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Besides, five special economic zone (SEZ) promoters including Maharashtra Industrial Development Corporation (MIDC), wants to surrender their projects.

The Board of Approval (BoA), headed by Commerce Secretary S R Rao, will take decision on these requests in the forthcoming meeting scheduled on November 23, an official said.

The BoA is a 19-member inter-ministerial body that deals with Special Economic Zone (SEZ) related matters.

The developers have cited global slowdown, imposition of minimum alternate tax and lack of response from infrastructure developers as major reasons for surrendering projects.

“Now, the developer has requested for de-notification of the SEZ on the following grounds – that due to implementation of proposed DTC and global slowdown it is not possible to develop SEZ …,” MIDC has said in its application. The developer has proposed to set up a multi-product SEZ in Amravati.

According to an industry expert, uncertainty over tax exemptions for new SEZs has also led to decline in interest in tax-free enclaves. Investors are very apprehensive about the new draft Direct Taxes Code (DTC).

According to the revised DTC draft, which will replace the Income Tax Act of 1961, tax exemptions for SEZs will be confined to existing units. The developers who have sought more time to implement their projects include Andhra Pradesh Industrial Infrastructure Corporation and Enfield Exports.

Under the SEZ Act, SEZ units get 100 per cent tax exemption on profits earned for the first five years, a 50 per cent exemption for the next five years and another 50 per cent exemption on re-invested profits in the following five years.

SEZ developers, on the other hand, get 100 per cent tax exemption on profits for 10 years, which they can choose to invoke within the first 15 years of operation.

Merchandise exports from the 160 operational SEZs in the country totalled Rs 2.39 lakh crore in the April-September period, an increase of 36 per cent vis-a-vis the same period last year.

Shriram Properties is the privately held real estate unit of the $9-billion southern conglomerate Shriram Group. Ascendas is the leading  bidder for the 1.3 million sq ft special economic zone, which counts Accenture and Mahindra Satyam among others as tenants, and is part of a large integrated township located near the Chennai international airport.

The SEZ has potential to develop 3.2 million sq ft business space due to be completed in the next two years. Ascendas is expected to clinch a deal only for the already tenanted space and won’t have any right of first refusal for the development in the pipeline, said one of the sources mentioned earlier.

Shriram’s IT SEZ is part of a larger mixed use development on a 58 acre land, which it had bought from Standard Motors Factory in 2006.

Ascendas India Trust (a-iTrust), listed on the Singapore Stock Exchange, owns marquee technology parks in Bangalore, Chennai and Hyderabad. It has 92% stake in International Technology Park Bangalore (ITPB) and 89% stake in International Technology Park Chennai  (ITPC), with the state governments being minority investors in both the projects. a-iTrust, which builds and operates business parks, is the only listed Indian property fund for global investors.

The latest deal is part of the global investor interest in Indian business spaces catering to technology clients. Private equity firm Blackstone Group acquired 1.8 million sq ft technology SEZ of real estate developer DLF in Pune for Rs 810 crore last year.

It also struck a similar sized investment deal with Embassy Group for one of the largest IT SEZs in Bangalore. Private equity firms and global investment houses are allocating a part of their portfolio to risk free income yielding assets, such as IT business parks, which provide 9% to 12% assured returns besides providing capital value appreciation.

“Some PE funds with a real estate orientation are investing in pre-leased commercial projects pre-dominantly in IT Parks and SEZs in addition to residential projects. Though these developments yield lower returns than residential assets, they give some assurance of steady annual returns,” Jones Lang LaSalle India Managing Director for Corporate Finance Ambar Maheshwari told PTI in Mumbai.

Such investments can provide a buffer for funds, which do not produce the expected returns, he added. “These investments are happening selectively, because a lot of investors have burnt their fingers by investing in underdeveloped commercial properties. There is oversupply in this space and it is very difficult to ascertain if a project will be commercially viable or not. Investing in pre-leased commercial projects is a relatively low-risk route, which also provides a reasonable assurance on returns,” Maheshwari pointed out.

