Net absorption totalled 1.8 million sq.ft in the first two quarters of 2010. This is a growth of over 38 per cent compared to the first two quarters of 2009 which saw an absorption of only 1.3 million sq.ft. This increase is primarily due to the demand arising from companies expanding and upgrading to better quality premises. Grade A office rentals levelled out for two consecutive quarters, suggesting that the market is at the bottom of the cycle. The first two quarters of 2010 saw increased market activity, although due to high vacancy levels, rentals remained stable.

The sluggish leasing, uncertainty and falling rentals seen in 2009 have been replaced by a more stable office market. Many buildings with significant vacancies recorded improved occupancy rates. The office vacancy rate increased to 28 per cent marking nine consecutive quarters of increased vacancy. Total stock in the market stands currently at 38 million sq.ft., with 11 million sq.ft. of vacant space.

Major transactions included TCS e-serve, Igate, CTS and IBM expanding in DLF IT SEZ, Tata Teleservices buying space in Prince Infocity 2, Reliance Communications leasing space in India Land Tech Park, Nokia Siemens Network leasing space in Pacifica Tech Park, Neptune and Force 10 leasing space in Olympia Tech Park, Franklin Templeton leasing space in RMZ Millenia, Iopex leasing space in Ambit IT Park and Hapag Lloyd and Amazon leasing space in S P Infocity.

The self-correction phase has started with developers slowing down construction and changing usage of their office projects. IT Park developers who offered aggressive terms such as lower deposits and more rent free periods were able to attract prospective tenants. With rentals having corrected by 20 per cent to 30 per cent in most micromarkets from the peak seen in first quarter 2008, many corporates and IT/ITES companies are using this opportunity to

consolidate or relocate to better quality buildings at lower rentals or sale values. This window of opportunity for corporate occupiers is likely to be extended till end of 2010.

The yield levels stabilized at 10.5 per cent to 11.5 per cent.

The overall outlook is positive for the next two quarters and should see rentals further stabilising across micromarkets.

A continuing improvement in the economy suggests that demand for office space will increase in the next 12 months, but the huge vacancy will keep prices in check. Leasing is expected to see an upward trend in the next two quarters with both enquiry levels and transaction velocity picking up. The absorption for office space in Chennai in 2010 is expected to be around 3.5 million sq.ft.

Demand for SEZs

The stability in rents and low operating costs should help Chennai regain its position as one of the most preferred IT destinations in India. The demand for SEZs is expected to go up considerably in the next three quarters given the uncertainties arising out of the implementation of the Direct Tax Code. Major IT SEZs such as DLF IT SEZ and Tata Realty’s Ramanujam IT SEZ in

Taramani are expected to see significant interest from occupiers.

The cost of project finance has increased dramatically, so there won’t be much speculative office development happening in the near future. Until the gap between buyer and seller expectations is narrowed, sales is not expected to pick up. Prominent new buildings due to be completed in the next six months include ASV Chandilya (500,000 sq. ft), TVH Agnitio Park (600,000 sq.ft.), Ascendas Phase 3 (740,000 sq.ft.) and Prince Infocity 2 (770,000 sq.ft.).

The State government needs to send out positive signals by marketing Chennai more aggressively across the world as a low cost outsourcing and manufacturing destination.

Although it is still early to say if the market is seeing a full fledged rebound, it definitely looks like a market recovery in terms of demand as developers and real estate consultants get busier. However, the basic problems such as high vacancy, low rent and low liquidity continue.

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He says that according to reports, the population in cities will grow by 60 per cent by 2030.

In five States, the urban population will be larger than in rural areas. By 2030, an estimated 70 per cent of the country’s GDP will come from cities. In such a scenario, infrastructure is hugely important and if it is not addressed, there would be a gridlock. Hence, “greater focus is needed on infrastructure.”

In India, unlike in developed countries, real estate is not part of infrastructure development, which includes roads, power and water.

Affordable housing, play areas and institutions were also real estate-related infrastructure.

Typically, in Indian cities, infrastructure comes after development and thus pushes the prices up in those areas. Those who are unable to afford the cost, had to look to areas with less infrastructure where prices were lower.

In States such as Maharashtra and Rajasthan, developers are encouraged to go in for townships that include infrastructure. On demand in the real estate sector, Mr. Gera says there was a slowdown about a year ago. Real estate came to a standstill in terms of sales and prices did come down by 10 per cent to 40 per cent. Prices had not returned to the earlier levels yet. They have started moving up. Demand for residential units is buoyant in most places.

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Being a loyal customer who has been paying EMIs (equated monthly instalments) for the past few years, ideally the lender should have rewarded you by charging interest a notch less than that charged to the new customer.

