Special Economic Zones: Profits At Any Cost

By C.R. Bijoy

22 October, 2007
Countercurrents.org

No other economic 'reform' in India has seen such a rapid expansion of militant protests and conflicts as Special Economic Zones (SEZs). Local inhabitants, particularly in Raigad (Maharashtra), Jhajjhar (Haryana) and Nandigram (West Bengal) cutting across caste, class and party affiliation rose up in revolt, with Nandigram seeing the most militant uprising leading to at least 14 deaths in police firing on 14 March 2007. These come in the wake of growing struggles against land acquisitions for industries met nonchalantly with deadly state terror, as in Kashipur, Lanjigarh and Kalingangar in Orissa, Singur in West Bengal or Bastar in Chattisgarh turning central India into a war torn zone.

The intensification of the expropriation of livelihood resources of the masses since the 1990s with the launch of the New Economic Policy, followed by what is popularly referred to as ‘globalisation’, which in fact is liberalization, privatization and globalization, facilitated by the troika – the World Bank, International Monetary Fund and World Trade Organisation – has seen an outburst of conflict between the state and the people. The rapid accumulation of capital leading to over-accumulation, the emergence of finance capital as the engine of change and control, and the materialization of the marauding global capital for accumulation through dispossession as a distinct outgrowth for control of resources and market are set to change the political discourse of geographies and her peoples.

SEZ that promises to usher in a new era of rapid growth and employment as never before evoke intense debate. The West Bengal government has put all SEZ's on hold. The plans for a large multi product SEZ in Kalinga Nagar has been dropped by the Orissa government. Rehabilitation policies are being revised by Punjab and Haryana. Maharashtra government is planning to reduce the size of the planned MahaMumbai SEZ. The Finance Ministry and the Reserve bank of India are unhappy with the SEZ policy on grounds that the policy offers excessive exemptions which will lead to revenue loss and spur real estate speculation. The Rural Development Ministry objected to the large-scale acquisition of agricultural land threatening spinning off further food insecurity. The IMF and the Asian Development Bank have criticised the tax exemptions being provided making SEZ ‘business-friendly’ rather than ‘market-friendly’, inherently violating market principles and market reform which they ardently promote.

A number of patch work remedies are proposed. Avoidance of acquisition of prime agricultural land, improvement in the compensation package offered in rehabilitation, offer of shares in the companies in the project to the displaced, compensation for agricultural labourers and sharecroppers besides land owners, ceiling on the area of SEZ's and no land acquisition by the state governments but instead the private developer to buy land at the market price directly from the land owners are some proposed remedies. The Parliamentary Committee on Commerce has demanded a freeze on new SEZs pending a fresh look at the policy, ban on use of irrigated crop land, a ceiling on the extent of land for SEZs and that too on lease rather than purchase. The Commerce Ministry meanwhile issued a new notification making SEZ developers responsible for the rehabilitation of displaced persons “as per the policies of the State government”. At the same time the Commerce Ministry has further liberalized exemption to now include contractors in SEZ units to claim exemptions to further promote SEZs while the Finance Ministry on the other hand is trying to tighten tax exemptions.

The Manufacturing of SEZ, the High-Speed Engine of Growth
However, what is noteworthy is that SEZ policy, followed by SEZ Act and Rules, emerged and established without much parliamentary debate over the last eight years across both the National Democratic Alliance and the United Progressive Alliance regimes. The SEZ has, as its predecessor, the Export Processing Zones (EPZs) which are ‘industrial zones with special incentives to attract foreign investment in which imported materials undergo some degree of processing before being exported again’ (The International Labour Organisation, 1998). EPZs are 'enclaves' dedicated to the promotion of export processing, isolated and insulated from the domestic economy with relaxed and liberal state controls in import, infrastructure and, in some cases, labour laws, simplified bureaucratic procedure, and favoured treatment to foreign and often domestic investors. The investors are to process all intermediate imports within the zone and to export without adversely affecting the domestic economy, attract foreign investment into and promote exports from the industrial and manufacturing sector within these initiatives that are not be extended beyond a specified geographical area, namely a ‘zone’.

EPZs emerged in response to the emergence of finance and global capital as the major economic players, the rapidly accumulating capital that seeks to move out to invest, the growing competition between developing nations to attract foreign direct investment and the thirst of capital to have an unfettered play in the pursuit of profit. Around 1967 Western capitalism was faced with a crisis of stagnation in growth, co-existing with high rates of inflation creating an economic downturn and slump along with the over-accumulation of capital. To snap out of this crisis, capitalism evolved a mechanism where the adjustment process heavily depended on lowering the cost of labour, raw materials and production by migration of capital to the peripheral regions of South Asia in the form of EPZ. This led to the decision of US firms to locate assembly operations in low-cost East Asian locations in the 1960s, particularly South Korea and Taiwan, where the US had particular political and strategic interest besides influence. Both these countries established their first EPZs in 1965 around the same time as India. Now an international phenomenon, EPZs increased from 176 across 47 countries in 1986 to over 3,000 across 116 countries by 2002. This does not include the enormous numbers of industrial parks, free zones and other areas which strongly resemble EPZ's but are not officially declared as such. Three countries in particular –Taiwan, South Korea and China – are often cited as major successes in using EPZ's as part of their industrialisation strategy.

South Korea under US occupation and Taiwan under the Kuomintang had gone through far-reaching land reforms freeing agricultural surpluses for use in industrialization with the virtual elimination of the feudal landlordism. EPZ formed a part of the larger domestic industrial and economic development of these countries through export-oriented strategy. Moreover the EPZs were not central to this strategy.

Taiwan's first export-processing zone was set-up in 1965 in Chien-Jiang, Kaohsiung City, followed by the opening of more zones managed by Taiwan's Export Processing Zones Administration. Average annual growth in exports was high at about 61 percent from 1967-79 but new investment had largely dried up by the early 1980s with infrastructure becoming redundant, duty-free arrangements improving elsewhere in Taiwan, and investment migrating elsewhere in the Asian region in search of greener pastures in terms of higher returns per dollar of investment and lower wage rates.

South Korea organized special industrial parks and export processing zones focused on the under-developed regions away from the high investment receiving Seoul. The industrial parks for export production and the export-promotion zones were initially expected to spearhead the development of capital-intensive heavy industries such as iron, steel and petrochemicals, but in the 1980s shifted focus to high-technology industries as computers, semiconductors, telecommunications and biotechnologies. But these zones waned in importance that by 1985 the SEZ manufactured good exports amounted to only 2.9 percent of the country's total manufacturing exports.

In the case of China, the situation was different with a socialist command economy, state ownership of land in urban areas and village commune ownership (collectivization) of land in the rural areas, and strong labour security. EPZs for earning much needed foreign exchange earnings commenced in the 1960s and SEZs beginning in 1979 with four SEZs, at Shenzhen, Shantou, Zhuhai, and Xiamen. Hainan Island was opened as the fifth SEZ in 1984 when ‘open door’ economic privileges were also offered to fourteen coastal cities. This opening up was carried out while insulating the economy of the remaining region of the country, as a strategy for regional development and that too of the poorer southern coastal areas. The strategy adopted was liberalization in a gradual manner with SEZ as the vanguard of market socialism. Unlike South Korea and Taiwan, SEZ in China was of central political and economic importance. In 1981, China clamped a moratorium on further SEZs. Large scale foreign investment came in from Hong Kong, Macao and Taiwan to tap geographical proximity and economic advantages as wage rates. The 1987 Land Administration Law provided the country's first property rights with provincial governments, municipalities and SEZ's also empowered to create their own land regulations as long as they did not contradict the national legislation.

By the 1990s these export promotion zones became import processing zones with net exports barely 16 percent of gross exports due to the high import component. Property markets emerged by 1991 with administrative allocation of land and rise of a speculative market in land rights. Only less than half the land transferred was actually developed. The ‘Zone fever’ spread with the provincial and local government declaring special zones that the number was estimated from 6000 to 8700 zones covering 15,000 square kilometers, often in violation of national or provincial regulations that more than 1000 such zones were cancelled by the national government. Uncontrolled speculative spin-offs forced the government to impose restrictions on the construction of hotels, restaurants and commercial buildings. Economic and Technical Development Zones (ETDZ) and National Industrial Development Zones for New and Advanced Technology (NIDZNAT), smaller high-technology oriented zones, sprung up close to the cities numbering 54 by 2006. 5 million hectares of arable land were transferred to such zones between 1986 and 1995. By 1997 the government imposed a blanket moratorium on conversion of land-use across the country followed by a law in 1998 restricting conversion of agricultural land. The Hainan Development Bank that invested heavily in such zones closed down bankrupt. Some of the biggest public sector corporations faced financial crises and bankruptcies. The preferential tax treatment offered to investors are being removed and made uniform across the country. In Shenzhen, the biggest of all SEZs, a third of the workers received less than minimum wages and about half the firms owed workers wage arrears. Runaway pollution problems cost the country more than US$200 billion a year, roughly 10 percent of China's gross domestic product and pollution-related deaths is estimated at 750,000 annually.

India set up the first special EPZ in Kandla, Gujarat, as early as in 1965. Santacruz Electronics Export Processing Zone (SEEPZ) followed becoming functional in 1973. Four more zones were set up by the Central government in 1984 at Kochi (Kerala), Chennai (Tamil Nadu), Falta (West Bengal), and Noida (Uttar Pradesh). Another one was set up in Visakhapattanam (Andhra Pradesh). SEEPZ in Mumbai for instance transformed the labour-intensive jewellery industry with its cottage industry status to a highly mechanized modern industry accounting for 55 percent of the Indian jewellery exports in 2002-03. The unit established by Tata Group in partnership with Burroughs, an American company, in 1977 in SEEPZ saw the beginning of India’s export in software and peripherals. Citibank established a 100 per cent foreign-owned, export-oriented, offshore software company in SEEPZ in 1985. The first private EPZ started operations in 1998 in Surat, Gujarat. All these eight EPZs, including the one at Surat, have since been converted to the new SEZ scheme.

