Market Trends - Multiplexes Replacing Cinemas Theatres

Multiplexes are not a new concept in India. Chennai (then Madras) had the Devi complex and Diamond/Sapphire/Emerald complex over three decades ago, while Mumbai had Shivam/Satyam/Sundaram complex for the same period of time. But the US had set up movie complexes in the suburbs about twenty years back and this concept is now spreading all over the world. Major movie production houses and media companies, including 20th Century Fox, Paramount, United Artists, Columbia-Tristar/Sony and Warner Brothers, operate multiplexes all over the world.

This concept has gathered momentum lately with the retail boom in India. In fact, several state governments have provided incentives to encourage the multiplexes all over India. The single screen movie theatre has now become a dying breed, with the failure of most Bollywood movies lately. A positive concession to the cinema theatre industry is the deduction of 50 to 100% of the profit earned by multiplexes that come up in the next two to five years. The waiver is restricted to multiplexes, which are essentially in metropolitan cities, but the concession has been extended to second line cities like Kolhapur and Baroda. This concession will spur development in state capitals and entertainment centers like Ahmedabad, Bangalore, Pune and Goa. Several companies are planning several multiplexes in the next 5 years. Companies include Pentamedia, which has 10-12 complexes on the anvil over 5 years and the Essel Group, which plans 12 multiplexes cum entertainment centers over 10 cities. Other groups include Adlabs, Runwal, Sringar Films, PVR Group and Inox Leisure. Overall there are plans for over a hundred such multiplexes coming up all over the country in the next 18 months. Inox Leisure is setting up 8 multiplexes including 4 in Mumbai, with its flagship at Nariman Point, covering 1 lakh sq. ft. opening in June 2003. PVR Group has planned a massive 8-screen complex in Phoenix Mill compound in Central Mumbai. The multiplex will include entertainment facilities and a shopping mall. Pune could well become the city of multiplexes with 41 applications submitted for clearances of the same in the next five years.

States which are offering concessions include Maharashtra, West Bengal, Gujarat, Rajasthan and UP. Maharashtra is currently the hot spot with 20 new multiplexes under construction, since they offer 100% waiver of entertainment tax for the first four years in Mumbai and for the rest of Maharashtra the exemption period is five years. The state has over 230 applications for exemption of entertainment taxes. Maharashtra has the most attractive policy for multiplexes, followed by West Bengal, Gujarat and Rajasthan. The requirements are at least three theatres with a minimum of 1000 seats, which must be completed within two years of the application being approved. HUDCO too has plans to use prime areas in major cities belonging to the Department of Post (DoP) for multiplexes.

Typically, the multiplex model is built around a primary anchor - movies. The revenue generating channels in a multiplex includes box-office collections, rent from display systems, restaurant rentals, food and beverage collections, product launch rentals and promotions by companies. The other revenue streams are often larger than box-foffice collections, but movies are the main pull of such complexes. Several of these multiplexes are being located in shopping complexes and average an investment of around Rs. 5 crore for a four-screen theatre. Having a multiplex ensures about 1,200 footfalls daily, which is great for a shopping mall. There are about 1000 screens planned over the next five years all over the country, joining the existing 12,000 screens. The screens per one million population for India are only 11 as compared to 117 in the US and 77 in France. Though this scheme has not boosted the existing single screen cinema theatres, several theatres are planning to upgrade to the multiplex concept and hence provide a boost to the big screen cinema. There is healthy competition among the multiplexes and the initial high-ticket rates will definitely come down to more acceptable levels. In fact, these may actually spur the declining cinema market in India. The smaller cinema halls provide the owner flexibility to rotate the movies economically. The cinema going concept has changed drastically, becoming part of the “broad spectrum” family entertainment. This is good for consumers and film buffs. The threat of over-capacity of cinema seats has not dampened the multiplex mania currently prevailing all over India.

Market Trends - India's Retail Boom Boosts Commercial Real Estate

The retail boom that is being witnessed in the past few years is bound have a significant impact in the commercial real estate sector. The current size of the retail sector in India is around Rs. 8,10,000 crores (US $162 billion), of which only 2% is organised. Over 12 million retail outlets, mostly run by small shopkeepers, cover the remaining 98%. The retail sector is growing at the rate of 20% per annum and more important, the organised retail sector is estimated to grow from 2% of the total retail market in 2001 to 22% in 2005. Most of this rapid growth will be in the large metropolitan cities. 

