundra port and Adani developed SEZ can be
grow by 15% through cost rationalization, increase sighted as an example.
traffic and by providing value added services. This Benchmark of Indian Port Charges: The
will generate a surplus investible fund of around benchmarking of Indian port charges reveal
Rs.2000 crores per annum for the next 10 years, that the Indian ports charges are comparable
enabling an investment of Rs.100,000 crores in the if not competitive with their peers around the
maritime sector. The market capitalization of such world.
companies may increase to US$10 billion. Port Charges: As can be seen from the
Public Private Partnerships: The process of PPP in comparison below the container traffic of
the port sector has come of age. The most Indian ports are comparable to regional ports
commonly adopted approach is to unbundle various of South Asia and Middle East. Only the
assets and operations within the port and privatizing marine charges are significantly higher and
them separately. The initial success of the model has THC is second lowest. We have the entire
driven the international players like P&O, DPI and ingredient to be a successful maritime nation.
It is left to the imagination of us how to make
“The port companies KPPL a success in this scenario.
Benchmarking Indian Port Charges (2004)
have the potential to
Tariff Heads JNPT Fujairah Colombo Salalah Dubai Port
generate Rs.2000cr per Klang
annum in the next 10
Port dues 8500 1566 3950 1650 1900 950
years and have a market
Pilotage cum Towage 21000 567 2275 272 284 66
cap of $10 billion”
Birth Hire 7000 243 1100 190 203 60

Tugs 810 322 1060 1108 240

Moorings 351 64 64 39

Pilot Boat 81 320 344

Mooring Boat 81 55 54

Total Maritime Charges 36500 3699 7647 3611 3957 1355

Marine Charges per TEU 14.60 1.48 3.06 1.44 1.58 0.54

Container Handling (Loaded TEUs) 132653 219375 370000 272500 285000 152500

Container Yard to Truck and Vice 20408

versa

Total Container Handling Charges 153061 219375 370000 272500 285000 152500

Total Charges 189561 223074 377647 276111 288957 153855

Container Handling Charges/TEU 61.22 87.75 148.00 109.00 114.00 61.00

Total Port Charges/TEU 75.82 89.23 151.06 110.64 115.58 61.54

Vessel Capacity TEUs (4000), GRT (50000), NRT (29000), Stay at Berth (1 day), Parcel size handled TEUs (2500),
Exchange Rate – 1USD =Rs.46, 1USD=3.6 Dhd
 Chanakya Page 3 of 5

Fortune at the Bottom of the Pyramid

Even though the real estate sector is at its HIG segment have stabilized over 6 months
all-time-high in the country and is as developers cannot afford to hold flats.
apparently showing signs of slowing down, There are reports that suggest, North and
total returns or operating profit from the Western India is likely to see 15-20 per cent
sector is likely to moderate in future in correction in realty prices and a fall of 50 per
comparison with those of the past three cent in real estate off-take. The sector will
years. According to the ICICI Bank Global continue to have the potential to deliver
Investment Outlook for July, brought out by attractive returns, albeit at lower levels than
the banks Private Banking Research Division, seen in the past three years.
operational income of the sector grew at a
rate of 179% over the past 5 quarters, with The first movers to adapt to the changing
operating profits up by a massive 469%. dynamics of the housing business as a
Average margins of constructors are now as commodity and look at the bottom of the
high as 29 per cent with some real estate pyramid will be the ultimate winners in the
companies in the national capital region and long run. This resultant stagnation may force
the Mumbai-Pune belt earning an the developers to look into the other
astronomical 170-200%. Despite the boom, avenues of unfulfilled demand segments like
the sector is unlikely to be able to fulfill the the EWS/LIG.
growing housing demands of the country,
especially of the middle and lower income The Story of SEZ In the first year of approval itself Indian
groups. The likely demand for the LIG and There are approximately 847 SEZs in SEZs have attracted an investment of
MIG housing are in the region of 27 million globally till end of March 2006. Leading in around US$5 billion which is around 60%
houses by 2012. the pack is the US with around 213 SEZs, of the total FDI during 2006. This will
followed by China at 124 SEZs. These are increase to US$20-25 billion in the next
A prosperous middle class, higher incomes called by various names like Export three years. In the last 15 years the
and fast urbanization has presented promotion zones, Export Processing EPZs, SEZ in its early avatar, saw an
opportunities to develop the retail sector Zones, Free Trade Zones, Free Zones, investment of Rs.3600 crores and
especially. All these years, till now, the Economic Processing Zones etc. but they created 1 lakh jobs. After the SEZ act in
developers have been promoting the upper all mean the same. the first 11 months alone, around Rs
middle and high end products without 11,600 crore investments has been
having bothered about the huge untapped Globally there is no common definition received in SEZs, creating 15,000 jobs.
potential of LIG and MIG houses in the range for SEZs. The definition was standardized This will create 8.9 lakh (890,000) jobs in
of Rs.10-25 Lakhs. There is no denying that in the Kyoto Convention as “Specifically the next three years.
the margins are better in these high end delineated, duty free enclave that shall be
developments but housing is slowly deemed as foreign territory for the The total turnover of Indian SEZs
becoming a commodity and will evolve into purpose of trade operations, duties and (companies located within the SEZs) by
th
a volume play in the near future. tariffs”. Globally around 74% of foreign the end of 11 five year plan i.e. 2012 is
trade excluding commodity trade happens expected to be Rs.15,00,000 crores.
India has a total housing shortage of around from SEZs. In the past 10 years the Currently these EPZs have been doing a
24.71 million units as of March 2007. Out of countries with these zones have shown a combined turnover of Rs.28,000 crores.
this 24.67 million is in the EWS/LIG group marked improvement in trade
(upto Rs.12.50 Lakhs). The shortage for HIG performance. In the eve of Industrial revolution (1770)
and Upper Middle class (Rs.15 lakh and India was the 2 largest economy in the
above) is around 0.04 million. Tamil Nadu The share of global trade of the 102 world contribution around 20% of world
accounts for a total housing shortage of countries with SEZs have grown from 73% output, which has declined to 3% in
around 2.58 million in the LIG/EWS group. in 2000 to 75% in 2006 and the share of 1970, lowest in the recorded history.
The margin in the development of these the other 126 countries without SEZs have Now with this SEZs India is likely to
types of houses has kept the developers for come down from 27% to 25%. The major reaffirm its rightful place in the global
far too long into entering this segment. hit was taken by the middle income economic map.
There are innovative and cost effective ways countries which have lost 2% and the high
of building technology to make do this income countries have kept their share of “Let the Asian giants sleep, lest they
situation. 19% constant and the low income group will take the world like a swirl wind” –
also has kept their share at 1% of the Napoleon referring to India and China.
The property prices for upper middle and growth in the global trade volume.
 Page 4 of 5 Chanakya