Foreign Direct Investment (FDI) to the total investment in EPZ was a low at 16.7 percent. The share of EPZ in the country’s export was a mere 5 percent in 2004-05 accounting for 1 percent of employment in the factory sector and 0.32 percent of factory investment. All these indicate that the hype over EPZ has no basis as far as India is concerned.

EPZs were justified as necessary in order to overcome the often repeated shortcomings on account of the multiplicity of controls and clearances; absence of world-class infrastructure, and an unstable fiscal regime and with a view to attract larger foreign investments in India. The Special Economic Zones (SEZs) Policy was announced in April 2000 offering more lucrative incentives/benefits. During the period 1 November 2000 to 9 February 2006 SEZs functioned under the provisions of the Foreign Trade Policy with all existing zones being converted into SEZs. Statutes to formalize the fiscal incentives became operational subsequently.

The Special Economic Zones Act, 2005, passed by Parliament without much parliamentary debate in May, 2005 receiving the Presidential assent on the 23 June, 2005 supported by SEZ Rules, came into effect on 10 February, 2006. The Left parties opposed any relaxation of labour laws and insisted on the removal of two clauses in the Bill pertaining to the Central government's power to modify or withdraw the application of any law to SEZ's, and a clause empowering the State governments to withdraw application of labour laws in SEZ's which were amended by the Commerce Minister through amendments in Parliament. The debate over SEZ Act came up only with people’s resistance that emerged subsequently.

Unraveling SEZ: A Boon or A Bane
The Act provides for drastic simplification of procedures and for single window clearance on matters relating to central as well as state governments for generating additional economic activity; promoting exports of goods and services, investment from domestic and foreign sources; creating employment opportunities; and developing infrastructure facilities. Single Window SEZ approval mechanism is provided through a 19 member inter-ministerial SEZ Board of Approval (BoA). The functioning of the SEZs is governed by a three tier administrative set up. The Board of Approval is the apex body. Each Zone has an Approval Committee dealing with approval of units in the SEZs and other related issues. Each Zone is headed by a Development Commissioner, who is ex-officio chairperson of the Approval Committee. Once approved the Central Government notifies the area of the SEZ and units are allowed to be set up in the SEZ.

A whole range of incentives and facilities are offered under the Act including duty free import/domestic procurement of goods; 100% Income Tax exemption on export income; exemption from minimum alternate tax, Central Sales Tax, Service Tax and State sales tax and other levies, customs/excise duties, and dividend distribution tax; external commercial borrowing up to US$500 million in a year is permitted without any maturity restriction; provision of standard factories/plots at low rents with extended lease period, and infrastructure and utilities. Most taxes and cesses are not applicable to goods procured from the Domestic Tariff Area. The fifteen year income tax holiday consists of total exemption for the first five years, 50% for the next five years, and 50% on reinvested export profits for the following five years, while Developers get a 10 year 100% tax exemption. Electricity taxes and duties are to be removed for electricity that is to be used within the processing area.

The main difference between an EPZ and SEZ is that the former is just an industrial enclave while the SEZ is an integrated township with fully developed infrastructure. In addition, state governments also enacted their own SEZ laws, primarily to cover state subjects.

All that is required to create an SEZ is simply finding land for it. Objectives of exports, employment, industrialization etc., are in effect deemed irrelevant to the declaration of the SEZ. It is however required that the unit would have a positive net foreign exchange earning within the first five years; the Developer confirms availability of space in the processing area for the unit, the applicant (a resident with a good financial record) undertakes to fulfill applicable environmental and pollution control norms; certain industries are to fulfill the respective sector-specific requirements; and units involving transfer of machinery from the Domestic Tariff Area (as per a clause added in October 2006) will not be approved. The State government is also to provide water, electricity and other services required by the developer. SEZ's includes restaurants, housing and apartments, gymnasiums, club houses, multiplexes, shopping arcades and retail space, schools, convention or business centres and even swimming pools. Hotels are allowed in all SEZ's except IT, gems and biotech SEZ's. The performance of the SEZ units is to be periodically monitored by the Approval Committee and units are liable for penal action under the provision of Foreign Trade (Development and Regulation) Act, in case of violation of the conditions of the approval.

366 SEZs were granted formal approvals granted as on August 2007 covering a land area of 48,968.9724hectares. Of this, 142 have been notified as on 24 August 2007 for an area of 18,933.83908 hectares. Further in-principle approvals have been granted for an additional 176 for 157,169.0131hectares. The Ministry of Commerce claims that these zones would attract investment of about Rs.100,000 crores including Foreign Direct Investment (FDI) of US$5-6 billion creating 500,000 jobs by end of 2007. Total investment expected by end 2009 is Rs 300,000 crores creating additional 40 lakh jobs, by December 2009.

The critique of SEZ has largely been around the issue of land acquisition and its fall out in terms of how much land, what kind of land and the compensation package; but SEZ portends much more than these. There is also the anticipation that SEZs will take the country to unprecedented growth levels. Speculations are rife with cynicism alongside that these are misplaced. But what is not being recognized nor debated is that SEZ, more than an ‘economic growth model’, is more of a ‘governance model’ that gives almost full rein to capital, and that too predatory capital.

The Transfer of Power: Abrogation of Democracy to Corporate Governance
SEZ's will be notified as ‘industrial townships’ under Article 243Q of the Constitution which exempts them from the provisions of Part IX of the Constitution that provides for elected local governments. Instead, an industrial township authority is constituted with the same powers and duties as a municipal body. There would be no democratic local governance institutions in SEZs. The developer is to construct the zone and also be effectively in control of the local governance in terms of provision of infrastructure and basic services such as education, health, transportation and so on. The Development Commissioner, along with the Developer, effectively replaces local democratic institutions centralizing powers with every arm of the state such as public services, police, judiciary and local governance coming under the control of the Development Commissioner, the Developer and the Central government. This is evident from the three tier governance system in place.

Full powers are bestowed by Section 49 of the SEZ Act on the Central government to modify or repeal any Central law in its application to SEZs (with the exception of labour law), a power normally vested in the parliament. This exception is ‘relating to trade unions, industrial and labour disputes, welfare of labour including conditions of work, provident funds, employers’ liability, workmen's compensation, invalidity and old age pensions and maternity benefits applicable in any Special Economic Zones.’ However, this exception is virtually nullified by the Rules that require that State governments declare SEZ's to be public utility services and delegate the powers of the Labour Commissioner to the Development Commissioner whose specified mandate is for ‘speedy development’ of the SEZ, especially the promotion of exports. Moreover, the SEZ Act only bars the Central government from relaxing labour laws but not the States. These include exemptions from the Minimum Wages Act, Contract Labour (Regulation and Abolition) Act, Employees State Insurance Scheme, requirements for posting information, and so on.
The Development Commissioner in most States is the authority for most clearances and for labour rights. The judicial and policing functions are altered with ‘No investigation,
search or seizure shall be carried out in a Special Economic Zone by any agency or officer’ without the permission of the Development Commissioner under Section 22 of the Act with the exception being only in the case of ‘notified offences’, notified by the Central government under section 21 of the Act, which are also to be intimated to the Development Commissioner. Special courts are provided under the Act in SEZ's for both civil and criminal matters who alone can try and adjudicate any civil dispute within an SEZ or any trial of a ‘notified offence’. Ordinary criminal trials of non-notified offences can take place in ordinary courts, but investigation of such crimes is not possible without the authorization of the Development Commissioner. Appeals from the special courts will lie directly with the High Court of the State. These provisions produce a system of a separate judiciary for the SEZ with the Development Commissioner playing a key role. The net effect is the transfer of power over resources, governance and people within the Zone to big business and investment capital, and the creation of a new economic, geographical and political reality.

The SEZ Act itself insists that all those employed or residing in the Zone is to have an identity card with entry restricted to only ‘authorized persons’ into the processing area. The Zone will effectively be a secured enclosure, fenced off by boundary wall or wire mesh of a minimum height of two meters forty centimeters with top sixty centimeters being barbed wire fencing with mild steel angle and with specified entry and exit points. This clause was replaced in March 2007, with a requirement that the processing area and an FTWZ (Free Trade Warehousing Zones) shall be ‘fully secured with measures approved by the Board of Approval.’

Economic Parasitism
Unlike India, the so-called ‘success’ stories of Taiwan, South Korea and China have two important features namely, (a) in all these countries the EPZs/SEZs followed a thorough land reforms that effectively eliminated the feudal landlordism which in the case of India remain cursory and (b) EPZs/SEZs formed part of a national economic and development strategy of the countries as a whole whereas India expects the SEZs to be the engine of rapid transformation of the national economy and development. That these ‘successes’ came with its own baggage of acute problems as enumerated earlier is another fact. Together, what it portends is further economic and political crisis besides the social and environmental fallouts.

SEZs are expected to bring in a flood of investment, especially FDI due to the unbridled incentives. Rs.3,000 crores is estimated by the Ministry of Commerce to be invested in the SEZs by the end of the fiscal year 2006 – 2007. In contrast, India received an FDI of Rs. 1.06 lakh crores in 2006 (Union Budget 2007-2008). FDI also has shown a preference to acquire existing companies or invest in infrastructure rather than greenfield export-oriented projects. The projected large FDI into SEZs is skeptically viewed as chasing a mirage. FDI as a percentage of total investment in EPZ's varied in Asia from a high 90% in Malaysia and 85% in Taiwan to a low of 16.7% in, significantly, India. Once the infrastructure is in place, production and exports increases initially following initial large investments. Later, there is a ‘leveling off’ of foreign investment and exports. The cost of labour and general costs tend to rise subsequently driven by increased cost of living and services.

