#Budget Reactions : A Damp Squib For The Hospitality Sector

For the first time in recent history, the government in power had announced tourism as one of its four pillars for growth. Consequently, the hospitality was looking forward to significant new provisions in Budget 2014. However, quite like in most previous years, the government failed to give hospitality any notable relief and stimulus for growth. Despite its 6.6% contribution to the GDP and the fact that it created close to 40 million jobs in 2012-13, the Indian hospitality sector continues to be a story of neglect from our policy makers.

Even today, India receives only about 0.5% of the global tourist arrivals despite being a country rich in history, culture, natural splendour and diversity. The fact that it has still not been equipped to receive a better share of global tourism receipts is puzzling and frustrating.

What Was Delivered

·         The budget gave tourism some mention and indicated plans for long-term growth by way of developing India’s pilgrimage and heritage tourism circuits (PRASAD & HRIDAY schemes) and also provided for the development of a world-class convention centre in Goa via the PPP route. While these are welcome initiatives, these provisions will take between five to ten years to impact the growth of domestic and international tourist travel.


·         The introduction of electronic visas and visas-on-arrival initiated earlier this year can be a major game-changer for Indian tourism with respect to foreign travel into India.


·         The time-bound directive to implement e-visas at nine major airports within six months is perhaps the best news that this budget has delivered. This can have far-reaching consequences once implemented.


·         The improvement and modernisation of railways, proposed new airports of international standards and the thrust on improved road connectivity augur well for the hospitality industry. These along with other policy announcements regarding increased FDI in several sectors and clarity on setting up of REITS, are catalysts for growth.


What Was Ignored

·         The sector is desperately in need of incentives in Tier 2 and Tier 3 cities to make hotel investments there reasonably attractive


·         The sector also needs better borrowing terms through the infrastructure lending route, and relaxed ECB norms


·         The sector needs to be spared from double taxation through service and luxury tax/VAT at the state and centre levels. Indian hospitality was looking forward to rationalisation of taxes and ease of raising capital.


No economy can hope to achieve and maintain any degree of sustainable growth and buoyancy without its tourism and hospitality sector being given the necessary importance and corresponding stimuli. As of now, the Indian hospitality sector is still trying to shake off the lingering effects of the serious downturn it has been experiencing for almost six years.

In short, from the perspective of the Indian tourism hospitality sector, Budget 2014 failed to deliver. The industry must continue to survive primarily on the basis of die-hard optimism that it will eventually be given its rightful importance at the policy level.

Mandeep Lamba, Managing Director – India, JLL Hotels & Hospitality

Jones Lang LaSalle Shortens Name to “JLL” and Unveils New Logo

Underscoring its global operation, scale and vision for the future, Jones Lang LaSalle (NYSE: JLL), the professional services and investment management firm specializing in real estate, has announced that it is now using the name “JLL”  and introducing a refreshed logo.
Charles Doyle, Chief Marketing and Communications Officer at JLL said:  “Although we are adapting our name, our cultural foundation of collaboration, integrity and delivering real value to our clients, people and investors remains constant and unchanging. JLL is easily pronounced, remembered, visible and representative of our firm wherever we serve our clients around the world.”
The JLL name and new logo will be rolled out globally over the next two years. The firm’s legal name, Jones Lang LaSalle Incorporated, and the name of its wholly owned subsidiary, LaSalle Investment Management, will remain unchanged.

Indian Real Estate – Tough Times, But A Resilient Market: Colin Dyer

Colin Dyer, President & CEO - Jones Lang LaSalle Inc. was recently in India for the Firm’s General Executive Council Board of Directors meeting. Between sessions, Mr. Dyer took time out to share his impressions of the Indian real estate market:

Ø  Economic Markers


India’s GDP stood at 4.4% for Q1FY13-14, and the RBI projects it to reach at 5% by end of FY2013-14. This slow growth projection can primarily be attributed to India’s depressed industrial production and high interest rate environment. The effect of current credit tightening by the RBI is likely to control inflation by this fiscal end. WPI inflation is expected to reach 5.3% by end FY2013-14 from the current 6.5%.