The latest McKinsey study titled “India’s Retailing Comes of Age” has predicted a definite retail revolution in India. This is turning out to be very true. India is the last among the large Asian economies to liberalise its retail sector. The “licensing raj” is long over. A number of Indian and international retailers are entering this nascent, though dynamic market. Market liberalisation and increasingly assertive consumers are sowing the seeds of a retail transformation that will bring bigger Indian and multinational players on to the scene. The market is huge at US $162 billion overall. The entry of multinational companies (MNC) has certainly transformed this sector. The supply chain, and consumer interest and awareness in branded products have been built from scratch.

Presently, global players are entering India, indirectly, via the licensee/franchisee route, since foreign direct investment (FDI) is not allowed in the retail sector. Allowing FDIs in this sector will not bring in investments, unless the FDI policies make it attractive for MNCs to pump in capital to fuel growth along with systems, expertise and know how that will also shorten the learning process in India. All the major Indian cities have major commercial projects under construction for retail purposes. In fact, the retail sector has provided the primary boost to the commercial property market all over India. Presently, there are over 55 large shopping malls under development all over India. The retail sector is also getting acceptance in the job market with more and more business schools focusing on the sector and large retailers setting up retail academies. This sector is estimated to create 50,000 jobs per year in the next five years. 

The big Indian retail players include Shopper’s Stop, FoodWorld, Vivek’s, Nilgiris, Pantaloon, Subhiksha, Ebony, Crosswords, Lifestyle, Globus, Barista, Qwiky’s, Café Coffee Day, Wills Lifestyle, Titan, Raymond, Bata and Westside. Most of the Indian players have ready and easy access to prime real estate locations. The international players comprise McDonald’s, Pizza Hut, Dominos, Gautier, Spencer’s, Levis, Lee, Nike, Adidas, TGIF, Bennetton, Swarovski’s, Sony, Sharp, Kodak, and The Medicine Shoppe. Most of the foreign companies have to depend upon shopping malls and rentals for their outlets. This has been a deterrent, since such prime real estate is relatively expensive in Indian cities. 

The Indian consumers are divided into two categories, viz., high-income urban consumers and low-income urban and rural consumers. The high-income urban consumers are willing to pay a higher price for having the choice of quality products and the complete shopping experience in the large retail stores. But, the low-income urban and rural consumers will go for the price sensitive products which are easily available in the smaller stores located nearby. The markets in both categories are very large and hence, there is little direct competition between the two retail sectors. As the awareness and disposable incomes increase in India, the two categories will merge slowly, before the competition actually begins. The minor players do not pose a major threat to the big retailers, because the target consumers are different and the Indian markets are very large. For the up-market client, who wants the experience, quality and choice, the shopping mall concept of the larger retail players is very well suited. However, for the less fortunate clients who prefer lower cost, personal service and home delivery, the smaller unorganised retail players are best suited. So, the threat is minimal in the urban areas for both the small and large retail players, since the markets are very large and varied. But in rural areas, competition will be present, and the minor players will prevail.

The rentals paid by the large retailer chains are relatively high in the organised sector. But, the unorganised retail sectors pay much lower rentals. The bigger players have to occupy larger spaces to get better rates. For instance, if they rent a large area, they will get the space for Rs. 75 per sq. ft. instead of Rs. 100 per sq. ft. The minor players rent small areas at Rs. 5 to 10 per sq. ft. per month. Therefore, the branded products in the large retail sector cost more and their clients are willing to pay the price for the experience. The retail rentals are generally 20% higher than the commercial (office) rates.

India remains one of the last frontiers of modern retailing. The complexities of the vast and varied market will be a challenge. But the retailer who can shape the nascent retail market as well as adapt to India’s unique characteristics will reap larger rewards over the long term. It is clear that the winner in this retail rush is going to be the consumers.