The exports are offset with high import component lowering net exports induced also by the reduction of duties and tariffs on imports. The importance of Zone to export promotion then declines leading to the inevitable reappraisal and reintegration into the domestic economy. In addition, under WTO the incentives provided in SEZs are treated as ‘export subsidies’ which lead to countervailing duties by the importing countries under the WTO Agreement on Subsidies and Countervailing Measures. Already India is subject to the largest number of countervailing measures for its exports from EPZs (and now SEZs) than any other country. And SEZ exports currently ranges between 7% to 9% of India's total exports only, which falls to half if one were to account for the invisibles.

The incentives dished out to SEZs will create a tilted playing field between SEZ and non-SEZ investors. Given the incentives, SEZs, rather than start new initiatives, would simply attract existing enterprises to relocate themselves from the domestic economy to SEZs to avail of the incentives in order to maximize profits. This would amount to a mere shift in existing investment from the outside to the SEZs rather than new investments. Of the SEZs notified, IT/ITES constituted the bulk of them (66%) with single sector IT SEZ forming the majority. This is followed by Pharma/chemicals (7%) and Textiles/Apparel/Wool (4%). It looks that the relocation process is in effective swing as can be noticed by the exceptional number in the IT sector. The government in November 2006 itself decided to stop further in-principle approval of IT SEZs. The Software Technology Parks Initiative, the main scheme is also scheduled to end by 2009. The majority of SEZ investment is from the private sector. Real estate sector applicants form the majority in the private sector followed by IT companies forming nearly three quarters of non-public sector approvals. IT and multi product SEZ's, form the bulk of all applications by real estate companies. Real estate development rather than export generation is a factor to reckon with.

Further, with strains emerging, the removal of the imposition of duties on sales of products in the Domestic Tariff Area would result in the entry of SEZ units into production for the domestic market with its damaging effect on the competitiveness of existing production outside SEZs for the domestic market. This portends closures of industries and resultant unemployment outside the SEZs.

With favored position and pampering along with relaxation of regulatory mechanism, SEZs could become the hub of economic offenses. For instance, the 33rd Report of the Parliamentary Standing Committee on Finance found that show cause notices had been issued for more than Rs. 3,400 crores between 2002-2003 and 2004-2005 for fraud in export oriented units (EOU's) and some other export schemes.

Redrawing Land Maps
The establishment of SEZs, and a large number of them, requires substantial land to be acquired or purchased by developers. About 2 lakh hectares are required for establishing the approved and in-principle approved SEZs. The notorious Land Acquisition Act 1894 has been used to acquire lands in many cases whether the developer is a public sector or private sector, at a price well below market prices not taking the dependants of the land as an affected party in the acquisition normally. Land can be acquired under this Act only for ‘public purpose’ which are defined in Section 3(f) of the Land Acquisition Act and does not include companies. However, the judiciary has deftly reinterpreted the law to say that once the government has acquired a land, the government can sell, dispose or transfer rights of its land at will to whomsoever it wants to, irrespective of the original intent of acquisition. In effect, land acquisition by the State has made a decisive shift from ‘public purpose’ to also ‘private profit’. But with militant resistance, the developer purchasing land directly from the owner without the mediation of the state is a proposed remedy.

Acquisition of prime agricultural land became a major issue with all its serious implication which is now attempted to be restricted with restriction of acquisition on single crop agricultural land alone beside waste and barren land. Double cropped agricultural land, if necessary, is to be limited to 10 percent of the total land. More over such areas have powerful farming interests and is at the heart of agricultural economies. That the category of waste and barren land most often constitute survival resource base for the most marginalized in vast numbers is ignored. Land acquisitions, or alternatively land purchases, are therefore to increasingly focus on the marginal and tribal areas. Official rehabilitation schemes rarely work satisfactorily, be it by the state or the private sector. However, holding the state responsible is easier than the private purchaser in a democracy. The proposition to take the land on lease is also floated to ostensibly ensure permanent income to the oustees.

The lands are invariably located in close proximity to raw materials, urban centers and transportation facilities. At least 35 percent of the acquired land is to be used as processing area while the rest could be for residential, and recreational facilities. The acquisition bypasses and belittles local self-governance institutions of the panchayats. The SEZs moreover become the nodal points for speculation fuelling large scale real estate activities around the Zones with the emergence of powerful land mafias in connivance with authorities to dispossess people of their lands in the surrounding areas driving land prices up within SEZs and around it. The attraction to SEZs is likely to vanish in due course defeating the main attraction of low cost SEZ. Almost as though recognizing this reality, the Reserve Bank of India has asked the banks to treat SEZ lending as real estate business and not infrastructure.

Promoting Disparities and False Hopes
SEZs will aggravate regional disparities. Over three-quarters of all approved SEZs are located in six States – Andhra Pradesh, Gujarat, Haryana, Karnataka, Maharashtra and Tamil Nadu. Maharashtra and Andhra Pradesh alone account for more than a third of all approvals. These states are all relatively well developed States with high industrial capacity. These are also highly urbanized with the partial exception of Maharashtra. Obviously, investment is channelised to areas of high levels of industry and investment which further propels these states to showcase their ‘success’ further.

Employment to the tune of 5 lakhs to as much as 40 lakhs is bandied about officially by the Ministry of Commerce. As indicated earlier, relocation of industries from outside to the SEZs to take advantage of the relative advantage would simply mean mostly the translocation or migration of existing labour than generation of new employment. In addition, the likely negative impact of SEZs on manufacturing outside the SEZs could spell a decline in employment outside. Between 1998 and 2003, while investments grew by 73%, employment growth showed only a 13.7% rise in EPZs. Net increase in employment, considering the growth in employment in SEZs, would therefore be actually far low.

The working conditions, in the context of the relaxed application of labour laws, could continue the turnover rate of 30% or 40% seen in the erstwhile EPZs. Labour abuse and violence in EPZs has led to consumer movements in the US for instance, demanding multinationals to respect labour rights. Workers are told that they could not organise trade unions because of the ‘zone’ status which are declared public utility services, a designation under the Industrial Disputes Act, 1947. Labour inspectors are reportedly issued orders by the Commerce Ministry not to visit the zones without prior permission from the Ministry. There is also the unemployment caused due to land acquisition or change in land use in and outside SEZ. The long term impact such as impact of pollution and change in land use in the surrounding areas could be colossal if one is to go by past experience.

The loss to the government on account of SEZ is incredible. In 2004 – 2005, the government already incurred a loss of Rs. 41,000 crores – a staggering 72% of customs revenues and 23% of total indirect tax revenue of any kind. The Finance Ministry estimates that Rs. 1.75 lakh crores will be lost over the next five years.

These capital driven enclaves have all the bearings of impending economic crisis and the concomitant political and legal turmoil. SEZs are not simply about land-based displacement-inducing projects driven by the nexus of capital and state. It is also about the replacement of democracy by governance by corporations, the new form of governance by capital supplanting people. It is also about growth with inequity, and social and environmental injustice. It is also about democratization of control over and governance of resources by people in response, as a matter of right and struggle.

[Email: cr.bijoy@gmail.com]

References:
1. Aggarwal, Aradhna. Revisiting the Policy Debate, Economic and Political Weekly, November 4, 2006, pp. 4533-4536
2. Gopalakrishnan, Shankar. Negative Aspects of Special Economic Zones in China, Economic and Political Weekly, April 28, 2007, pp.1492-1494.
3. http://sezindia.nic.in/HTMLS/about.htm

 

countercurrents.org

Kotak group to take 10 pc stake in Sunteck Realty

Mumbai (PTI): A realty fund managed by Kotak Mahindra Investments will invest Rs 140 crore in Sunteck Realty to acquire a 10 per cent stake in the latter.

This would be one of the first investments from the new USD 400-million realty fund recently raised from domestic investors by Kotak.

The investment would be through a combination of equity and convertible preference shares, which, on conversion will result in a 10 per cent stake in the company, on a fully-diluted basis, Sunteck said in a release on Monday.

Sunteck Realty is currently listed on the Bombay Stock Exchange.

The group plans to utilise the funds towards developing residential and commercial projects in Mumbai, Goa, Pune, Nagpur, Chennai and other key Tier-II cities.

The group is currently developing a premium residential project in Mumbai at Bandra-Kurla complex branded as Signature Island, apart from other office/IT park projects in the metropolis.

Group's Chairman Kamal Khetan said: "This investment will complement our existing expansion plans. We intend to add other value-accretive properties to our existing list of acquisitions, especially in Mumbai. We would also like to extend the group's footprint to other carefully selected Tier II cities across India."

Kotak Realty Fund's Chief Investment Officer V Hari Krishna said: "We are very excited about investing in Sunteck Realty group which has emerged as a strong participant in the booming real estate market in India."

 

TheHindu

People Group Unveils Makaan.com

The group that gave us Shaadi.com, Fropper.com, and Astrolife.com is now venturing into real estate -- online.
The Anupam Mittal led 'People Group' has launched its online real estate portal named "Makaan.com", which endeavors to provide a market place for home seekers, real estate agents, and builders alike.

"Makaan.com" tries to make the entire online process of finding buyers- and sellers- of property easier, faster, not-to-mention more secure.
On "Makaan.com", buyers can get a wider range of real estate options, while sellers can improve their reach like never before.
The visually clutter-free site believes in 'keeping it simple'. Yet, it boasts advanced search functionalities that help users seek a more efficient and effective house hunting experience.
As of now, the portal is focusing on top 13 cities including: Delhi, Mumbai, Kolkata, Bangalore, Chennai, Hyderabad, Ahmedabad, Pune, Chandigarh, Jaipur, Indore, Kochi, and Ludhiana.
In beta for nearly two months, the site is already getting close to 3 lac unique property seekers per month, with nearly 46 percent of registered users being real estate agents.