Taking this opportunity, international private equity funds like Blackstone, Baring Private Equity Partners and Xander have already invested in pre-leased assets such as IT parks and SEZs. While US-based firm Blackstone has invested in two properties each in Pune and Bangalore, Xander has bought stake in an IT park in Chennai, while Baring Private Equity Partners has invested RMZ Corp, which is the largest office space builder in the South.

Echoing similar views, DTZ CEO Anshul Jain said, “Though residential projects continue to be a lucrative market for PEs, the guarantee of assured returns on their capital deployed in pre-leased projects is attracting Pes to invest in such properties.”

According to statistics, the return on equity deployed in retail and commercial properties last year was USD 0.7 and USD 0.8 respectively per USD 1 investment. On the other hand, the return per dollar in residential properties was USD 1.3. However, in land deals the valuation received per dollar was around USD 5. Speaking about this growing trend, a senior official from Tata Realty and Infrastructure, who did not wished to be named, said, “Due to delay in project approvals, high land and construction costs, the risks involved in investing in residential and other development projects is high, as they may fail to yield the average expected return of 25 percent. “Therefore, PE funds are now looking at commercial and retail properties for investment though the returns are low.”

Although these projects churn out returns which are a tad lower than the conventional residential projects, they essentially provide annuity incomes for investors, he added.

By: Ravi Sinha

Track2Realty Exclusive

SEZ was originally conceived on the premises that it will be like an “Island of Excellence” with world class infrastructure available to the user at globally competitive prices. It was aimed to assist both Indian entrepreneurs as well as global investors wanting to set up their manufacturing and services bases inIndia.

Such a development would have helped to compete fiercely in the global market, especially post WTO. It was expected that India replicate such models across the country upon implementing few initial “genuineSEZs”. The said concept is predominantly based on accomplished models of Chinese success stories wherein, out of nowhere, several high profile and successful SEZs were created.

However, the difference between China and India is in the fact that while the Chinese Government built world class and world size infrastructure to attract huge investments globally, in India it is the responsibility of the private sector to develop world class infrastructure and subsequent to that attract investors to set up their manufacturing and service bases.

The policy makers seem to believe that once India provides the infrastructure for manufacturing and a tax free regime, the availability of cheap labour and raw materials will secure India a competitive advantage. But all these have been available in China for some time. More importantly, China has also invested in skills and training of a large work force that operates in its export factories; India is far behind in this respect.

As a result, while SEZs have failed to take off in India, the government is groping for fresh ideas and the developers who got into it for cheap land, tax concessions and brand value are struggling to fulfill the commitment. The road ahead is blurred and SEZs today stand as a case study in policy ambiguity, greed and wishful thinking.

By: Ravi Sinha

Track2Realty Exclusive

The government has also given more time to as many as 37 Special Economic Zone developers, including Navi Mumbai SEZ, DLF Commercial Developers and Tata Consultancy Services, to execute their projects. Five SEZ developers were allowed to surrender their projects as well. But the mounting criticism is now forcing the government to eject non-serious players from SEZ.

The non-execution and media criticism hasforced the government to rethink its strategy about developers sitting idle on the approvals. It expects the developers to either start work on the ground faster or surrender their applications and apply afresh when they are ready.

The Commerce Ministry will soon come out with a discussion paper on the Special Economic Zones in the backdrop of a large number of SEZs remaining only on paper and not getting operationalised.

Besides, it is only in a few states like Andhra Pradesh, Tamil Nadu, Haryana and Rajasthan where the tax-free enclaves have come up. The Ministry has also called for suggestions from all stakeholders to comprehensively address the policy framework and operational issues of SEZs.

The lack of economic activity in most Special Economic Zones has also led to the suspicion that many promoters were incapable of attracting economic production units to their SEZs and are merely betting on them as real estate assets and relying on loopholes in the law to realise their value at a later date.

This suspicion is only reinforced by the number of real estate developers in the fray who have been advertising SEZs as their ‘crown jewels’ and collecting enormous sums from the market in public issues of shares.

However, instead of taking any corrective recourse to make their SEZs become an economic hub, there are developers who shrug off their responsibility and blame the Government policy for the failure to take off SEZ project. Even after being allowed to stake sell, and more time to developers, including Raheja Developers, they are still crying foul.