The floating rate home loans are benchmarked to PLR (Prime Lending Rate) or Benchmark Prime Lending Rate (BPLR).

The PLR is defined as “the lowest rate of lending offered for the most preferred borrower and for such loans which are fully secured.”

A committee headed by Executive Director was formed by the RBI felt that there was much less transparency in fixing the PLR and it recommended to do away with PLR and introduce a base rate comprising of all cost elements which can be identified and are common across borrowers.

The committee recommended charging the same rate of interest for new borrowers as well as old borrowers under floating rate loans.

When it was expected that the woes of lakhs of home loan borrowers would end, the leading bankers aired their inability to charge same rate of interest for all borrowers old and new, under floating rate home loans.

The RBI officials clarified that since incremental funds have brought down average cost of funds for banks, why cannot they pass on the benefit to old customers.

Some bankers have expressed the fear that offering same interest rate for all borrowers may invite legal disputes as interest spreads (loans offered at PLR-2%, PLR -3% and so on) varied from customer to customer.

The RBI should help set right the injustice meted out to existing borrowers.

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Even banks are playing the waiting game and have created innovative products. That makes life tough for the borrowers as they need to take an informed decision. Here are some tips for choosing your loan:

Many banks have launched hybrid loans wherein the rate is fixed in the first year of the loan period but is linked to the market rate from the second year onwards. Here, the assumption is that the rate would go up at a later date though chances of the rate coming down are not ruled out. For instance, some banks have pegged the first year rate at eight per cent. One of the reasons why the rate could be higher from the second year onwards is the linkage of the rate to the benchmark lending rate which still hovers around 10-11 per cent.

In the last few years, though banks have reduced the lending rate on special products, they have not cut down the benchmark rate. So, Barring home loans, most other loans such as personal loans or overdraft facility continue to attract an interest rate of over 14 per cent. Hybrid loans will be suitable for individuals who are looking at home loans with a tenure of less than 10 years.

Since the interest component of an EMI is large in the initial years, it will be profitable to go for this option even if the lower interest is for a period of one year.

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The long-term players in the field took a wait-and-watch approach, and they believe that it was worth waiting.

The prospects for 2010 look bright, say the builders in unison. As the heady prices of the boom period came down, people heaved a sigh of relief. It was good because a market correction was necessary, says K. Lava, managing director, Skyline SFS.

A fair price range is important for the market, he adds. And the way the market had boomed, the sector had become a playfield for all comers out to make some easy money. Now that the mad rush has died down over the last one year, only the strong players who have solid finances and a record of timely completion of projects continue in the field.

The white-collar workforce in the country looks at a car as the first priority and then comes housing, Mr. Lava says. The automobile industry started picking up by mid-2009, while the housing sector saw good momentum by October this year, he adds.

The Union Finance Minister has said that there has been a good growth during the year, surpassing the estimates. This reflects all-round growth, Mr. Lava says.

The property sector, one of the major contributors to growth, cannot be left behind. This is not a sector people can ignore, says M.D. Jairaj, managing director of Jairaj Builders.

Lessons

Some important lessons that the builders have learnt is the pricing of property. There is definitely more demand for houses with areas between 800 sq ft and 1,500 sq ft that cost between Rs.20 lakh and Rs.35 lakh. Many builders have turned to make more offerings in this category.

There is more movement in smaller size homes, but an all-round demand for all categories of houses was experienced in the latter part of the year, Mr. Jairaj says.

More demand will automatically come through by March when stocks will finish by the end of this financial year, says George E. George, managing director, Infra Housing.

The recession has brought down the prices to an affordable level, perhaps. These prices are likely to continue into the next year. Prices have become steady and the better prospects in store are not likely to raise them, Mr. George says. The recessionary trend has been good in the sense that there is more stability in pricing compared to the boom period when prices had gone up sky-high. The builders see the growth in metropolitan cities such as Delhi and Mumbai as a benchmark for better prospects for the property market in the coming year. They are on the upward track in the two cities and Bangalore has also started reflecting the same momentum. So, the effect on smaller cities such as Kochi is also expected to be on the same track, Mr. George says.

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However, these days, banks and home finance companies offer a number of repayment options, which are a bit complex. Here is an effort to analyse them.

SURF

If you are a professional seeking a home loan and having good employment, no bank or home finance companies will like to lose you as a customer.

They will lure you with a higher loan amount by offering a telescopic repayment facility, also called as the step-up repayment facility (SURF), under which the EMIs will be less initially and will gradually increase over fixed intervals.