Finance Policies - Impact Of The Latest RBI Policy Review On Real Estate

On the 29th of October 2002, RBI made its mid-term review of the Monetary and Credit Policy. After assessing the economic situation in India, the RBI governor, Mr. Bimal Jalan has reduced the bank rate by 25 basis points from 6.50% to 6.25%. This is the lowest level since 1973. RBI also reduced the Cash Reserve Ratio (CRR) to be maintained by all scheduled commercial banks by 25 basis points from 5.00% to 4.75%. At the same time, the repo rate was also reduced by 25 basis points from 5.75% to 5.50%.

Let us first define the various terms involved in RBI policy reviews.

The bank rate is the rate at which banks borrow from the RBI. This is also the rate at which central and state government borrowings, under the ways and means advances, take place. Any revision in bank rate by RBI is a signal to banks to revise deposit rates as well as Prime Lending Rate (PLR). SBI and BOB have already announced their revisions.

The repo rate is the rate at which the RBI borrows from the banks. This is also the floor rate at which overnight deals are struck. Besides lowering the cost of the funds, a lower repo rate will see the emergence of a short-term yield curve, since yields on a 91-day Treasury bill and repo rate will be the same.

CRR is the cash reserve ratio, which is the percentage of net funds that commercial banks have to park fortnightly, with the RBI to do business. Lowering of CRR means that more money comes into circulation. This is in line with RBI’s stated policy to provide a roadmap with the ultimate goal of reducing the CRR to 3%, which is the statutory minimum level. The direct impact of reducing the CRR is to release more money into the market at no additional cost to the bank or finance company.

Bimal Jalan has asked commercial banks to cut their prime lending rates 
(PLR) - the rate at which they lend money to blue chip companies - and compress the band over it. All banks are expected to follow suit.

The RBI governor, Bimal Jalan, has sent a direct message to the consumers: Go ahead and buy a house with a loan that is getting cheaper by the day. RBI has sent out clear signals that overall interest rates must come down. The Indian economy with its stable rupee, strong foreign reserves, comfortable liquidity, low inflation and supporting global interest rates have helped shape RBI’s policy stance of softer interest rates ahead. RBI also wants the banks to pass on the benefits of the rates to borrowers. This is good news for the real estate industry, since housing finance interest rates will definitely head south. This will further spur the HFCs to widen their base for providing home loans to more people and boost the real estate markets all across India. The lower CRR will also release close to Rs. 3000 crore into the system, part of which will be in the HFC sector. Home loan seekers will get the biggest gains from this continuing drop in interest rates. Besides, these RBI measures will also elevate the bank’s income marginally and also enable them to manage interest rate risk better with lower interest rate risks for banks. This in turn will help the banks to lower the minimum requirements for their clients, enabling them to widen their base of customers and their reach. The overall lowering of the fixed deposit rates in the banks will also encourage individuals to look at other sources of investments including real estate as an attractive option.

The construction industry is on a marginal upswing and will benefit from the increasing trend among the middle class towards ‘borrowing to create assets’. Based on the RBI policy directions, clients also have a good fix on the interest rate trends, which will encourage them to request floating rates for housing loans. Single digit interest rates will now become the norm for home loans.

Finance Policies - Impact Of Kelkar Report On Real Estate

The Kelkar committee, which is the task force on direct taxes, submitted its recommendations to the Finance Minister on the 2nd of November 2002. Dr. Vijay Kelkar, advisor to the finance minister, has recommended sweeping changes on all income tax exemptions (including the standard deduction for salaried employees), significant reduction in tax rates and complete liberalisation of procedures. These tax reforms are different from all previous reforms in that it aims at removing the differential treatment given to various industries over the years, as opposed to lowering tax rates, bringing greater compliance and widening of the tax net. The Finance Minister is not bound to follow the recommendations, but this should have some impact on the 2003 Budget, since his Finance department itself has made this report. The government must have the political will to follow all and not some of the recommendations, keeping the big picture in mind. This complete reworking of the Direct Tax System makes it simple and transparent, reducing compliance costs. Let us examine the impact of the Kelkar report on Real Estate.

• Withdrawal of wealth tax: At present vacant urban vacant land and certain categories of house property are liable to wealth tax. Therefore the proposed abolition of wealth tax will be beneficial to the building industry.
  