In an email query to Raheja Developers by Track2Realty, Manoj Goyal, Sr VP, Raheja Developers shot back, “There is no delay from our side. The delay is mainly due to delay in clearance of master plan and environment clearance. We do not agree that Government is giving top priority to SEZ. We have to approach all individual authorities whether State or Central for approvals. The environment clearance hassame long drawn processes as applicable to other projects. The approval of Master Plan is pending since more than two years. You would now understand how a developer could develop such a big project without such approval.”

……to be continued

Track2Realty Exclusive

There was no holistic planning for SEZs to position them strategically for being complementary to each other and serving their own market niches respectively. The Ministry of Commerce that provides in-principle approvals to new SEZs on the basis of pre-feasibility reports being submitted by the respective state governments, soon seem to have lost its monitoring mechanism. Secondly, the SEZ was not synchronized with other schemes for development of specialized industrial parks.

The two draft direct tax codes (DTC), released in August 2009 and September 2010, further hindered the development of SEZs. The imposition of the Minimum Alternate Tax and Dividend Distribution Tax on SEZs as well as the economic slowdown hit the development.

As a result, the industry started crying foul and the chambers like ASSOCHAM asking the Government to revisit the policy on SEZs, particularly matters related with taxation in order to make them attractive for domestic and global investors. Huge investments have been made in SEZs across the country and frequent changes, especially relating to tax matters and land acquisition, are eroding confidence among investors, ASSOCHAM said.

In the absence of a sound vision and policy framework, added to the developers’ lax attitude, SEZs started making its presence felt only in the news, for all the wrong reasons. Only a handful of SEZs could get operational due to functional anomalies and rigid timelines.

Facts speak for themselves. After about five years since the SEZs Act and Rules were notified in February 2006, of the 585 SEZs approved and 381 notified, only 143 SEZs are functional.

“A large number of SEZs have been formally approved of which only few are in operation,” Export Promotion Council for EoUs and SEZs (EPCES) quoted Anup Wadhawan, Joint Secretary in the Commerce Ministry as having said.

However, in a face saving exercise the government seems to have given the SEZ developers more than what was actually needed. Right from coercive land acquisition and now allowing them to sell stake in their projects, setting aside Revenue Department’s argument that it would amount to transfer of land that is not permitted.

……to be continued

Track2Realty Exclusive

Once seen as very powerful economic tool for catalyzing the growth process during restructure and liberalization of economy, Special Economic Zones (SEZs) in India could not replicate the Chinese success story, as assumed. Track2Realty takes a look on the future of SEZs in India as realtors make a beeline to exit or extend the tax haven, and the government groping for fresh ideas.

Tax concessions, custom benefits and most importantly, land being granted at throw away prices; still Special Economic Zones (SEZs) have failed to take off in India. In the initial years of the SEZ Act providing liberal tax concessions to the developers of SEZs and the units therein, promoters from the real estate and information technology, among others, made a beeline for the same.

The Special Economic Zones Act (SEZA) 2005 was enacted with the underlying objective to boost economic activity, promote exports and investment from domestic and foreign sources, create employment opportunities and develop infrastructural activities. Keeping such objectives in mind, various fiscal incentives were provided to the SEZs under the Income Tax Act (ITA) 1961.

However, the planning for Special Economic Zones in India had some very specific gray areas at conceptual level. The stated primary objective of India’s SEZ Program has been to ensure the export-led growth by attracting FDI and other private sector investments and thus, using SEZ as catalyst in the process of reforms, economic development, employment creation, and regional development.

The dream to achieve the quantum of FDI flow equivalent to or more than China always remained far fetched because of the perceived poor standing of India by multinationals as reflected from trans-nationality index and perhaps, an inadequate marketing of the country ‘as a profitable investment destination’. This coupled with the ad-hoc approach towards the holistic planning for Indian SEZs to strategically position them as complementary to each other and not competing made it very difficult to attract FDI. SEZs thus emerged as a “status symbol” of realty companies and many of them were positioned to compete with each other for FDI and private investment.