Let us suppose you are eligible for a loan of Rs.20 lakh under the regular scheme with EMIs of Rs.20,286 for 15 years at nine per cent interest. Under SURF, you will be eligible for Rs.25 lakh for the same tenure and interest, but the EMI will be Rs.18,750 for the first 24 months, Rs.25,357 for the next 60 months and Rs.29,325 for the balance 96 months.

On the face of it, it looks attractive. For a higher loan, the initial EMIs are less. But it is beneficial to the lender and not you, as in the first two years, the lender will be collecting only interest. As a result, the total interest payable over 15 years will be 10 per cent more than in the normal scheme.

For a loan of Rs.25 lakh under the regular scheme, the total interest payable will be Rs.2,064,133 in 15 years, whereas in SURF, the total interest payable will be Rs.2,286,608, an additional interest of Rs.2,22,475. Hence SURF scheme is not advisable.

FLIP

If you are applying for a home loan with your father/mother who is left with less service (or if your service left is less than 15 years and your wife has more service left), in the regular scheme, your loan eligibility will be less as the tenure offered will be restricted to the service left for the elder applicant.

Under these circumstances, the flexible loan instalment plan (FLIP) comes in handy. It works the exact reverse of the SURF scheme. In the initial years (up to the retirement of elder applicant) EMIs will be higher and for the balance period, the EMIs will be much lesser.

For instance, a man is left with five years of service with a salary of Rs.40,000 a month and his wife has 12 years’ service and her salary is Rs.25,000 a month. In the normal scheme, the couple will be eligible for a loan of Rs.12.5 lakh for five years’ tenure, considering 40 per cent of the combined income towards EMI and interest rate of nine per cent. If you opt for FLIP, the eligibility will get enhanced to Rs.16.5 lakh. For the first five years, the EMI will be Rs.26,000 approximately, and for the balance seven years, it will be Rs.10,000.

This scheme is advisable as applicants will get a higher loan amount and end up paying lesser interest compared to regular schemes.

Home saver account

In the regular home loan, you go on paying EMIs comprising interest and principal amount. It is a non-transactional account. In the home saver account, the home loan account is made transactional by connecting it to a current account. It works like an overdraft facility and the borrower can park his surplus savings in the home saver account and can withdraw the surplus as per his needs.

Till the surplus (other than EMI) amount is lying in the account, it will earn same interest as that of loan. Such interest earned is accounted as principal loan amount repaid on a daily product basis. In this scheme, one can save a lot of interest payable on home loan as tenure reduces considerably. The scheme is ideal for business class applicants, who will have a current account for their business deals, which earns no interest and will have a high turnover on daily basis. The scheme can be opted for by high net-worth individuals who can keep surplus funds parked in their home loan account.

Accelerated repayment

Under this scheme, the borrower is allowed to increase his EMIs as and when his income is increased and he can pay lumpsum amounts, which will be apportioned to the principal loan outstanding. In this scheme, the loan gets repaid faster resulting in a lot of savings in interest payment and the long-term debt closes much earlier.

This scheme is good for salaried class borrowers, as whenever they get an increment, or disposable income is increased, they can use it for increasing the EMI amount or use it for part prepayment.

The banks and the home finance companies will try to lure you by offering many special schemes, saying that the scheme is custom-made for you and will try to push you to seek a higher loan amount. This is because there is surplus credit available and fierce competition among banks and home finance companies is making it difficult for the lenders to attract good customers.

Hence, before finalising the option, the customer needs to thoroughly analyse whether the special repayment option offered is really beneficial.
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For this segment, a rather big one, the priority is owning a house and luxuries such as a swimming pool or a spa are low on the agenda. The builders here had not addressed this need well earlier.

Their target had been mostly the non-resident Indians who had funds to invest in property. But with the recession making this section delay new investments, the builders seem to have found a new market in the budget section.

Late entry

“It is not really true that builders have ignored the budget segment,” says Jayanthan Namboothiri, managing partner of Lotus Properties. The concept of flats has made a late entry into Kerala.

The upper segment of society readily accepted it and the builders were ready to meet the requirements of this section with luxury amenities.

These include anything apart from the basic flat and facilities.

What adds to the cost are facilities such as swimming pool, a Jacuzzi, a jogging track, a private jetty if it is a waterfront project, a health club, a spa and so on.

The budget buyers have looked upon living in flats as a luxury which they cannot afford.

