Friday, February 4, 2011

Egypt's Revolution.

Hernando de Soto’s article on Egypt in the Wall Street Journal tells you a lot about what is really driving the Egyptian revolution–even if the protesters themselves don’t fully grasp the (economic) forces they are contending with.

De Soto of course is the preeminent authority on property rights and development (The Mystery of Capital, The Other Path). Egypt perfectly illustrates his case that weakly protected property rights tend to create a vast extra-legal economy, in which growth is stifled for lack of capital. He and his institute reported to the Egyptian cabinet on the state of the economy in 2004. The country’s underground economy was the biggest employer, he explains. Less than 10 percent of the Eyptians who “owned” real estate had legal title to their property.

The capital Egyptian enterprises control “cannot be leveraged as collateral for loans, to obtain investment capital, or as security for long-term contractual deals.” He calls it “dead capital”.

The key question to be asked is why most Egyptians choose to remain outside the legal economy? The answer is that, as in most developing countries, Egypt’s legal institutions fail the majority of the people. Due to burdensome, discriminatory and just plain bad laws, it is impossible for most people to legalize their property and businesses, no matter how well intentioned they might be.

The examples are legion. To open a small bakery, our investigators found, would take more than 500 days. To get legal title to a vacant piece of land would take more than 10 years of dealing with red tape. To do business in Egypt, an aspiring poor entrepreneur would have to deal with 56 government agencies and repetitive government inspections.

All this helps explain who so many ordinary Egyptians have been “smoldering” for decades. Despite hard work and savings, they can do little to improve their lives.

Egypt needs a legal system that provides economic freedom in the sense de Soto describes. Let us hope that political reform delivers it.


Thursday, February 3, 2011

What is FDI & FII?

The nature of foreign investment coming into the country is changing rapidly. Foreign investment comes in two ways. Foreign companies often establish factories in India. They remit monies for this purpose. This is called Foreign Direct Investment (FDI) because the investment is made directly by the principal. Control over the Indian factory rests with the foreign principal.

The foreign principal decides what goods will be produced, at what price they will be sold, whether the manager will be an Indian or an expatriate, whether the profits will be reinvested or repatriated to the foreign headquarters, etc.

The other way in which foreign investment comes is through Indian share markets. These investors are called Foreign Institutional Investors (FII). They earn by buying and selling shares when the prices are low and high respectively. They also earn some monies by the way of dividends. The control over the company in which money is invested remains with the Indian owners.



You have done a couple of land deals recently. Are you shifting your focus from home sales to asset sales?

We have done only two deals recently, where we have sold FSI (floor space index) to other developers. One in Goregaon where we have sold Rs 600 crore of FSI and the other is Popular Car Bazaar in Andheri, where we expect cash flows of Rs 700-800 crore. We are maintaining our focus on residential projects and only when there are big opportunities for FSI sale will we do that.

How much debt you need to repay by March 2011?

We have Rs 150 crore to repay till March 2011, which we are gradually paying off. Then, till November 2011, there is no repayment scheduled. Between November and March 2012, we have to repay around Rs 350 crore. We can handle that comfortably.

You have around Rs 4,000 crore of debt on the books. How are you planning to reduce it?

As of September 30, 2010, we had a debt equity ratio of 0.4. By no means is it high. But given the tight liquidity conditions, we are looking at both residential sales and FSI sales to generate cash flows. We will take a call in our next board meeting on whether to use positive cash flows from FSI or residential sale to reduce our debt. We do not have any pressure on debt, but we still want to reduce it by 20-25 per cent in the next 12-15 months. We have generated Rs 1,200 crore through qualified institutional placement (QIP), which we are using in various projects.

What is the progress on the Mumbai International Airport project?

State agencies have come out with a list of those ineligible for rehabilitation. It is for the government to take care of that. We are ready with around 7,000 apartments. As soon as government is ready with eligibility norms, we will hand it over to them. By the end of March 2011, we will complete another 8,000 units and by by the end of October 2011, another 10,000 units. We have generated 11 million sq ft of TDR (transferable development rights) from the project so far, though we have not shifted a single family because TDR generation is not linked to rehabilitation.

How are TDR sales?

Pretty good. They are in the range of Rs 2,800-3,400 a sq ft. If the overall condition remain tight, there could be some impact on sales. It also depends on the conditions of other developers.

What are the plans on residential segment?

On the Mumbai outskirts, we should sell 5,000 apartments or a minimum of three million sq ft of space every year. We are planning to launch projects in Shahad, Panvel and Bhoisar on Mumbai’s outskirts; within Mumbai, we will decide whether to sell FSI or apartments, which should total up to 2.5-3 million sq ft. We are planning to launch projects in Kochi and Shahad soon and deliberating on the timing of launch in Pune and Kandivali.

Residential prices went up 42-43 per cent in Mumbai last year. Analysts expect 10-15 per cent correction. What’s your view?

Yes, prices have moved sharply. We feel they will keep moving from here because of shortage in supply and slow execution by some developers. Since prices of inputs such as cement, sand are going up, we feel home prices will inch up from here. Unless there is any huge debt pressure, we do not expect correction will happen in home prices.

But home sales have come down by half in Mumbai since the beginning of the last year. Your comments?

We had tremendous sales in the past one year. We sold 5,000 apartments in Palghar (on Mumbai outskirts) in December 2010. There is a drop in sales in certain pockets and high end apartments. But we are neither in those pockets and nor do we do high-end apartments. In all our projects, we have crossed the 50 per cent mark in terms of inventory.

What is your strategy to push home sales when affordability is a question mark in cities such as Mumbai?

As a policy, our launch price is five per cent lower than the market. We do not think affordability has come down, as income levels have gone up by 25 per cent in the past one year.

There are reports that developers are borrowing at 24-28 per cent from private lenders. What has been your experience?

Rates are bound to go up, as overall rates are moving northwards. But that does not mean developers are going to Gujarat to raise funds at 35 per cent. Banks are averse to lending to individuals or firms where there is an excess exposure or whose projects are not cleared. But we are still raising non-convertible debentures at 12.5 per cent and our average cost of funds are at 13.5 per cent.