• Interest on housing loans: The Task Force has proposed the phasing out of the deduction of interest on home loans for the construction or purchase of self-occupied property. Presently the interest paid on borrowings for the construction or purchase of a self-occupied house is entitled to a deduction of up to Rs. 1,5 lakh, if the construction or acquisition of the property is completed within 3 years from the end of the financial year in which the capital is borrowed. This provision is effective from 1/4/2003, viz. assessment year 2003-04 onwards. The deduction is to be reduced to Rs. 1 lakh for the year 2004-05, Rs. 50,000 for 2005-06 and Nil for 2006-07 onwards. This withdrawal of the interest deduction will have an adverse effect on the purchase/construction of owner-occupied property and will slow down the housing industry as well as the housing finance industry.
  


• Capital gains tax: It is proposed that long term capital gains should be taxable at the normal rate, as any other income of the tax-payer. This would mean that the long-term capital gains would be taxable at 30% in place of the present rate of 20%, except in cases where total income of the tax payer is below Rs. 4 lakh. Besides, the exemption for roll over of capital gains is to be abolished for all schemes other than investment in house or the bonds of National Highways Authority of India. This proposal will discourage investors from entering the housing industry for rental income and capital appreciation returns. Hence this abolition of capital gains tax will have an overall negative impact on real estate, though it will also tend to keep the gains within the housing industry to reduce the tax liabilities.
  


• Removal of section 88 of Income Tax Act: Under section 88, rebate in income tax is allowed for sums paid for purchase or construction of residential property up to Rs. 20,000/- for repayment in any financing scheme. This will further discourage purchase or construction of residential property.
  


• Withdrawal of section 80P of IT Act: Presently a housing society providing loan for house building to its members is entitled to deduction of the income earned from this business of providing credit facilities to its members. Removing this section will have a negative impact on the cooperative housing society business and hence the housing industry.
  


• Abolition of profits and gains from multiplex theatres and convention centers: Section 80-IB provided for a deduction of 50% of profits and gains from the business of building, owning and operating a multiplex theatre or convention center for 5 consecutive years from the initial assessment year 2003-04 onwards. Removal of this deduction will affect the building industry adversely.
  

Low interest rates and tax benefits on the principal repayments on a housing loan have in large measure been fuelling the demand on home loans and growing the realty sector. The Kelkar report to the Finance Minister for tax reforms has put an overall damper to the housing and the housing finance industries. Of course, the Finance Minister does not have to follow the recommendations, but use it as a guideline to plot the future income tax strategy of the nation. The question really is whether the government will aggressively implement the Kelkar package in toto, or do it in a piece meal fashion. The latter is likely to occur. So there is still some hope that the 2003 budget will continue the housing loan tax sops for the real estate industry.

Taxation and Legal - Capital Gains Tax For Real Estate

Sections 2, 45 to 55 under Capital Gains:

• Section 2 defines that land or house property held for not more than 36 months is Short Term Capital Gain (STCG). Otherwise, it is Long Term Capital Gain (LTCG).
• Section 48 defines Computation of Capital Gains (STCG) = Consideration - expenses on transfer - cost of acquisition - cost of improvement
  LTCG = Consideration - expenses on transfer - INDEXED cost of acquisition - INDEXED cost of improvement
• Section 50C defines special provisions regarding consideration where consideration received is less than the value adopted by the stamp dity valuation authority, the value adopted by the stamp duty valuation authority shall be taken as the consideration (wef 01/04/2002)
• The tax on capital gain on transfer of house property are as follows:

1. LTCG on transfer of house property is taxed at 20%
2. STCG is added to income from other sources, and a taxpayer pays tax at the rate applicable to him/her.