The current quarter and 4Q FY 2013-14 are likely to demonstrate improved momentum on account of agricultural prosperity thanks to a good monsoon and growth in the infrastructure sector pushing up the performance of the industrial sector. Another effect that the Indian economy will see in 1 H CY 2014 will be on account of the general elections in May. The last elections in 2009 brought an influx of INR 9,000 crore (USD 1.5 billion), of which the Government spent INR 2,100 crore (USD 350 million) merely for conducting the elections. If a similar expenditure happens next year, it is bound to lift the country’s economy.

Ø  The Changing Landscape Of Private Equity


Private equity funds focused on real estate started out as pure equity players, with investments during the peaking period of 2005-2008 directed primarily towards the commercial office sector. Although the funds have kept away from organized retail formats since the beginning, the commercial office sector has now moved down the pecking order from being the favored asset to being a minor percentage of the investment pie. Investments are now mostly directed towards preleased assets or operational assets with healthy occupancy levels.

Since the aftermath of GFC, the investment philosophy of PE firms has made a paradigm shift towards the residential sector. Having realized the self-liquidating nature of the residential segment, where returns flow in faster given the demand for housing in the country, private equity players have spurred their investments in this asset class.

The way in which geographic focus has changed is also interesting. The initial years of the industry life-cycle saw the investment focus of most PE firms being restrictive in nature, with exposure to only the Tier 1 cities of India. However, with maturity improving in Tier 2 cities, PE funds were keen to evaluate transactions in other emerging real estate clusters of the country.

Tier II cities, especially those which had the potential to act as ‘spokes’ to the ‘hubs’ of Tier I cities, saw an active interest from such players. In recent years, a trend reversal has been observed wherein the geographic focus has shifted back to Tier I cities as the PE funds tread cautiously during times of uncertainty.

Private Equity funds are now increasingly looking at preferred returns structures that enable them to take out their capital prior to the developer. This ultra-cautious approach has emerged after the recessionary phase, which saw investments locked in illiquid assets. Funds are looking at market level protection to ensure that principal capital has sufficient safeguards.

Approximately USD 500 million would have been raised since April 2012. There are also some sovereign funds that are evaluating various deals. Approximately 45–50% of the amounts raised would have been invested to date. By 2Q 2014, most of the remaining amounts are expected to get invested. While sovereign funds are also looking at core assets, very few have so far actually been

The real estate segment that has been attracting the highest magnitude of investments is the residential sector. Funds are primarily looking at on-going projects by credible developers with transparent completion timelines. The reason why residential continues to be so attractive to funds is that despite the current moderation in absorption, the underlying demand dynamics driving the residential segment are still the highest.

Broadly speaking, Mumbai, NCR and Bangalore have attracted the maximum investments in recent times. These cities generate the bulk of employment in the country. It follows naturally that the demand for commercial and residential real estate is also the highest in these three cities. Axiomatically, whatever finance for real estate is now available is almost exclusively focused on Mumbai, Delhi and Bangalore. Pune is also notable - if not in magnitude of investments, then certainly in the consistency of interest in this city by funds.

Ø  Price Correction In Residential Real Estate


Real estate prices in many of the Indian metros have crossed sustainable limits. The real estate development business may not be sustainable at the current exorbitant price levels. Banks therefore perceive it as risky to lend to property developers. Lending institutions have taken an unyieldingly hard stance and are attaching the under-construction projects of defaulting developers. As soon as prices start becoming more rational, there will be a significant mitigation of risk and banks will begin granting more loans to developers.

I definitely foresee a correction in prices across many Indian cities. In fact, it is over-due. However, corrections will depend on certain aspects. We are seeing a massive inventory of unsold residential units in the larger cities, and the developers with the larger shares of this inventory will have little choice but to yield to the price pressures. It also depends on area specific demand-supply condition or macro market. In areas where the demand exceeds supply, price corrections may not happen. Moreover, properties bought for investment purposes will see more corrections.

Since 4Q 12 in which 80,000 new units were launched across the country, new launches have come down to 50,000 in 3Q 13. Sales have dipped from 50,000 top 40,000 in the same period and the inventories have piled up. The majority of sales taking place are during the project launch phase that corresponds to competitive pricing, sales during the construction phase have dried up.

The average prices of units in new launches have easily decreased by 15-25% with respect to prevailing market pricing, and developers are luring buyers with unprecedented offers. The new marketing theory appears to be to sell the maximum at the launch stage itself, with attractive pricing to ensure cash flows (as good as finance at zero cost) to sustain the project, and earning profits by selling a small proportion of units towards the end at a hefty premium.