 

techtree

Buying a house? Beware of builders' tricks

Everybody wants a piece of real estate. The sector has been growing at 25-30 per cent a year since 2003, fired primarily by low interest on housing loans and the rising affluence of homebuyers. Those who had bought stocks of real estate companies, whose valuations have gone through the roof, are a happy lot. However, the same cannot necessarily be said of scores of financially and emotionally bleeding homebuyers. The developers play lord and master to middle-income individuals, who often live like monks to fulfil their dream of owning a house. Most sale agreements are heavily loaded in favour of builders in the currently unregulated market.
This disillusionment is reflected in the rise in the number of complaints that has accompanied the growth of the sector. In the first 25 days of August 2007, the Delhi-based National Consumer Helpline, a consumers' body, received 33 housing-related complaints. The Consumer Guidance Society of India (CGSI), Mumbai, says it gets two-three cases a day. In this scenario, what chance do you have of safeguarding your interests as a buyer?
In 1993, the Supreme Court ruled in favour of M.K. Gupta in his case against the Lucknow Development Authority for not delivering his flat on time. This landmark judgment brought housing construction under the purview of the Consumer Protection Act, 1986. 
This, however, hasn't done much to change the unscrupulous ways of builders. Owing to the bonhomie between developers, the authorities and the contractors, projects get sanctioned easily but the quality of construction goes unquestioned. Supreme Court advocate C.M. Srikumar says: "Even in cooperative societies, the contractor, the
architect and the office-bearers of the society dupe the public." 
Rahul Todi, managing director, Bengal Shrachi Housing Development, says: "Unlike other consumer products, here we sell a concept first. If there is a gap between expectation and reality, then we are not doing our job properly."
What are the most common games that developers play? Here are eight common tricks and ways in which you can guard against them.
I. When do I get my house?
Most agreements do not clearly specify the date of delivery. For instance, one says: "Completion of the building is expected to be delivered by the date mentioned in the covering letter of this allotment. The delivery of the possession is subject to force majeure." What this means is that you cannot hold the developer responsible if he does not stick to the promised delivery date.
There have been cases when the delivery has been delayed by 12 months or more. Typically, the buyer would have paid 95 per cent of the price by the time he reaches the expected delivery date. If he is living in a rented house, delays will drive his calculations awry as he would not have factored in this additional rent (see Double Bite). Mumbai stockbroker Bhupendra M. Pitroda, 58, fought a legal battle against Megha Property Developers for five years. Reason: delayed possession. 
Pitroda was promised delivery of the flat he booked in 1998 in Navi Mumbai's Madhuri Cooperative Society Housing Project within 18 months. The builder later said that delivery would take another six months. When Pitroda visited the site six months later, he felt that the delivery would not happen soon. So, he instructed his bank to stop payment of the balance 37.5 per cent of the apartment's cost to Megha Developers.
The developer promptly sold off the flat. An aggrieved Pitroda then moved the State Commission in July 2000. Three years later, the commission asked Megha Developers to refund Pitroda the money he had paid with 15 per cent interest. Pitroda was also awarded a compensation of Rs 15,000 for the mental agony caused and Rs 5,000 for legal costs.
The developer appealed in the National Commission, which upheld the State Commission order but cut the interest to 9 per cent. The developer then moved the Supreme Court. "The Supreme Court judge flung the papers in the face of the builder's lawyer and asked the builder to compensate me immediately. The judgment was over in a minute," says Pitroda. Through the legal battle, Pitroda made 25 appearances in the State Commission, three in the National Commission and one in the Supreme Court.
Many agreements have penalty clauses for delayed delivery, but they are without bite. For example: "If the company fails to complete the construction of the said building/apartment within the period as aforesaid, then the company shall pay to the allottee compensation at the rate of Rs 5 per sq. ft of the super area per month for the period of such delay." What this means is that for a 1,000-sq. ft flat, you would get a compensation of Rs 5,000 per month�a pittance (see Double Bite).
In most cases, buyers put up with the delay quietly rather than 'antagonise' the builder. Most fear retribution, harassment and further delays in delivery. This is not entirely baseless. For one, agreement papers are designed to protect the builder. Two, your intention to fight the builder may look like a joke given your handicap in terms of financial prowess and influence. Three, there is no industry regulator you can turn to for redressal. Suresh Virmani of National Consumer Helpline says: "We generally encourage a dialogue between buyers and sellers to settle disputes. If that fails, the matter is taken to the regulatory body. But we can't even suggest this in real estate because there is no regulatory body."
What to do. Don't just take the builder's word on the progress of construction. Check it out from time to time, as Pitroda did. If you feel a delay is likely, start building up pressure on the developer. The best way to do this is to form a society, says Virmani. Usually, builders have many projects running at the same time and they push the ones where the pressure is higher. "The more the number of buyers, the greater is the pressure," says Bharath Jairaj of Consumer Action Group, Chennai. 
II. Where are my papers?
A lot of builders are evasive about giving the completion certificate at the time of handing over the flat. A completion certificate is issued by municipal authorities and establishes that the building complies with the approved plan. A developer would not get the certificate if he deviates from the plan.
You cannot prove ownership over your house if you don't have the certificate as you would not be able to get the house registered. Also, you may not be able to get utility connections. You will have problems selling, mortgaging or reverse mortgaging the house as it will not be in your name. In the worst case, the unapproved parts of your house would be demolished by the municipal authorities. Not a happy state of affairs.
Businessman Mohammed Haroon, 45, got his flat in Tulip Garden, Gurgaon, six years ago, but he has not got the completion certificate yet. The same goes for the other 59-odd flat owners there. Together, they took Sarvapriya Developers, which built Tulip Garden, to the consumer court. "After four years, in mid-August this year, the court directed the builder to hand over the completion certificates within a month, or pay Rs 5,000 each as compensation to all the flat owners," says Haroon. "But we know that none of the two will come our way and are prepared to approach the Delhi High Court in this matter." 
What to do. Sale agreements often don't mention the completion certificate. If yours doesn't and you notice it before signing the papers, insist on the inclusion of a clause that you will be given the completion certificate when the flat is handed over to you. Ask the builder for it as soon as he announces that the house is ready for possession. If, like Haroon, you move into the house without it, the court will probably be your last resort. 
III. What's the guarantee of quality?
Within a month of moving into his apartment in Mahagun Manor, Noida, Rajiv Raghunath, 41, got trapped inside the house as the door lock failed. In six months, the plaster started peeling off and the fans stopped working. In another few months, water started seeping in as the pipes had corroded. "I felt cheated. This wasn't worth my money," says Raghunath.
As of now, there is no way for a buyer to check the building materials used or the quality of construction. Says advocate Anupam Srivastava, who is with law firm Chambers of Law: "Quality is a subjective matter. Buyers should enter into an agreement on the kind of material that the builder will use."
In October 2005, Pune's Gera Developments started a trend by providing a 5-year warranty on its buildings. The warranty, however, is subject to the conditions that no structural changes be made to the house and that there be no misuse.
What to do. Don't fall for the builder's glib talk. Insist on including the sanctioned plan of the building and the specifications of the raw materials to be used for construction in the purchase agreement. If you are already facing quality problems, you can go to the consumer court. Says Anand Patwardhan, a consumer activist and lawyer: "If you want to approach the consumer court, move it within two years from the day you take possession." Alternatively, flat owners can form a Residents' Welfare Association (RWA) and get the builder to fix the problems, as Raghunath, an RWA member, did. 
IV. What is the price really?
Nishit Babyloni, 38, mech-anical engineer in BHEL, Bhopal, had booked bungalow No. 105 with Ansal Housing and Constructions (AHC) in Pradhan Enclave, Bhopal, in 2004. On a visit to the site five months later, he found that his bungalow was not being built. He asked AHC to give him bungalow No. 120 instead, as construction was in full swing on that. AHC formally changed the allotment in February 2005, but sent him a letter eight months later asking for Rs 3.15 lakh more.
Atit Arora, general manager (marketing) and project head, Ansals Pradhan Enclave, Bhopal, says: "The bungalow's specifications were changed. Babyloni was required to deposit the amount if he wanted the new specifications." Babyloni retorts that AHC did not tell him about the additional work and the changes in specifications. "We were not told that we would have to pay 25 per cent more for the new bungalow till 18 October 2005." He is thinking of moving the consumer court. But, it is not unusual for an agreement to say that a builder can ask for additional payments if specifications are changed or there are cost overruns.
There are legal loopholes as well. The Maharashtra Ownership of Flats Act, 1963, protects buyers against malpractices in the sale and transfer of flats. It gives homebuyers the right to inspect the builder's documents such as the specifications that he has obtained from the authorities. The Delhi Apartment Ownership Act, 1986, however, is a different story. Although it was published in the Gazette of India over a decade ago, brought on the statute book by Parliament and given the President's assent, it is yet to be notified. 
What to do. The last stop is the consumer court. Says Srikumar, "Many malpractices are offences under the Indian Penal Code, for which the responsible party can be prosecuted." Keep checking with the builder if any changes are being made to the specifications mentioned in the agreement and the allotment letter. Also, try to get it mentioned in the contract that if a sum higher than the original price has to be paid by you, the builder would give you additional time for that. You must also ask for a copy of the sanctions that the builder has taken from the authorities to carry out the alterations.
V. What else do i pay for?
To make your house liveable, you will need electricity, water and sewage connections. You will also need electrical wiring, appliances like fans, lights and a water pump, which are unlikely to be part of the package and generally won't be mentioned in the agreement. These will be additional costs that you will have to bear. You might also have to keep some speed money aside for registration so that it gets done in a decent timeframe. In some cases, the builder may make a verbal promise to get it done for you.
What to do. Builders generally have a take-it-or-leave-it attitude with conscientious buyers while striking a deal. Even so, it pays to be scrupulous and to read the agreement and its fine print. "Get a lawyer, an architect or an evaluator to determine the correctness of the purchase," says Srivastava. Finally, do some quick math and keep aside some funds to get your house up and running.
VI. How big is house?
A typical home purchase agreement states: "The plans, designs, and specifications are tentative and the developer reserves the right to make variations and modifications..." Simply put, in most cases, you won't know the final area of 
the house till you get it. The agreement will further state, "In case of change in area, the difference in cost of area shall be adjusted at the time of making final payment."
Shikhar Saxena, partner, Ace Equity Solutions, a leading housing finance franchisee of ICICI Bank [Get Quote], had booked a fully-furnished, air-conditioned service apartment measuring 650 sq. ft (super area) in Cabana Service Apartments in Indirapuram, Ghaziabad, which was being built by Assotech Realty. He got an allotment letter mentioning this area. However, when the builder offered possession, the super area of the flat had increased to 671 sq. ft. "Once the authorities approve of the floor space index, how can the builder change it?" he asks. After holding out for over 18 months, the choice before him now is to either accept all the terms of the builder or seek cancellation of his allotment. Further, he was informed that the maintenance charge, which was to be Rs 1.50 per sq. ft per month, has been increased to Rs 7 per sq. ft per month. The agreement shields the builder. It says "the monthly maintenance charges will be subject to revision from time to time".
Assotech's Elegante project, also in Indi-rapuram, was to have terrace gardens on the seventh and thirteenth floors. "There is only a patch of green; the developer has built units on these floors too," says a buyer. Srikumar says there is nothing one can do unless the size of the garden is specified in the agreement. 
What to do. Builders usually follow the same practices through all their projects. So, before buying, check out the builder's earlier projects to see if he plays fair. Start a blog or join one to share your experiences with others, though this doesn't guarantee redressal. You can read about the mistakes and experiences of other people on websites like mouthshut.com.
VII. What's the carpet area?
Most residential units in India are sold on the basis of the super built-up area, which includes open spaces like space for lifts, staircases and parking, among other things. But, what you really get is the carpet area, which literally means the area that you can carpet. This can be 15-35 per cent less than the super built-up area. In 2005, HDFC [Get Quote] chairman Deepak Parekh had said the company would provide loans at cheaper rates to developers who sell their flats on the basis of carpet area. But, there has been little headway on this front. Some developers, especially in Bangalore, sell on the basis of carpet area. In Pune, too, the builders' association has decided to increase the carpet area by 25 per cent to arrive at the saleable built-up area charged to the buyer. In both these cases, buyers are aware of the area they will get. Though there is still a long way to go, experts believe that soon properties all over India would be sold on the basis of carpet area. 
What to do. Buy property on the basis of carpet area, although the builder will not like the idea. Argue with him that if the super built-up area is mentioned on the basis of the approvals and sanctions, the carpet area can be quantified. Says Srikumar: "There should be a provision for termination of the contract and resumption of the property so that builders don't have an upper hand. However, in the absence of rules, buyers should be vigilant."
VIII. Will I get a well-managed property?
The developer may promise to maintain the building or complex in the initial years. The service, however, may not be satisfactory. Residents of Mahagun Manor in Noida have taken over its maintenance. "The homebuyers cannot even use the Right to Information Act, 2005, to their advantage because it doesn't apply to private builders or even group cooperative housing societies," says Srivastava.
What to do. You are unlikely to get relief through correspondence and phone calls. You can go the e-way to attract the builder's attention. For months, Delhi-based developer Unitech ignored the complaints of the residents of one of their premier offerings, Uniworld City. Then, a resident shot a nine-minute video that captured the visible flaws of the project, and posted it on YouTube.com, a broadcast site. Their grievances were soon attended to. You can use websites like www.consumerhelpline.in and www.cgsiindia.org to seek further guidance. 
Though the dice is clearly in favour of the builder, the buyers can still fight back and many of them are doing so. Now, the government urgently needs to put a regulator in place to ensure proper disclosures and protect the buyers.