..…to be continued

Track2Realty Exclusive

Industry body NAREDCO admits that a lot is needed by the Finance Minister rather than just the tax exemption, which again was needed keeping in view the housing shortage which is one of the biggest challenge for the government of the day.

Justifying the demand for tax exemption Sunil Dahiya, Senior Vice President of NAREDCO says the deficit largely exists in affordable and low cost housing, which even PSU banks are skeptical to fund for various reasons and hence, capital markets can’t be expected to be extroverts looking at the PSU Bankers’ shying.

“The expectation from the budget should be to create an ‘international task force‘ under the Ministry of Housing & Poverty Alleviation’ as the nodal force that shall allow the realty sector to go overseas and raise such capital and allow any alternate capital raising instruments to ’innovate’ and to evolve per se the market demand. Housing units being short in the country with a deficit of 25million homes will cost approximately INR 1lac Crore. With the requirement spiralling at an average of 5% p.a of the same deficit, the government needs to create a framework to raise that kind of national wealth to cater to the demand of this social infrastructure,” he says.

Brotin Banerjee, MD and CEO of Tata Housing believes the initiatives like lowering & standardization of stamp duty across the country as well as reducing transaction burden could benefit the developers as well the end consumers would be. He believes the introduction of unified taxation system across all states will also help to incentivize more consumers for home ownership. Advocating for a regulator to create level-playing field in the realty sector, Banerjee, however, demands special concessions for integrated townships as it is the way forward for Indian developers and it immensely helps to reduce the pressure on city infrastructure.

“The appeal of integrated townships lies in the fact that it puts affordability, convenience, and focus on lifestyle in one very attractive package. Also in order to meet the demand and need for facilitating MIG/LIG housing, and thereby the requirement of decongestion of cities, there is a need to extend tax holiday under section 80IB for Integrated Township development project as Infrastructure project (development of township project with over 20 acres of land out of city limits with development of at least 50% of the FSI area as Affordable housing with area less than 950 Sq Ft). This section gives tax relief to the builders for construction of integrated townships and thereby contributing to development of infrastructure around the metros and tier 1 cities, thus reducing the demand and supply gap for affordable housing,” Banerjee says.

]]> http://www.track2realty.com/realty-welcomes-proposed-housing-tax-exemption-but-ye-dil-maange-more-ii/feed/ 0 http://www.track2realty.com/blackstone-to-fund-embassy%e2%80%99s-22-stake-buy-in-bangalore-it-sez/ http://www.track2realty.com/blackstone-to-fund-embassy%e2%80%99s-22-stake-buy-in-bangalore-it-sez/#comments Fri, 01 Jul 2011 05:18:14 +0000 Track2Realty http://www.track2realty.com/?p=2872 Private equity giant Blackstone will finance south-based Embassy Property Development’s purchase of 22% stake in Manyata Tech Park, the country’s largest operational tech SEZ located in Bangalore, from HDFC Property Ventures for Rs.540 crore.

A source close to the development said the PE behemoth is likely to back Embassy’s stake purchase through a combination of convertible equity and debt totaling $100 million, or roughly Rs.450 crore, sources added. The transaction, if clinched, could mark Blackstone’s biggest real estate investment in India.

The stake buyback would raise Embassy’s shareholding in the IT business park to 57%. Jitu Virwani, Chairman of Embassy Property Development, confirmed the Rs.540-crore share buyback from HDFC Property Ventures, but said he had no immediate plans to raise funds from outside.

Embassy Property Development, which has delayed its Rs.2,400-crore IPO, has been holding talks with Blackstone and Warburg Pincus to raise funds. Blackstone has emerged as front runner to finance Embassy’s buyback in the tech park. 

Multiple banking sources familiar with the development said the impending transaction “will be a structured finance with an equity component built into it.” Blackstone has already made Rs.135 crore commitment to Embassy’s residential project in Bangalore.

Manyata Embassy Business Park is an integrated mixed-use development business park which has a developable area of 18.29 million sq ft. As of April 2010, 7.85 million sft of developable area within the business park was operational. 

Jitendra Virwani owns 100% equity stake in the Embassy Property Development by way of 0.4% direct ownership, 91.9% through JV Holding Private Limited and 7.7% through JV Family Trust.