Ø  To Summarize


India's real estate market is definitely experiencing its own share of turmoil, but the pain is not wasted - every market must undergo pain in the process of maturing. If anything, the Indian real estate market is extremely resilient and is growing even in times of hard change. It is impossible to ignore such a market, either at a domestic or international level. Cyclical highs and lows apart, I am convinced that Indian real estate's best times are yet to come.

Pune's Rohan Builders Partners With Avenue Venture Real Estate Fund for Bangalore Residential Project

Rohan Builders ('Rohan'), one of Pune's leading residential developers with existing presence in Bangalore, has partnered with Avenue Venture Real Estate Fund ('AVREF') for development of a residential project in East Bangalore. As per the transaction, AVREF - a Mumbai-based domestic real estate fund - has invested approximately Rs. 55 crore in Rohan’s project. The Pune division of Jones Lang LaSalle India Capital Markets, acting as transaction advisor, was instrumental in closing the deal.
One of the most established developers in Pune and Bangalore, Rohan has marquee projects such as 'Rohan Mithila' and 'Rohan Madhuban' in Pune and the award-winning 'Rohan Ashima' and 'Rohan Jharoka' in Bangalore (among others) to its credit. This is the first time Rohan has adopted the private equity route for its portfolio expansion.

AVREF, which primarily invests in residential projects in Pune, Bangalore and Chennai, identifies developers on a growth trajectory and partners with them right from the initial stage of land acquisition, found the transaction is well within its strategy and investment guidelines.
Suhas Lunkad, CMD - Rohan Builders, says, "The size of the project is approximately 7 lakh square feet of saleable area and is located in Boganahalli, one of the fast-developing corridors of Bangalore city. We found the investment objectives and philosophy of AVREF aligned with our own. Along with our expansion plans in Pune, this acquisition gives us a welcome opportunity to expand our existing footprint in Bangalore. These two cities represent the highest potential for developers catering to residential demand from India's thriving IT sector"

Anuj Puri, Chairman & Country Head  - Jones Lang LaSalle India says, "This deal once again proves that, even in times of curtailed liquidity for real estate, there is quality capital available for quality projects by established and credible developers. Jones Lang LaSalle India is currently working on a number of similar deals on behalf of our clients."
Boganahalli, situated along the Marathahalli-Sarajapur stretch in East Bangalore, is strategically located in the midst of the IT Corridor on Outer Ring Road. The site is located on the optimally performing stretch of the ORR (Outer Ring Road) with residential destination for IT/ITeS knowledge professionals.
 

RBI Bans 80:20 Schemes: Correction On The Cards?

Recently, the RBI announced a measure that created ripples on the residential real estate market - the monetary authority sent out a warning to banks not to lend money to builders under the 80:20 or 75:25 schemes. The timing could not have been worse, coming as it did just before the festive season. This is a period in which consumer spending is generally higher, and developers often announce schemes that could help them sell high-priced apartments. 80:20 was one of such scheme, wherein the buyer agrees to pay 20% of the flat cost upfront. The remaining amount is funded by the bank after signing a tripartite agreement between all three parties at stake here.

The Impact

Several viewpoints have been floated since the RBI announced this ban, largely speculating on a fall in real estate prices as a consequence. It has been opined that developers’ holding power will be significantly reduce, forcing them to reduce prices. This analysis of the situation is based on the currently high levels of inventory that developers are saddled with, especially in larger cities like Mumbai, Bangalore and Delhi.

Indeed, inventory levels in the leading seven cities in India are much higher than the comfortable industry levels seen around 8-10 months ago, which is between 14-15 months’ worth of unsold supply:

Big City Real Estate Dynamics

Despite the RBI’s edict, it is important to note that there are dynamics at play in some of these larger cities which could result in developers resisting price cuts. In the first place, the cost of land in these cities is already at astronomic levels. Secondly, the recent amendment to the Land Acquisition and R&R Bill will raise land owners’ expectations, which means that developers will have to negotiate harder for available land. As a result, developers in these cities will now operate from the standpoint that overall real estate prices will, in fact, rise going forward.