rediff

We are optimistic on real-estate sector prospects for the long term

We followed a strategy of picking companies where growth visibility was strong and valuations reasonable; more importantly, we held on or added stocks from these sectors even when they were out of favour.

SANDEEP NEEMA, FUND MANAGER, JM MUTUAL

Aarati Krishnan

After the quick turnaround of JM Basic, another fund from the JM fund-house has been steadily climbing up the performance chart. JM Hi Fi, a theme based fund, which focuses on housing, infrastructure and financial service sectors has ascended the ranking list over the last six months. In an interview with Business Line, Mr Sandeep Neema, Fund Manager, JM Mutual, explains the reasons for the fund’s outperformance and shares his views on the real estate sector and the interest rate scenario.

Excerpts from the interview:

JM Hi Fi Fund’s performance has picked up pace over the past six months, outperforming the bellwether indices. What’s behind this performance?

JM Hi Fi Fund focuses on the housing, infrastructure and financial services sectors. These sectors underperformed during the early part of 2007 because of interest rate concerns, in general, and, more specifically, following some changes announced in the Budget for the construction sector. However, over the past six months, we have seen interest rate concerns receding, as a result of which these sectors started outperforming.

We followed a strategy of picking companies where growth visibility was strong and valuations reasonable; more importantly, we held on or added stocks from these sectors even when they were out of favour. Our conviction and stock picks helped the portfolio outperform.

Despite being a theme fund focused on housing and infrastructure, JM Hi Fi actually has a very diversified portfolio with exposure to sectors such as capital goods, cement, steel and construction, with a relatively low exposure to pure realty plays. In fact, leading stocks in the space such as DLF, Unitech etc do not figure in the recent portfolio. Any specific reason for this?

As mentioned, the universe for JM Hi Fi Fund is fairly diversified and comprises infrastructure, housing and financial services. Our strategy of picking stocks is based on the growth and valuations. There is no fixed percentage of the portfolio to be allocated to a particular sector; the allocation to these sectors is done on a dynamic basis depending on the growth prospects and relative attractiveness.

Realty stocks have been strongly re-rated over the past month. What are the factors that contributed to this re-rating? In your view, are current valuations for leading players justified?

Realty, housing and financial services sectors are interest rate-sensitive sectors. These sectors have been re-rated primarily on expectations that interest rates have peaked. Also, for realty companies, the positive factor has been the stability in the real estate prices (+/-10-15 per cent) when most people expected a crash in prices across the country. This has helped the re-rating process.

We believe that, as interest rates come down, the real estate sector will do well and as the economy grows at 9 per cent plus, the demand for real-estate will continue to be buoyant. Sector fundamentals have also changed positively over the past year, with more institutional and banking money flowing in, increased presence of organised players, emergence of pan-India companies and FDI flows into real-estate. We are optimistic on the prospects of the real-estate sector in the long term.

How are infrastructure/real-estate companies addressing their fund requirements after the recent controls on overseas fund raising?

The capital requirement of the sector will continue to be high given strong growth opportunities. A buoyant capital market means that fund requirements are met by way of equity, quasi-equity and debt from all classes of investors — private equity funds, institutional funds and real-estate funds.

Since the fund’s focus is on rate-sensitive sectors, what is your view on interest rates in the domestic context. It appears that interest rates may be on hold for some time to come, but will they really decline? If so, when?

The RBI is close to the end of a interest rate tightening cycle; it may hike the short-term benchmark rates by another 25 basis points from the present levels and they are likely to remain on hold for some time thereafter.

The central bank’s focus has shifted from growth to targeting inflation and liquidity management. Domestic interest rates are likely to stabilise and remain range-bound over the coming months on the back of mixed economic data. However, interest rates should start declining from the beginning of the next fiscal.

JM Hi Fi has consistently been high on cash (12-15 per cent debt/cash in recent months). Is this on account of concerns about market valuations?

The momentum of the current rally has been very strong. We have booked profits in some of our positions; we will deploy the cash as and when the stocks in our watch list are at comfortable valuations.

TheHinduBL

Get a piece of sunny Florida, for $1million

A US resident has advertised to sell land in that country to Indians here. In the process, the seller may have started a trend of US owners turning to overseas buyers as local demand for housing dries up following the serial bankruptcies from the sub-prime mortgage, or high-risk home loan, crisis.
Leena Reddy, a US resident of Indian origin who advertised in this newspaper late last week, told Business Standard she hoped some well-heeled Indian would buy the land.
Listed at an estimated Rs 4 crore, the 0.9 acre property is apparently part of “a prestigious golf community at Naples, Florida, with a scenic view of an 18-hole course and a lake”.
In dollar terms, the price works out to $ 1 million, which Reddy described as “a real steal” — the cheapest home expected to cost $2 million in the area.
“We bought this lot and had plans to build a house on it. But, our plans have changed and we are now looking for buyers,” she said.
Why advertise in India? Reddy said: “The real estate scene in the US is quiet. The Indian rupee has become so powerful that I thought why not?”
Reddy may be the first among a smart set of US-based NRIs who are looking at buyers from the country of their origin. A leading industrialist said he recently received e-mail offers for property in Las Vegas and Florida but trashed them for being overpriced.
The reasons for seeking Indian buyers are easy to understand. The US real estate market, battered by credit defaults, is in the throes of a major downturn, with property prices at new lows and no early prospects of a recovery.
On the other hand, the Indian rupee has appreciated by about 12 per cent against the US currency in the financial year and now stands at around 39-40 to the dollar.
In addition, recent policy changes have allowed individual Indians to remit up to $200,000 overseas — double the previous limit — from September 25 this year.
The move is aimed at increasing outflows in an attempt to balance huge foreign exchange inflows into India that could impact inflation.
So, a combination of cheaper US asset prices, the higher purchasing power of the rupee overseas, the increasing affluence of Indians and the freedom to invest more money overseas are factors that could work in favour of sellers like Reddy.
However, given the asking price of around $1 million, the transaction would need more than one buyer on account of Indian remittance limits.
Vivek Mehra, executive director of PricewaterhouseCoopers, said: “The limit of $200,000 (around Rs 80 lakh) is per individual per year. So, five buyers will need to come together and buy the property.”
Analysts say offers to resident Indians for land and apartments overseas are not unheard of, but the number of transactions is small and confined to the UK and Dubai.
But the trend is clearly catching on. Last year, a UK-based property developer had set up shop here offering to sell agricultural land to Indians. The plot sizes were small and prices were tailored to the remittance limit prevailing then.