• Section 54 concerns the sale of residential house and subsequent purchase of another property. The conditions are:

1. the taxpayer must be an individual or HUF
2. the residential house sold must be a long term asset
3. the new residential house must be

• purchased within a period (T-1) to (T+2) years, or
• constructed within a period (T) to (T+3) years

4. It does not matter whether or not

• The house sold was not self-occupied
• The taxpayer owned any other house property when the sale and purchase is done

5. Concession in taxes if the capital gains (on sale of old house) is greater than the cost of the new house, then only such excess capital gain is taxed. But if the capital gain (on sale of old house)     is less than or equal to the cost of the new house, then the entire capital gain is not taxed.
6. If the taxpayer sells the new house within three years of its purchase or construction, then for the purpose of computation of capital gain on the sale of the new house (remember, this becomes a STCG when the CG on the sale on the old house is greater than the cost of the new house), its cost will be taken as nil. If capital gain on sale of old house is less than or equal to the cost of the new house, its cost will be reduced by the amount of capital gain made (and was exempted) on sale of the first house.
7. Capital Gains Account Scheme: The amount of capital gain not utilized for purchase or construction of new house within the same accounting year, but which is earmarked for such purchase of construction, must be deposited in a specified bank account opened under ‘Capital Gains Account Scheme’, and payments in subsequent years must be made from such account.

• Section 54B applies to capital gain on transfer of agricultural land, if proceeds are invested in agricultural land. Its provisions are similar to those of Section 54 above.


• Section 54F concerns the sale of any asset other than residential house and subsequent purchase of another property. The conditions are:

8. the taxpayer must be an individual or HUF
9. the asset sold must not be a residential house (if it is, S54 applies)
10. the asset sold must be a long term asset
11. the new residential house must be

• purchased within a period (T-1) to (T+2) years, or
• constructed within a period (T) to (T+3) years

12. It does not matter if the taxpayer owned any other house property when the sale and purchase is done
13. Concession in taxes if the cost of the new house is NOT less than the net consideration in respect of the old asset, then the entire capital gain is not taxed. But if the cost of the new house is less than the net consideration in respect of the old asset, the proportionate capital gain is not taxed.

• If the taxpayer sells the new house within three years of its purchase or construction, then the amount of capital gain on old asset, which was not taxed, will now (in year of sale of new house) be charged to tax as ‘LTCG’.
• If the taxpayer purchases within two years from the sale of the old asset, or constructs within three years from the sale of the old asset, any residential house other than “the new house”, then the amount of capital gain on old asset which was not taxed will now (in years when such additional house property is purchased) be charged to tax as ‘LTCG’.
• Capital Gains Account Scheme: The amount of capital gain not utilized for purchase or construction of new house within the same accounting year, but which is earmarked for such purchase of construction, must be deposited in a specified bank account opened under ‘Capital Gains Account Scheme’, and payments in subsequent years must be made from such account.

RBI’s Monetary Policy Inimical To Real Estate: ASSOCHAM

New Delhi, India, September 23, 2007 - The Reserve Bank of India (RBI) should immediately review its monetary policy to remove its excessive focus on taming inflation only and concentrate to reduce mortgage rate, besides take measures to curtail interest rates to enable wage earners to afford dwelling units.

Above observations are made by ASSOCHAM Past President and Chairman, DLF Universal, Mr. K P Singh  while he was releasing the ASSOCHAM Study on `Reality Check on Real Estate’ with its President, Mr. Venguopal N. Dhoot here on Tuesday.

Mr. Singh said that RBI has been framing its credit policy with over focus on containing inflation, totally ignoring its adverse consequences on real estate as the premier bank has not given any thought in reducing interest and mortgage rates and thus the policy is proving to be inimical to real estate growth.

The increase in interest rates and those of mortgage rates, the demand for properties have been eliminated as their prices have gone up beyond affordable limits.  Although, the demand for property purchases was very much there but today affordability has come into question, said DLF Chairman.

He sought that the government should get out of the business of infrastructure building and leave it entirely to private to spur up growth in property businesses just as it played a role of facilitator in telecommunication about couple of years ago.

Unveiling the findings of Study, Mr. Dhoot said that even as default rates on installment payment of home loans have risen around 4.5%, Indian real estate market which is estimated at US$ 14 billion is likely to be US$ 90 billion by 2015 as demand for both commercial and residential property is surpassing supplies.

He, however, pointed out that the study projects that since the real estate sector is growing at 30% rate and the demand will continue to surpass supplies even in near future, it is estimated that US$ 10 billion worth of investment is expected to flow into the sector by end of the year 2008.