Moreover, real-time appreciation in property prices (adjusted for inflation) in tier-1 cities during the last few years (1Q12-current) have not more exceeded 4-5% - a fact that could dissuade developers from reducing property prices significantly. It is also pertinent to note that most projects within the municipal limits of cities like Mumbai, Delhi and Bangalore these cities are targeted at HNIs / NRIs, who can afford to purchase these properties without availing of bank funding.

Significantly, a large number of projects that are completed or under-construction is in the high-end segment, which in any case places them out of reach for mid-income buyers. Therefore, a marginal price correction in these apartments would not augment demand from the non-affluent class.

Short-Term Correction?

While these are enough reasons for developer to hold their prices at the current levels, a marginal correction in the prices of certain projects aimed at the mid-income segment is not entirely out of the question. If it occurs, it would be within a range of 12-18%, depending on specific projects and their builders’ holding capacity and financial strength. A correction in prices beyond this level would affect developers’ profitability to a non-acceptable extent.

Any discounts that we see this festive season will be a function of developers’ need to sail through the current difficult market conditions. With the slightest indication of a recovery in economy, this window of opportunity will close, as has been amply evidenced in the past.

Much of the uncertainty surrounding the Indian economy currently revolves around the global market conditions, and also the doldrums that most markets experience prior to general elections. Depending on the new policies that invariably define the post-election scenario in India, there could be a major change in the country’s economic status quo, which will automatically reflect in market sentiments.

Ashutosh Limaye, Head – Research & REIS, Jones Lang LaSalle India

RBI Stance On 20:80 Scheme

The RBI has reacted sharply to the fact that a number of banks and housing finance companies are promoting home loan products such as the 80:20 or 75:25 schemes, which involve tripartite agreements involving lenders, developers and property buyers. The basis of this move is that though these schemes do invariably mention the financial implications to the consumer in the fine print,  many consumers are evidently unable to decipher the fine print. This move by the RBI is aimed at protecting the interest of property buyers who are not aware of the long-term financial implications of such and similar schemes. It is definitely meant to advance the cause of greater transparency in the Indian real estate sector, and also to protect the financial institutions that provide funding in it.

Shobhit Agarwal,  Managing Director – Capital Markets, Jones Lang LaSalle India

Reaction To The Revised Land Acquisition Bill by Jones Lang LaSalle India

The newly revised Land Acquisition Bill is beneficial to land owners. The scope of minimum required approval has been increased to 80% of the affected families. This consent is mandatory only for private enterprises.

Secondly, the Government's role in land acquisition has been curtailed as far as private enterprises are concerned. These enterprises can now enter into their own negotiations and arrive at the price to be set for acquisition.

Thirdly, different techniques for arriving at the compensation to be paid have been provided. With the intention of providing land owners with compensation which is closer to the existing market rates, the Bill now stipulates that local circle rates will now need to be doubled and further multiplied by a factor of two when it comes to land parcels in rural areas. This means that that the acquisition price for land in rural areas will effectively be four times that of the local circle rates. In urban areas, the circle rates will need to be doubled in order to arrive at the acquisition price.

The new Bill also requires a Social Impact Assessment (SIA) study to be carried out. This study will have to outline how the acquiring parties intend to use the land, and how the original inhabitants or owners will be rehabilitated. The Act now also puts very definite timelines on project completion and entire land utilization.

For developers, the cost of land is going to increase significantly, impacting their project costs and therefore margins. Land valuations are already high and by further increasing them, land acquisition becomes even more difficult. Anyone without an existing land bank will now be looking at vastly increased entry costs.

Mayank Saksena, Managing Director - Land Services, Jones Lang LaSalle India

Juggy Marwaha Joins Jones Lang LaSalle as Managing Director - South India

Leading International Property Consultancy Jones Lang LaSalle India today announced its appointment of Juggy Marwaha as Managing Director, South India operations. Continuing to be based out of Bangalore, he will be responsible for growing the business footprint for the Firm in the aforementioned region with effect from 2nd September, 2013.
Juggy will bring into play his established reputation as a commercial real estate expert on the South Indian market. Coupled with the fact that he has managed a variety of complex and coveted assignments across Bangalore, Hyderabad and Chennai, it made him the natural choice to provide strategic leadership to the region.