 

BS

NRIs fuelling Indian property demand

NRIs fuelling Indian property demand

Chennai Property Tax Increased

Cheyyur Project Cancelled

India Offers Enormous Opportunity for Commercial Retail

Real estate in India is soaring high with people reaping profits from this sector. In the last 2-3 years real estate has plummeted to new highs with around 100 % to even 600% increase in the rates of both commercial and residential sector.
The shift today is and expected in the future will be towards the commercial segment with retail giving a strong impetus to it. The international retail giants have keenly set their eyes on government of India for granting them entry into this enormous demand generating country with huge potential. At present only single brand retailers can own upto 51% of the equity. All the international players are anxious to have their share of this pie in an attempt to raise the company’s profit graphs northwards touching new peaks. The retail wave which is waiting to come into its full swing will sweep the real estate sector to further highs.
Not only the global retail giants are eager to foray into Indian markets but big and well established companies back home are mapping out plans to explore new expansions into retail. Wal-Mart recently entered into a JV with Bharti and will soon be setting shop in India. Other retailers waiting on the wings are: TESCO, Carrefour, IKEA, Target, VF brands, etc.
According to AT Kerney’s report, India is the most favored destination for global retailers. AT Kerney’s Global Retail Development Index 2005 puts India at the top.
The retail outlets opening up in tier II and tier III cities exemplifies the company’s strategies to target the middle class, rural and semi urban category of more than 70% of the population living in villages and non-metros who do not have access to quality retail markets; with assumptions of this segment worth more than $350 billion. With companies like Reliance on the verge of opening their retail store, Fresh in cities like Yamunanagar, Ambala in Haryana. Chandigarh tri city including Panchkula and Mohali is also soon going to witness the mall culture in the next 10-14 months with around 8-10 malls ready to offer a new world of organized retail to the local residents. Places like Ludhiana and Amritsar have already followed this league.
Not only the retail sector is making waves in the country but also IT and ITES is turning to be a boon for real estate. With a vast number of global IT companies foraying into India, the demand for quality office space is increasing and thus are the prices. Real estate companies are vying to fill this gap between demand and supply by offering standardized office space. Even the state and central government is coming up with IT parks in tier II cities anticipating the demand and the availability of quality human resource. For instance Chandigarh and Mohali both have their own IT parks within a distance of about15 kms.
This upward trajectory in organized retailing and IT sector will certainly boost the commercial retail sector with demand expected to increase manifold.
About PropertyVertical
http://www.PropertyVertical.com is a move towards synchronization of comprehensive range of real estate services covering sale, purchase, rent, lease to advisory services and transaction management of residential, commercial, land, hotels, etc. in any part of India. With an extensive database, latest updated information, authentic and reliable research analysis, 24x7 customer support, maximum number of genuine interested buyers as well as the NRI clients, has certainly increased our credibility in the real estate market. Our presence in US, Delhi and Chandigarh helps us to cater to a wide range of customers both national and international. Assistance from trained, skilled and dedicated team working around the clock provides sale/purchase/investing solutions to the clients. Also the presence of dedicated research team and advisory council offers an in depth information and advisory services.

 

sbwire

RBI suggests more curbs on VC funds

Measures targeted at managing surging capital inflows.

The Reserve Bank of India (RBI) has recommended to the finance ministry a series of measures to curb investment flows from venture funds and into real estate.

These measures are expected to help check part of the huge inflows of foreign capital, particularly since the last week of July, and plug loopholes in foreign investment norms.

Among the recommendations, RBI has suggested restrictions on investments by venture capital funds in sectors that are already developed and booming.

The central bank has also suggested that FDI in real estate be brought under the approval route — such investment is currently under the automatic route.

The RBI has suggested that there should be end-use restrictions for investments by foreign venture capital funds. It has said that venture funds by definition should be investing in high-risk ventures in which entrepreneurs are unable to access capital and not in mature sectors like real estate.

It has also sought a time-frame within which companies have to allot shares to foreign entities after receiving advance payments. This is designed to curb a practice by Indian companies of using advance payments from foreign sources as loans and then returning the money.

Such transactions amount to overseas borrowings without restrictions. Overseas borrowings are currently locked in for a minimum of three years and the interest paid is capped at 150 basis points above the benchmark London Interbank Offered Rate (Libor) for borrowings of three years and above; and 250 basis points above Libor for borrowings of five years and more.

The RBI has also suggested a clear policy for investments by non-resident Indians (NRIs) in commercial real estate in India.

At present, NRIs are permitted to invest in two residential flats/apartments in India but there is no policy on their investment in commercial real estate.

Surging foreign investments have seen the country’s foreign exchange reserves swell over $50 billion to $251.33 billion in the first six months of 2007-08.

The purchase of foreign currency by the RBI to check rupee appreciation, which impacts exporter earnings, is leading to an infusion of rupee liquidity and has a high potential to fuel inflation.

The RBI has already taken several steps to absorb the excess liquidity, raising the cash reserve ratio (CRR) — the proportion of deposits banks must keep with the central bank — one percentage point this financial year.

It also recently raised the ceiling on government bond issues under its market stabilisation scheme (MSS) to Rs 2,00,000 crore from Rs 1,10,000 crore at the beginning of the year.

 

BS

Rising infrastructure costs a new challenge

Chennai: Office space rentals are higher in Chennai than in New Jersey. If that sounds too dramatic, try forming a new company and set up offices in India and the US, as G.B. Prabhat did.

“The cost of rentals and office infrastructure (including secretarial services) is higher by around 15 per cent in Chennai than it is for far superior infrastructure in places such as New Jersey,” says Prabhat, Founder & CEO Anantara Solutions. His company is headquartered in Chennai and now has an office in New Jersey.

And, how would the bigger metros in India compare with the best in the world? Says Anuj Puri, Chairman and Country Head, Jones Lang Lasalle Meghraj, “Delhi’s Connaught Place and Mumbai’s Nariman Point command occupation costs to the tune of Rs 4,500 per sq ft and Rs 5,500 per sq ft per annum and above respectively.”

That means it is costlier to establish an office in these two locations than in the central business districts of Paris, New York, Hong Kong and Singapore.

However, he clarifies that depending on the type of business, it could be cheaper and more profitable to actually operate the office in India, for reasons unrelated to real estate.

In other words, wage costs and availability of skilled manpower come into play, too, when deciding on the location for a business. Says Shiva Ramani, Co-Founder & CEO, Cybernet-SlashSupport, “(Infrastructure) costs in the six big Indian cities (four metros plus Bangalore and Hyderabad) have been inching closer to some lower mid-tier cities in the US.”

“However, we look at the sum of manpower, administrative and infrastructure costs to evaluate the business case.”

But, says Prabhat, companies need to realise that rising infrastructure cost is as much a challenge to Indian IT companies as rising wage cost.

Though N. Ramachandran, CFO, iGATE Global Solutions, feels that rental and real estate costs are far lower in India than in the US, he does agree with Prabhat that rising infrastructure costs would be a cause for concern.

“Both wage and infrastructure costs are significant components of IT business and are equally important in terms of economic feasibility. While rising manpower costs are manageable through innovative models (using technology), rising infrastructure costs are more worrisome.”

Sify

Homes that count every inch

BANGALORE: Heard of houses that have no doors and no corridors? Or of houses costing Rs 8 lakh that have bathrooms fitted with sensors and bum-washers?
At a time when real estate costs have hit prohibitive levels, Japanese-style condominiums that use every little space to the optimum and conserve energy to the maximum are in the works in India, an effort to deliver homes at a cost that's affordable to ordinary folk. "The thought of building such homes came about four years ago during a client briefing with my junior staff members. One of my staff wanted to know whether we would only be working for clients, or also build homes for ourselves, homes that common people could afford," says Amit Bagaria, chairman of Asipac.
Bangalore-based Asipac, a provider of concepts, planning and marketing solutions to the real estate market, along with over 20 builders (domestic and international) are planning India's biggest private sector housing venture—the Rs 62,000-crore Satyagriha Project, which proposes to build 342,000 homes in the next six years across India.
These homes will come up across 125 projects, to be built by developers like Bangalore-based Mantri, Salarpuria Group and Golden Gate Properties, Hyderabad-based Koncept Ambience, Jaipur-based Unique Builders Mannat, Chennai-based Marg Constructions and Israeli-consortium PBEL. M A Alagappan of Murugappa Group will invest in his personal capacity. The first project, at Jaipur, is planned to be launched in November, and the second, at Visakhapatnam, in January 2008.
Conceptualised along the Japanese idea of ‘space saving', the project proposes to deliver 1BHK (504 sq ft), 2BHK (900 sq ft) and 3BHK (1,206 sq ft) homes in the price bracket of Rs 7.75 lakh to Rs 23 lakh, substantially lower than most current offerings.
"While the real estate sector in India talks about square feet, in Japan they talk of square centimetre. So much so that Japanese houses don't even sport corridors," says Bagaria. Doors are wardrobes on wheels, making use of spaces that are otherwise of little use.
The houses are fitted with sensors to conserve electricity and water. Bathrooms have shower cubicles split into a wet and dry area. These have weight sensors—when a person steps into the wet area the water starts, and turns off the moment he steps into the dry area. The toilet bowls are fitted with bum-washers, which too conserves water. The Satyagriha consortium plans to customise these technologies to Indian requirements.
The other big cost advantage comes from standardising everything for the project, and having common design, specifications and centralised procurement. Individual projects would not require separate sets of architects, engineers and other back end staff. The procurement is expected to be of the order of Rs 28,000 crore, and doing this centrally could deliver enormous savings.
Sushil Mantri, MD of Mantri Developers, who plans to build 11 such projects, says, "Today's middle class consumers, who are the target audience for this project, are looking for functional homes and also want some amount of luxury."

IndiaTimes

DLF to invest Rs 16,000 cr

New Delhi: Real estate company DLF plans to invest Rs 16,000 crore over the next 3-4 years to develop up to 18 malls across the country.

According to sources, the investment would flow into mall projects in Chennai, Hyderabad, Kochi, Kolkata, Bangalore, Panipat, Jalandhar, Baroda, Goa, Mumbai and Ludhiana. In all, the shopping projects will entail 22 million square feet.