The budget and low-budget flats have made a mark during the recessionary period. A major problem during the boom time has been the skyrocketing prices of land, Mr. Namboothiri says. Many people are interested in buying flats with areas of about 1,000 sq ft and prices in the range of Rs.25-30 lakh. Rajeev Kumar Cheruvara, director, Apple a Day Properties, says that there is a large segment for whom housing is a need and not an investment. The construction sector has failed to address the needs of this segment, he says, as most builders were not offering products that the end-user really needs. In many other industries, the profit margins range from 20-50 per cent, perhaps, but in the construction sector, the boom time has given builders 200-300 per cent margins, he adds.

Corrective measure

The recession is actually a corrective measure so that there are houses available at affordable prices, Mr. Cheruvara says. A good number of families have combined annual incomes ranging between Rs.4 lakh and Rs.6 lakh each.

A sum of Rs.25 lakh is the maximum that they can afford for a house.

Builders should have products with prices ranging from Rs.6 lakh to Rs.1 crore so that it can cater to all segments. There needs to be products that range from the popular to the premium in the housing sector, he adds.

A large number of people in the lower segment of society continue to build houses themselves on small plots of land.

Mr. Cheruvara says that one-bedroom villas at affordable rates will attract that segment.

A person who likes to build a house on three cents of land will be attracted. All these need to be without frills as people in this segment are looking for shelter and not luxury.

Though food, clothing and shelter are the basic needs of man, shelter has become rather speculative, he says. This is because the product is being designed for speculation.

Such affordable housing is usually found a little away from the city, maybe 6 km to 10 km away or even more. But some builders have started offering budget flats even in prime locations.

Anil Gopinath, marketing manager of Galaxy Homes, says, “We have found a good demand for two-bedroom apartments for Rs.10-15 lakh going up to a maximum of Rs.30 lakh. Two-bedroom flats with areas of 600 sq ft each have a good demand if built in the city. The location and price both have to appeal to the customers.”

These flats will have basic facilities and security but will be devoid of luxury amenities. Such housing will be a relief to a large number of people who find it difficult to build a home.

Low awareness

Mr. Namboothiri believes that awareness of living in flats is low in villages. This can be one reason that people feel reticent about approaching the builders.

It is people in urban areas who have picked up flats built in panchayat areas.

A change in attitude is, perhaps, round the corner and the builders catering to the segment believe that the demand in this segment is bound to increase slowly.

Mr. Cheruvara says that if affordable property is built, there will definitely be a buyer.
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Today, for instance in Kozhikode, the scene is vibrant with more commercial buildings coming up even on the outskirts of the city. The shortage of commercial spaces has forced builders to set up projects in new areas, such as the mini bypass and the n ew Ramanattukara-Malaparamba bypass. Some have already drawn up plans to establish hotels and business-related ventures on the upcoming stretch from Malaparamba to Vengalam.

Property developers say the Vengalam-Ramanattukara bypass will witness a big growth in terms of commercial and residential projects. The availability of space will give the stretch a boost to real estate business. Besides, the place will be free from traffic chaos.

Builders say that land is not available in the centre of the city for constructing shopping malls. So, they are forced to develop new commercial sites on the bypass. A multitude of projects ranging from star hotels, showrooms and supermarkets are coming up from Thondayad to the Malaparamba junction. This is a strategic location and has good connectivity.

The ‘hi-lite’ group is coming up with ‘hi-lite’ Hills, a commercial and residential project. The ‘hi-lite’ Plaza will have office spaces in two towers with over 10-lakh sq ft of built-up space. The towers, each of eight storeys, will be equipped with all amenities and a corporate ambience suited for all kinds of commercial enterprises. Among the advantages is a peaceful working environment.

It will have 100-plus office spaces with areas starting from 750 sq ft. The first tower will be completed in July 2011. The selling rate is Rs.4,500 a sq ft.

The company hopes that the area will accommodate information technology parks, multi-specialty hospitals and star hotels. One of the reasons for such expectations is that Kozhikode accounts for a large volume of remittances from Non-Resident Indians. Further, the city is known for its strong trading class.

Back to investing

People who have made a fortune in West Asia have forayed into new ventures here. Many have started investing in businesses in new regions. The recession in Dubai and Kuwait has made many invest in shopping complexes here. Business enterprises are not so risky in the State. Moreover, it offers a steady income. Banks are also willing to finance new projects, they say.

The slowdown has forced many multinational companies and retail giants to stop business in the city almost a year ago. But now they are retuning to reinvent their businesses. The businesses run by local companies might have had gone through a rough patch but they have emerged stronger.

Today, the rental rate quoted at shopping malls in the heart of the city ranges from Rs.200 to Rs.300 a sq.ft. This is high even in comparison with the rates prevailing in the market during the real estate boom in 2007.