Santhosh Kumar, CEO - Operations, Jones Lang LaSalle India says, "Juggy Marwaha is a highly accomplished real estate professional, and we are extremely pleased to have him driving our business growth in the exciting South Indian market. With his wealth of experience in working closely with leading global IT and BFSI clients, Juggy is appropriately positioned to play an impactful role in fortifying and expanding some of the firm’s most stellar business locations, as well as contribute significantly towards increasing our stature as the region’s leading International Property Consultancy".

Juggy Marwaha says, "I am excited to join the country's leading International Property Consultancy. Reinforcing Jones Lang LaSalle India's pre-eminence in the South Indian market is an exciting opportunity, and a challenge which I eagerly look forward to."

Juggy was previously attached to Mantri Developers and responsible for management of an office development portfolio of over 10 million sqft., along with administering the residential asset management business of over 12 million sqft.  Prior to this, he spent almost 12 years with RMZ Corp. as part of their senior executive council leading the pan-India office development portfolio where he leased over 13 million sqft. of office space. He was also briefly associated with CBRE USA as the VP for Global Shared Services.

Jones Lang LaSalle Releases Q2 2013 Asia Pacific Office Index

Jones Lang LaSalle's Asia Pacific Office Index Q2 2013 reveals that Mumbai and Delhi NCR’s most active secondary business districts (SBDs) stand at 6th and 13th rank respectively among business districts of top cities in Asia Pacific Region. The secondary business districts (SBDs) of Bangalore and Chennai barely make it into the top 30 districts, occupying 26th and 27th place respectively.

The indices show that cities in India still offer competitive real estate prices. This factor provides a compelling incentive for international companies to choose India over other countries for setting up their offices, provided that other business requirements such as availability of talent, location, the size of market they serve and infrastructure are met.

Ashutosh Limaye, Head - Research & REIS, Jones Lang LaSalle India says, "While this is good news for occupiers, it does not bring cheer to landlords and developers. Mumbai’s Bandra Kurla SBD was ranked 3rd on this index in 3Q CY 2009, while Delhi SBD ranked 6th then. Both have slipped to 7th and 13th places respectively in 2Q CY 2013. SBDs in Bangalore and Chennai have slipped by one place each during the same period. This means that after the Global Financial Crisis of 2008-09, Indian cities have not recovered from the rental and price correction of between 20-40% from the peak values of 3Q CY 2008. Other business districts in Asia Pacific have performed better."

Bangalore is the only city in India that is close to peak prices, with a current index of 99 (base index of 100 as of 3Q CY 2008). All other cities are far behind, with Mumbai City and Mumbai Suburbs indexing at 61.8 and 66.5, Gurgaon and NOIDA at 76.1 and 77.7 and Chennai at 84.2.

"That said, there has been a sharp polarization at work - there are fewer high-quality office projects at desirable locations and several average-quality projects at avoidable locations in Indian cities," says Limaye. "Going forward, we anticipate healthy appreciation in rents with high occupancies for the projects falling in the first category - and a prolonged wait for occupiers at discounted rates for the latter."

Please click here to download Asia Pacific Office Index Q2 2013

Investing in International Real Estate - New RBI Restrictions

The new restrictions by RBI with regards to Indians investing in international real estate under the Liberalized Remittance Scheme (LRS) have been introduced in an effort to stabilize the rupee. This move will have medium to long term implications.

Individuals who were planning to buy international real estate at attractive valuations and planning for their kids’ education and housing aboard will now see such plans challenged. Currently, the variety of options available on the international property market offer very attractive rental yield and valuations, making the proposition of investing in property abroad a potentially lucrative one.

However, the new restrictions will put a dampener on the sentiments of Indian investors who were considering this route.

 Om Ahuja, CEO – Residential Services, Jones Lang LaSalle India

Tips For NRIs – Repatriation of Indian Property Sale Proceeds by Om Ahuja, CEO – Residential Services, Jones Lang LaSalle India

The recent times have seen an interesting new trend in the whole NRI property debacle - NRIs from North America and Europe coming to India to sell their purchased or inherited real estate after they obtain citizenship in these countries. This is not a trend that has been extensively examined, but it makes perfect sense. Holding on to real estate is not always feasible if one is unable to manage them.