DLF had recently announced it would raise about Rs 6,000 crore from overseas market to execute its business plans that includes investment in projects in India and abroad, and in buying shares in DLF Offices Trust’s public issue in Singapore.

 

Sify

Property crimes on the rise near Chennai

Iluppur, Tamil Nadu: Many areas close to Chennai have witnessed a steep rise in property rates in the recent past. This has caused a spurt in property crime.

In Tiruvallur district, in Chennai, real-estate agents are indulging in fraudulent practices to grab as much land as possible. In one of the villages, Iluppur, 30 villagers have claimed they have been illegally dispossessed of their lands by a real estate agent in the area.

Pazhani, a resident of Iluppur, has lost almost 2 acres of his ancestral property because of forged property deeds. According to the documents, Pazhani's father, who died over three decades ago, had transferred his land to a local agent, which Pazhani denies unequivocally.

"I was 8 when my father died, but i do recognise him. What's in the document is neither his photograph, nor his signature. Ask any villager here - they all knew my father and they will vouch for me," the 40-year-old farmer says.

Pazhani is not alone. Over 30 villagers have claimed that over 100 acres of land owned by them has been confiscated by real estate agents, who have forged documents.

Tiruvallur's SP, N K Senthamaraikannan, says that the prices of land has gone up in recent times so there is the tendency to acquire as much land as possible.

"These land-grabbers are doing it more technically," he says.

When asked about cases lika Pazhani's, the SP adds, "Since this case is a bit larger, it will take time, say, may be a week or so. Then we can take action and do something conclusively."

Pazhani and other villagers like E Shanmugham who, too, may lost 1.18 acres, have filed a case at the Tiruvallur police station and are determinedly fighting on.

 

ibnlive

ICICI Venture to float $2 bn real estate fund

ICICI Venture Funds Management Ltd is floating a $2 billion real estate fund — the largest in the country.
The fund, which will be launched next month, will have a tenure of ten years and the money will be invested in projects within three years.
The fund from the country’s largest private equity fund (it manages assets of over $2.5 billion in a diversified portfolio) comes just 18 months after it launched a real estate fund of $500 million. Of this, it has already invested 70 per cent in various projects.
ICICI Venture joins other majors such as Morgan Stanely, Citigroup, HDFC, J P Morgan, and Kishore Biyani that hope to cash in on the realty boom by floating real estate funds.
The private equity fund is planning to operate in the entire value chain of the real estate business and will now use part of the cash from the fund to build a land bank. It has also decided to buy and manage completed properties — commercial and residential — and sell them later.
Confirming the development, Renuka Ramnath, managing director and CEO of ICICI Venture Funds, said: “We will be able to raise large sums of money leveraging the ICICI brand name, coupled with over five years of experience in realty investment and, of course, a great international real estate developer as partner.”
ICICI Venture has a 50-50 joint venture with Tishman Speyer, TSI Ventures, to develop new projects with other partners. The fund has also tied up with developers to finance and build new properties in India.
For instance, TSI Ventures, in association with Nagarjuna Constructions Company Private Ltd, has won a bid to develop an integrated township at Tellapur, Hyderabad on a 400-acre plot.

 

BS

Nitesh Estate wins Chennai realty deal

Nitesh estates has pipped heavyweights such as Unitech, DLF and HDFC Realty with a Rs 642-crore offer to bag a church property in the heart of Chennai city.
The deal gives the Bangalore-based real estate and construction player — managed by the 31-year-old Nitesh Shetty — access to a nine-acre plot just off the city’s high-profile Boat Club area.
At Rs 642 crore excluding registration, the transaction is the costliest land deal in south India and jostles for a place among the biggest deals nationally. The Chennai archdiocese had put the land parcel on Chamiers Road on a 66-year lease and called bid for the same, with some 30 expressions of interest coming in the initial round itself.
The just-concluded transaction could well be the fifth-largest land deal in India after Adani’s Rs 2,250-crore pact with HDIL, DLF’s Rs 1,675-crore acquisition of DCM Shriram property in Delhi, Unitech’s Rs 1,586-crore purchase in Noida and DLF’s Rs 702-crore acquisition of National Textile Mills’ land in Mumbai. Earlier this year, hospitality major Leela Group purchased a three-acre plot at Chanakyapuri in Delhi for Rs 635 crore.
The Chennai deal follows Citigroup’s $250-million investment into Nitesh Estates, as reported by ET last week. When contacted, a Chennai archdiocese representative declined to comment. Hugh Britto, senior vice-president, business development, at Nitesh Estates offered no comments. The deal size could well be in excess of Rs 700 crore, including registration value.
Sources said realty bigwigs like Sobha Developers and RMZ were in the fray. Unitech had tied up with local player Arihant for the bid. Unconfirmed bids suggested interest from corporate giants like Reliance Retail and ITC. It is believed that Nitesh could look at developing over one million sq ft of mixed use development on plot. The nearly a decade-old Nitesh group is in the midst of an expansion acorss key cities. It is also planning a foray into the hospitality industry and has plans to set up at least five luxury hotels.
Last year, Nitesh inked a definite deal to bring Ritz Carlton to India with the first property in Bangalore. While Nitesh is not the exclusive partner to Ritz Carlton in India, it could well be the preferred party for future expansion, sources said. The Ritz Carlton arrangement as well as an earlier investment by the $26-billion global hedge fund Och-Ziff have catapulted Nitesh into national limelight in recent times. Citigroup’s $250 million infusion was the biggest by the global financial powerhouse in the domestic realty sector.

 

ET

India Real Estate - An Update & A Window of Opportunity

Introduction

The Indian economy has been witnessing an unprecedented growth with the GDP growth averaging 8% over the last three years, up from an average of around 6% during the 1990s. The principle drivers of India's GDP are changing demographics, rising levels of foreign investment, a vibrant services sector powered by the IT and ITES sectors and buoyant exports. Notwithstanding concerns over lack of structural reform, these factors are likely to be sustained in the foreseeable future, resulting in continued strong GDP growth.

This economic growth has, in turn, stimulated demand for real estate to help meet the needs of business, such as modern offices, warehouses, hotels and retail shopping centres. It has also boosted housing demand as a wealthier populace seeks upgraded accommodation. Moreover, shrinking household size and improved access to housing finance have boosted the demand for residential property. Tax incentives have also been granted to interest and principal paid on home loans, which has made owneroccupied property more attractive.

According to research estimates, the Indian real estate market is expected to grow from US$ 14 billion in 2005 to US$ 45-50 billion in 2010 and reach US$ 90 billion by 2015.

Regulatory and Taxation Landscape

Historically, the Indian real estate market has been disorganized, fragmented and governed by archaic laws; the liberalization of real estate industry lagged other sectors. However, during the last few years, the Indian real estate industry has been gradually transforming. What was once a highly fragmented business, dominated by regionally based private entrepreneurs is gradually becoming a national and global business.

This makeover has been fostered by significant growth in capital formation in the real estate industry and rise of more sophisticated real estate capital markets. This has been primarily driven by listed/unlisted real estate companies, private real estate funds and heightened focus on Indian real estate by leading international property consultants and commercial banks.

The partial relaxation of Foreign Direct Investment ("FDI") regulations in February 2005 permitting foreign investment in the real estate sector subject to certain guidelines has acted as a major catalyst resulting in significant foreign investment in the Indian real estate market. Leading private equity players and property funds have since raised/allocated significant amounts for investment in the Indian real estate market.

While the foreign investment guidelines have been partially relaxed there continue to be several restrictions on foreign investment in the real estate sector. For instance, the current FDI regulations only permit investment in certain specified projects in the real estate sector in India. Further, the regulations contain various conditions to be satisfied in respect of such investments such as minimum investment, minimum area, lock in period of the investment etc. Further, foreign debt is currently completely prohibited in the real estate sector and the use of convertible instruments has also been recently blocked.

Further, the tax regime in respect of the real estate sector in India is bogged with various taxes which include income tax (on business income and on capital gains), indirect taxes (includes Value Added Taxes and Service tax) and other transaction taxes (property tax and stamp duties). In fact, as per reports, India has one of the highest levels of Property Taxes and Stamp Duty among the major countries in Asia.

Special Economic Zones ("SEZ")

The boom in the Real estate sector has also been recently fueled by the fiscal incentives package offered by the Government in the recently introduced policy on SEZs.

SEZs aim to provide an internationally competitive duty-free environment for exports, supported by world-class infrastructure, to achieve a quantum jump in exports.

As per the SEZ policy, an SEZ would be a specifically delineated duty-free enclave that is deemed to be outside the customs territory of India. Further, the policy is a comprehensive legislative framework in order to meet the long-standing industry demand for a single enabling legislation for SEZs and provides various tax concessions, including concessions in respect of taxes on income and indirect taxes, to the Developer of the SEZ and to the units located in the SEZ.

The SEZ initiative of the Government, though marred with political controversies, has been received with significant enthusiasm by the Industry and has caught the fancy of foreign investors.

Mauritius – Preferred Jurisdiction for Investment Flows

One of the critical elements for structuring foreign investment into Indian real estate companies is the choice of the jurisdiction for routing such investment into India. Historically, Mauritius on account of the favorable Double Taxation Avoidance Agreement ("DTAA") with India and its favorable tax and regulatory regime has been the preferred choice of jurisdiction for routing investments into India. In fact till date, Mauritius accounts for the maximum FDI into India. The story has been no different in the real estate sector and Mauritius continues to account for a significant proportion of the foreign investments in the real estate sector.
Abhishek Goenka & Kalpesh Maroo BMR & Associates, India Member of Taxand Global Alliance

 

multiconsult

Sobha outlines ambitious Middle East plans

Posted by Sarah Campbell

Tuesday, 09 October 2007

Sobha Group is embarking on a period of rapid expansion in the Middle East, as the company aims to bring its quality driven construction excellence to a host of developments in Dubai and across the region.