However, commercial spaces are available at nominal rates in the range of Rs.15 to Rs.50 a sq ft in areas such as Malaparamba, Nadakkavu, Karaparamba and West Hill. The rental rate at prime locations such as Mavoor Road is above Rs.100 a sq.ft. It is also high near Malabar Christian College Road, Arayadathupalam, YMCA Cross Road, Railway Station Link Road, Eranhipalam and Annie Hall Road.

The rates are soft in residential areas such as Chinthavalappu, Chalappuram, Karikkamkulam, Bilathikulam, Mankavu and East Hill. Warehouses are available at cheaper rates in areas adjoining the main junctions on Beach Road or at West Hill.

A year ago, many private banks, financial institutions, insurance companies and telecom players have started looking for commercial spaces away from the din of the city. Most did not want to remit high floor rates. Others wanted locations close to residential areas. Today, they believe their strategy has worked. House owners having plots adjacent to National Highways, especially on Kannur Road (National Highway no.17), try to sell their land to developers or construct office spaces. The trend is seen in other parts of the city as well. They hope that the positive outlook will spur growth and end the shortage of commercial space.
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According to media reports, the RBI is planning to ask banks to discontinue the practice of foreclosure penalty, which was a bane for the borrowing community.

At present, borrowers sitting on large chunk of loans need to think twice before shifting loans as in most cases the penalty amount runs into thousands of rupees.

Though penalty charges are applicable for all types of loans, it is particularly harsh for those sitting on home loans because of the large loan ticket size.

Hopefully, it will be a thing of the past soon.

As a borrower, you are bound to feel like celebrating but you will have to wait a little longer.

For, the RBI’s move is likely to be applicable only for fresh loans though the regulator is not averse to the idea of extending it to old borrowers at a later date.

In fact, the RBI wants to make life good both for new and old borrowers by removing various disparities between the two.

For instance, there is a move (still in early stage) to remove the concept of benchmark rate and replace it with a single rate which would be

The above changes, in reality, would put a greater emphasis on the concept of borrowing and borrowers would be required to keep track of loan pricing.

At present, for many borrowers, the downward trend in interest rate did not mean much as they were forced to continue with existing loans because of pre-closure penalty. In the case of home loans, the penalty amount was good (huge) enough to maintain their loyalty.

For instance, a loan amount of Rs.30 lakh required the borrower to cough up a penalty of Rs.60,000 for foreclosure (at a rate of 2 per cent) and worse, this was not funded by the fresh lender.

As you are aware, loans when shifted from one bank to another, take care of only the principal amount and do not include other charges.

Hopefully, the new regime will bring in the desired changes.

As pointed out earlier, the changes on the home loan front require borrowers to be agile to the changing dynamics and it will be prudent for borrowers to prepare for an early closure in their own good.

Gone are the days when borrowers could feel comfortable with the fact that their EMI is not a burden. With interest rates fluctuating on a regular basis, it will be advisable to look at the option of closure of loans well before the due date.
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There are enquiries for villas, but unfortunately, there are no stocks available at present. The builders over the last year had concentrated more on delivering the ongoing projects. It was not a good time to announce new ones.

The customers’ approach is to go in only for finished products or projects nearing completion. This approach has slightly changed, he says. However, the change in this graph has favoured only builders who have sustained through the recessionary period and have delivered their products in time. Unless progress is seen in a project, customer confidence will be lacking.

The customer confidence is just coming back, says M. Unnikrishnan of the Thripunithura-based Royal Projects. There is a release from fear. The market is very much alive, but the budgeting is small. The customer is having a studied approach, Mr. Unnikrishnan adds.

Earlier, an investor will put in an extra effort to go for a higher budget, but now the customer is looking at the builder to help them make a good buy within their fixed budget. In fact, quite a few genuine enquiries are not materialising into buys only on the aspect of cost.

Customers have had to face bad times because quite a few projects in areas such as Kakkanad have come to a standstill. These probably had come up without any USP and hence were hit by the market trend, Dr. Zackeria says. The delay in the SmartCity project may also have been playing on the customer mind. Another factor affecting Kakkanad was perhaps the mushrooming of a number of small-time builders during the boom period, some of whom were not able to sustain through the difficult times. The builders are taking the new momentum in the market with caution. “We do not expect any rapid improvement,” Dr. Zackeria says. It will take about another six to eight months for a turnaround, he adds. It will happen as a spontaneous effect of the overall economic improvement, and depending upon the absorption of the present supply of stock and end-user demand, the new supply will start trickling in.

In fact, quite a few builders are waiting for some more time to pass before they announce their new projects. The full concentration is on completing projects in time.
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