This is especially true if the NRIs in question do not visit India frequently and are not open to renting out their properties. They prefer not to burden relatives and friends with the task of paying property tax, maintenance and society dues and see more sense in encashing the capital value of their inherited properties

Selling such real estate is usually not the biggest challenge. What can create confusion is the viability - and ways and means - of remitting the resulting funds back into the country of residence. There is, in fact, a fairly straight-forward process.

The aspects that come into play are:

Taxation

As in the case of resident Indians, NRIs who sell purchased property after three years from the date of purchase will incur long term capital gains tax of 20%. The gains are calculated as the difference between sale value and indexed cost of purchase. Indexed cost of purchase is nothing but the cost of purchase adjusted to inflation. Calculation of indexed cost of purchase is easy - many websites provide a calculator; else a chartered accountant can assist.

In case of inherited property, the date and cost of purchase for purposes of computing the period of holding as well as cost of purchase is taken to be the date and cost to the original owner. To be more precise, the amount of long term capital gains together with the cost to the previous owner (i.e. the person from whom the property is inherited) would be considered as the cost of purchase. NRIs are subject to a Tax Deducted at Source (TDS) of 20% on the long term capital gains. But there are certain instances when NRI can get a waiver of the TDS. One such case would be if the NRI is planning to re-invest the capital gains of the property in another property or in tax exempt bonds. In such cases, the NRI will be exempt from tax in India, and no TDS will be deducted either.

If the NRI sells the property before three years have elapsed since the date of purchase, short term capital gains tax at his or her tax slab is incurred. Short term capital gain is calculated as the difference between the sale value and the cost of purchase (without the indexation benefit). The NRI will be subject to a TDS of 30% irrespective of his or her tax slab.

NRI selling their properties can apply to the income tax authorities for a tax exemption certificate under section 195 of the Income Tax Act. They must make this application in the same jurisdiction that their PAN belongs to and will be required to show proof of reinvestment of capital gains. If the NRI is planning to buy another house, the allotment letter or payment receipt will need to be produced; if capital gains bonds are chosen instead, an affidavit to this effect will have to be prepared. Usually, buyers withhold the last installment of payment until the NRI produces a certificate of exemption. A NRI has up to two years from the date of sale to invest in another property, or up to six months to invest in bonds.

Tax Exemptions

Section 54 - This section stipulates that if NRI sells a residential property after three years from the date of purchase and reinvest the proceeds into another residential property within two years from the date of sale, the profit generated is exempt to the extent of the cost of new property. To illustrate - if the capital gains is Rs. 10 lakh and the new property costs Rs. 8 lakh, the remaining Rs. 2 lakh are treated as long term capital gains. The sold residential property may be either have been self-occupied property or given on rent. The new property must be held for at least three years.

NRIs cannot invest the proceeds on the sale of a property in India in a foreign property and still avail the benefit of Section 54. However, some recent hearings with the appellate authorities have held that exemption can be claimed under Section 54 even if the new house is purchased outside India. However, this is not explicitly specified clearly under the law, and it is advisable for an NRI to consult a tax expert before making any investment decisions outside India to avail of tax benefits under Section 54.

Section 54EC - This section of the Income Tax Act states that if an NRI sells a long term asset (in this case, a residential property) after three years from the date of purchase and invests the amount of capital gains in bonds of NHAI and REC within six months of the date of sale, he or she will be exempt from capital gains tax. The bonds will remain locked in for a period of three years.

Repatriation

General permission is available to NRIs and PIOs to repatriate the sale proceeds of property inherited from an Indian resident, subject to certain conditions. If those conditions are fulfilled, the NRI need not seek the RBI's permission. However, if the NRI has inherited the property from a person residing outside India, he or she must seek specific permission from the RBI.

The conditions for repatriation of such funds are not really complicated - the amount per financial year (April-March) should not exceed USD 1 million, and should be done through authorized dealers. NRIs must provide documentary evidence with regard to their inheritance of the property, and a certificate from a chartered accountant in the specified format.

What NRIs must pay attention to is the income tax implications in their country of residence. Many countries tax their residents on their income regardless of where it originates from, while others provide partial or total exemption on capital gains arising on sale of a residential house if certain conditions are met. The most important point to ponder is the income tax liability in the country of residence on the amount of gain, and whether claiming exemption under Sections 54/54F/54EC is really worth it. The NRI may, in fact, be better off claiming only partial or no tax exemption on the capital gains in India.