Monthly Economic Indicators

Indicator July 2007 June 2007 their margins and to have an asset-
Bank Credit 24.6 25.6 liability match. The other indicator that
Deposits 24.5 23.3 confirms this trend is the increase in the
Money Supply 21.7 21 value of INR against the USD. This shows
Forex Reserve US$ 215.6 US$220 the confidence of the Indian economy.
(Bn) The current account deficit for this
WPI Inflation 4.03% 4.13% quarter for the Indian economy (trade
Home Loan 11.25% 11.25% deficit) has increased from US$9.2 to US$
Rates 9.6, but this has been offset by the huge
Forex Rate 40.13 41.56 capital account receipts to turn the BOP
1USD = Rs. to a positive figure. This has been
Core Sector 8.7 7.4 reflected in the increase in the value of
Index INR against the USD. Is this good or bad is
a debatable issue and a different subject
Looking at the monthly economic indicators it is altogether!
likely that the real estate sector will start looking
up in the near term. It is, in our view, will increasingly be
reflected in the value of investments in
Analysis the Indian economy and one of the
beneficiaries would be the real estate.
There is a considerable decline of around 1%, The other factor that supports this theory
within one month, in the bank credit. This is is the high capital accretion in the real
“the economic estate industry in this quarter. The total
mainly due to the increase in the interest rate. It
indicators points can also be noted that the deposit rates has capital that has come to India for real
increased by 1.1%. This means that the Indian estate investment has increased from
that the real US$I.8 billion to US$ 2.3 billion on a
companies, people and investors are interested in
estate sector will keeping their money in the bank rather than quarter on quarter basis.
start looking up in borrowing money from the bank. The area of
concern here is, even with this trend the money Conclusion
the near term” supply has increased by a notch of 0.7%.
In view of these factors, our take on
With robust money supply and decrease in bank market is that, in the short term we can
credit spells a blessing for inflation. This will force witness a fall in the interest rate and a
the banks to decrease the interest rate to sustain general increase interest on the real
estate market.

Port Snippets
The Average availability of Equipment The Average tones of cargo
of the Indian ports is 70% against 90% handled per employee in a year
for the European ports for Indian ports is 1,474 tons
against 50,500 t0nes by
Number of containers handled per ship Rotterdam port and 47,280 tons
per hours in 10 in JNPT (the most by UK ports
efficient Indian port) against 69 in The logistics cost of India as a
Singapore and 30 in Colombo percentage of GDP is around
13% against 8.7% in US AND
The cost to the Indian economy on 9.3% in Europe-scope for
demurrage charges, transshipment improvement!
charges, pre berthing delays and vessel India has 150 maritime training
turnaround times is US$ 1.5 billion institutes, 4 in Government and
annually 146 in private sector, that
produce 11,164 seafarers
annually.
 Chanakya Page 5 of 1

Team Chanakya Quiz of the Month

Mr. Subramanyam M From this issue on Chanakya will come with a quiz.
Head – Strategic Planning Believe us the winner will get a prize worthy to
remember.
Mr. Lakshmanan C V
GM – Corporate Finance How many minor ports that India has?

Mr. D Joel K Pandian How many jobs that the SEZs in the earlier
DG- Strategic Planning avatar as EPZs generated in India?

Mr. Anup Choudhary What is the housing shortage in the

AM – Strategic Planning EWS/LIG category in India?

Mr. Sheetal Shah Where is port Klang located?

AM- Strategic Planning
What is the drop in the bank credit over
Ms Gayathri N the last month?
Executive Secretary
What is the increase in the capital flow to
the real estate industry quarter on
quarter?

Please fire your answers to We’re on the Web!

[email protected] to win exciting prizes. See us at:
www.margconstructions.com