The US $2 billion Sobha Group, with extensive interests in real estate development, civil and MEP contracting, factories for aluminium, façade glazing, joinery and concrete products etc., has been the driving force behind many of India’s leading residential and commercial developments in recent years.

In India alone, the company has developed over 10 million sq.ft of quality real estate, with a team of over 25,000 people. The Sobha portfolio includes such prestigious landmark constructions as Kerala’s first integrated township Sobha City in Thrissur and the Sobha Lifestyle Presidential Villas in Devanahalli. The company has also been behind the development of the many Infosys offices and commercial buildings, including the pyramid-shaped Infosys Studio in Bangalore.

Sobha Group has had a presence in the Middle East since the 1970s, when the company Chairman, PNC Menon established the Services & Trade Group in Oman, specialising in interiors outfitting and as a contractor for other developers in the region. The company has been a part of some of the most prestigious palaces, mosques and five-star hotels in the Arabian Gulf.

Today, Sobha Group also has operations in Doha, Dubai, Bahrain, Germany and the USA. Sobha (Indeset) UAE has been behind the implementation of a number of unique interiors, including Sphinx Restaurant and the Pyramids Health Club at the prestigious Wafi Centre.

Now, Sobha Group intends to tap into the burgeoning Middle East real estate market, with its own commercial and residential properties.

“We have had a presence in the Middle East market for years, with interiors operations in Qatar and Dubai. But now the time is right to push forward with our real estate expansion plans for this region,” said Ajay Rajendran, Vice Chairman, Sobha Real Estate LLC.

Already, Sobha Group has tasted success in Dubai. The company has two commercial projects under development within the high-status Business Bay district, both of which are already sold out.

The two commercial towers, Ivory I and Ivory II at Business Bay are mirror images of each other, creating yet another unique Sobha landmark. Each tower offers 15 storeys of high-tech office space with world-class construction, stylish design, optimum space usage, ultra-modern amenities, high speed connectivity and retail space.

“Our success with the commercial developments in Business Bay tells us that the Sobha Group name is already making a mark in Dubai. We are confident that our future plans, which will include residential developments in the centrally located Jumeirah Village, will prove equally successful,” Ajay Rajendran said.

The Sobha name is known for luxury, quality and creating a lifestyle. We will bring the same standards of quality and on time completion to our developments in Dubai and the Middle East,” he added.

The Sobha Group expects to have announced a portfolio of over 2 Billion AED by the middle of 2008 which will include another development in Business Bay, some water front properties as well as developments on the Palm Jebel Ali. Sobha Group will be officially launching its first residential project in Dubai during the Cityscape exhibition.

 

PR-GB.com

Red Fort Cap to pump in $425 mn on Indian real estate

New Delhi: Private equity firm Red Fort Capital will invest $425 million (Rs1,677 crore) this fiscal in the booming Indian real estate market and has tied up with the Prestige Group for a township project in Bangalore.

Red Fort India Real Estate Fund managing director Parry Singh said of the $425 million earmarked, it has already invested $225 million in five projects - one in Chennai and two each in Bangalore and Hyderabad.

Besides these projects, the firm has also tied up with the Prestige Group for a $250 million township project in Bangalore. “The initial investment in the 800 acres mega township will be around $180 million, where we will put in $80 million and the remaining will be borne by the developer (Prestige),” Singh said.

He said Red Fort Capital (RFC) has not yet decided about the final investment. The proposed township would feature 1,000 units of low-cost mass housing for Rs1,100 per sq ft on 25 acre of land, he said.

This would be a mixed-use project, housing both residential and commercial properties, Singh said, adding “the township will constitute about 2,000 residential units in total.”

On its Hyderabad project, Singh said RFC has invested Rs200 crore to purchase land for building middle class housing units. The company is currently developing the second phase of the Commercial Tech Park in Bangalore. “We are investing $35 million for the second phase in 2.2 million sq ft of land,” Singh said.

 

livemint

JM fund to invest $50 m in real estate firm

Kolkata: Infinite India, a real estate fund co-promoted by JM Financial Ltd, will invest $50 million in unlisted Shrachi Developers Ltd, a senior JM official said on Friday.

The investment will be utilised in residential and commercial real estate development in eastern India, Vishal Kampani, director, Infinite India, said.

"We want to capitalise on the real estate development in eastern India," he said.

Infinite India has already committed investments worth $200 million in various projects in Mumbai, Chennai, Bangalore and Delhi, Kampani said.

Shares in JM Financial ended 0.89 per cent down at Rs 1,700 in the Mumbai market.

sify

Real Estate in India: A Survival Guide

by Peter R. Russell, Jr.

(Mr. Russell hails from Jones Lang LaSalle’s Boston office and is currently on assignment as part of the International Staff Exchange Program, as a Senior Manager at Jones Lang LaSalle Meghraj. Based in Hyderabad, Peter is leading the procurement and execution of project leasing assignments in South India and is working with developer clients such as DLF, Emaar-MGF, Indu Projects, and Shriram Properties. The article is reproduced here from the firm's Real Estate Market Intelligence Monthly.)

India has experienced near-double-digit growth in the last several years and stories of the Indian economic juggernaut fill newspapers and bookstores. The commercial real estate market is no exception. The IT boom has created a huge demand for quality office space that was nonexistent a few short years ago. Several prominent Indian developers have emerged, and more and more international investors and developers are plunging into the country.

As with any local or regional market, there are many idiosyncrasies that color the business environment, and India is no exception. Below is an introduction into the current conditions within the Indian real estate market and what the future may hold as India quickly becomes a global superpower.

What City am I looking at?

India is a large country with an even larger population, and multi-national companies are taking a strategic approach to capitalize on this growing market and rich pool of talent. In terms of establishing office locations, most companies consider three types of cities:

Tier I cities are the hubs of business. The financial capital of Mumbai, the political capital of Delhi, and the technology capital of Bangalore are the first destination for most corporations and real estate demand and rental pricing reflect this. Consider this: office space in a prime location such as Nariman Point in Mumbai costs upwards of 350 Rupees per square foot per month (or approximately $105 per square foot per year), making it one of the most expensive real estate markets in the world. While bursting demand and constrictions on new supply have propelled rental rates, these cities face significant infrastructure issues, particularly road congestion, and the capital markets environment is somewhat stymied due to the prominence of strata title and opaque ownership history, specifically on older, more established assets in downtown locations.

Tier II cities such as Chennai, Hyderabad and Pune are the burgeoning centers of IT commerce. With large populations, developing infrastructure, airport connectivity and top-notch educational institutions, many companies look to establish large operational hubs here. While demand for space in these cities remains strong, stronger interest by developers has caused inflated land prices and many markets are predicting an oversupply of new office supply in the next ten to eighteen months. As a result, rental rates are leveling in many cities after several years of growth.

Too many to list, Tier III cities are those that have yet to see the formation of a formal real estate market, but to varying degrees have the right ingredients to attract multi-national tenants. Corporate occupiers are increasingly looking to gain first-movers advantage into cities such as Kolkata, Chandigarh, Kochi, Coimbatore and Vishakapatnam due to the potential of untapped labor markets and heavily discounted real estate costs that accompany less established locations. In light of rising costs, particularly in real estate and human capital, and a weaker dollar, these cities in coming years are sure to provide plenty of competition to Tier II cities.

What to Expect

Despite early signs of the market reaching a peak, most of India’s cities continue to be overwhelmingly a landlord’s market. All cities are still seeing multiple leases and active requirements from 100,000 to over 1 million square feet, and tenants are sometimes forced to wait months for the completion of core shell construction to start the hiring process for their new operations. Tenants are faced with the resulting conditions: no tenant improvement allowance, free rent periods that are only given during fit-out construction, and maintenance charges up to twenty percent above cost.

Things to Look Out For

A relatively young democracy – celebrating its 60th year of independence this year – India is still maturing economically and politically, and a thorough due diligence is required when considering India from an occupier or investor perspective. Local developers are still responsible for the majority of new supply in most markets and their reliability on timelines and construction quality varies. State governments play a key role in the viability of any particular market and a shift in power can cause major changes in the growth patterns of a city. Furthermore, the economic vehicles created for IT companies are a source of much debate. STPI, or Software Technology Parks of India, is a longstanding government agency, which provides tax benefits until 2009, and the extension of these benefits is unclear. The result of this is that the majority of new requirements are looking at Special Economic Zones, or SEZs, which allow for up to 15 years of tax holidays for both occupiers and developers. However, frequent changes in SEZ policy require companies to create a customized strategic plan with their tax consultant before commitment and occupancy. Likewise, there is no clearly defined exit strategy for SEZs and developers are currently required to adopt a long-term hold strategy on these assets.

The Future

Despite volatility in the US and elsewhere due to sub prime lending, Indian equity markets have remained strong, and this means companies from the subcontinent are quickly reaching market capitalizations and credit levels that allow for major acquisitions abroad. According to Grant Thornton, in the first eight months of 2007, there have been 164 acquisitions by Indian companies worth nearly $31 billion, compared to 73 in-bound deals worth $15 billion. Global brands such as Tetley Tea are already Indian-owned and Tata Steel made headlines early this year with its $12 billion acquisition of Corus Steel to become one of the world’s largest steelmakers. Indian realty major DLF made its Initial Public Offering in June and reached a market capitalization of over $20 billion, rivaling the sale price of Equity Office to Blackstone last year. Interest in institutional assets abroad is only inevitable and don’t be surprised to see Indian real estate majors such as DLF and Unitech or conglomerates such as Reliance and Tatas owning premium real estate assets in major US markets in the coming years.

India offers an unparalleled opportunity to participate in one of the fastest-growing economies in recent history. India’s integration into the global marketplace can be measured on a daily basis, and the most successful real estate occupiers and investors will be willing to adopt a flexible strategy that works with the country through this growth phase. If you do business here, look beyond the confronting challenges of overcrowded streets, poor infrastructure and still-pervasive poverty, and you’ll find a country of wonderful people, beautiful scenery, colorful history and plenty of opportunity. The Indian tiger is ready to pounce.

 

BOSTON/SF