The Study further says that lucrative returns ranging from 12 to 30 per cent coupled with cheap and easy availability of funds have seen people from all walks of life investing in the Indian realty. Furthermore, improving institutional framework and fiscal benefits have encouraged more and more players to enter the market. The list of investors includes High Net Worth Individuals, Non Resident Indians, Financial Institutions, Private Equity Funds and Retail Investors.

Housing which constitutes almost 80 per cent of the Indian real estate development has witnessed a huge demand, which is set to multiply further. As per the Global Report on Human Settlement 2005 - ‘Housing crisis in the making’, 40 per cent of the Indian population will require proper housing and basic infrastructure by 2030, said Mr. K P Singh.

Home loans formed 11 per cent of the total outstanding credit of scheduled commercial banks in March 2005, up from just 2.4 per cent in Mar 1990. The sales value of housing construction has witnessed an exceptional leap from Rs. 17.61 crore in 1991 to Rs. 4,182.67 crore in the year 2006. Lower interest rate regime has played a pivotal role in the process.

The rising home loan rates, resulting from Reserve Bank’s measures to control overheating in the real estate market, have severely impacted the genuine buyers, according to a Study of ASSOCHAM.  The Study has also found that the interest payout on housing loans has amplified tremendously with the sharp rise in home loan rates. The annual additional burden comes out to be as high as    Rs. 39,000.

The home buyers have received double blow with rise of more than 400 basis points since January 2006 and property prices mounting by 50-100 per cent in most of the locations. The eligibility of the borrowers has come down by roughly 28 per cent since the hike in interest rates have begun.

The speculative purchasing activity in the housing markets has come down as the funds have become dearer. This is evident by a drop of 60 per cent in the sales in re-sale market of Mumbai, Delhi, Kolkata and Bangalore as compared to 35-40 per cent rise in May 2006.

“While the speculative activity leading to overvaluation in the real estates market is not desirable, it is equally important that the genuine buyers do not get hurt in a move to curb speculation”, said ASSOCHAM President.

The growth in the home loans have been severely affected due to rise in cost of funds.  The growth rates of housing loans had come down to 29.1 per cent in FY2005-06 and 26.6 per cent in FY2006-07 as compared to 49.5 per cent, 73.9per cent and 48.6 per cent in FY05, FY04 and FY03. The ASSOCHAM Study has forecasted that the growth in home loans may slow to 17-20 per cent in the financial year 2007-08.

The home loan to GDP ratio in India is just above 5 per cent, which is significantly lower than the developed markets of the US and the UK, where it is more than 50 per cent.

ASSOCHAM has recommended to the government to repeal the Urban Land (Ceiling & regulation) Act, 1976. The Act imposed a ceiling on the quantum of vacant land that any individual can possess in urban areas, with a view to prevent concentration of urban land in few hand, speculation and profiteering from it. The Act is applicable in states of Andhra Pradesh, Assam, Bihar, Maharashtra, Jharkhand and West Bengal.

Another major recommendation of the ASSOCHAM is the rescinding of the rent Control Act which would be instrumental in meeting the growing need for housing. The Rent Control Act which put restriction on the upward movement of rental values in accordance with market dynamics has led to withdrawal of existing housing stock from the rental market and stagnation of municipal property tax revenue.

Read more India Real Estate Policy stories at the link below:

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Home loans now slightly cheaper

Mumbai, India, November 17, 2007 - In addition to festival offers by banks on new home loans, some lenders are taking down interest rates a notch.Mumbai, India, November 15, 2007 - In addition to festival offers by banks on new home loans, some lenders are taking down interest rates a notch.

SBI offers floating rates on home loans at 10.5% as against the previous rate at 11.25% for loans up to Rs 20 lakh. For loans above Rs 20 lakh, the bank is charging a higher rate at 10.75%. These rates are applicable up to December 31, the bank said in a statement.

According to research by website Apnaloan.com, as on November 07, floating interest rates were 9.5%-10.5% at Punjab National Bank, 9.75% at Indian Bank, and 10.5%--11.25% at HDFC Bank. Current interest rates at different institutions are available at this link.