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Is Costain the next Carillion and why is bigger better in India?

July 10, 2019

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In 1865 Richard Costain persuaded his brother in law to take the boat to Liverpool, setting up business as jobbing builders and undertakers, and the company they founded went on to build Mulberry Harbours for D Day, assembled the largest dredging fleet ever to create acres of new land for Hong Kong Airport and was a founder member of the Channel Tunnel Consortium. Unhappily, history doesn’t record what happened to the undertaking business, but we can probably assume it was less successful…or at least we could until last week. Shares in Costain collapsed last Friday by 35% following news that the HS2 southern section will be delayed (again), as will the M6 smart project and a new road system in Preston. It’s all beginning to sound a bit Carillion: yet another ratcheting up of the seemingly unstoppable malaise affecting UK infrastructure projects.

Costain might now be regretting its dependence on the UK sector which would be ironic not only because it was a key player at Hong Kong Airport, but also in a string of prestigious projects across the globe, including the Amlohri Mine redevelopment in Northern India. This involvement by a British company at Amlohri also seems particularly ironic now given the disparity between the UK (with its record of projects being pulled, cancelled or delayed) and India’s vibrant, homegrown construction sector.

Construction is second only to agriculture as the largest employer on the subcontinent, and in a sector that was once dominated by small, barely regulated entities, there has been a marked shift towards consolidation: just the kind of consolidation that would have warmed the cockles of Richard Costain’s heart. And a major factor behind this was 2017’s Goods and Services Tax (GST), widely seen as having disrupted smaller (and all too often shadier) sector participants: the new system of reverse charging in particular means tax is now charged upfront to the client and collected by the contractor, but only if the contractor is state registered. Smaller, unregistered companies now have to leave it to the customer to record and pay GST and with rates on cement (still the crucial construction material) currently running at 28%, that’s on any basis an accounting and cashflow headache the client can do without. So they’re turning to better regulated, more compliant (and usually bigger) companies to do their work for them.

And given the extraordinary growth of construction on the subcontinent, reflecting an increasingly urbanised and rapidly expanding population, this kind of regulatory and market stability has to be a good thing: it provides a solid and stable base for further growth, as well as a platform for the technologies required to deliver more buildings at the dizzying rate India demands: technologies like modular construction and lightweight steel structures.

Modulex Construction is the World’s largest and India’s first Steel Modular Building Company, working to meet the challenges of the subcontinent’s construction boom in a practical and focused manner.

                                                          

                                                                    Learn more about Modulex

Executive Overview

We’ve definitely seen a seismic shift in the global balance of infrastructure and construction power: I think we’ve all sensed it, and the reasons aren’t hard to find.

India now has the fastest growing population on the planet and will soon have the biggest population in absolute terms too (overtaking China). Added to that the subcontinent is going through an unprecedented process of urbanisation, all of which requires more homes and buildings to be delivered at a rate never seen before in the country’s history (or any other country’s come to that).

Prime Minister Modi’s government has responded by securing regulatory and compliance structures like never before, consolidating markets and supporting structured corporate growth. But when it comes to construction, bigger and more reliable businesses won’t be enough by themselves because traditional building technologies just can’t cope with the sheer scale and pace of delivery required. That’s why innovative techniques like modular construction will always be part of the solution.

I expect Mr Costain would have agreed…

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Time matters with India’s Real Estate revitalisation

December 10, 2018

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KPMG reported last month that Indian Real Estate Sector has now entered a “revitalisation mode”, with aggregate growth projected to reach $ 650 Billion by 2025 and topping $850 Billion by 2028: the average yearly contribution of real estate to the Indian economy will more than double from its current 7% by 2025. And CBRE India are equally optimistic: in their own quarterly report, snappily titled “India Real Estate: Variance in Construction Costs”, they forecast 17 Million new jobs will be added to the sector and an additional 8.2 Billion square feet of space released by 2025.  It all resonates well with the ambitions objectives of Prime Minister Modi’s Affordable Housing Programme, with Real Estate now set firmly in growth mode, and growing stronger every year. But there’s a dark shadow in the garden…

Each of these influential reports has highlighted a potential issue relating to construction costs on the subcontinent, capable of acting as a brake on growth and with no less than six major conurbations (Chennai, Pune, Hyderabad, Mumbai and Delhi) causing particular concern. Perhaps predictably, Mumbai tops the list of areas where unit construction costs have spiralled over recent years and show little sign of slowing down despite the broadly stabilizing effect of GST legislation introduced by the Modi Administration which helped smooth out some of the worst supply and pricing differentials across the country.

The average cost of construction for a residential apartment in Mumbai is now Rs 3,125 per square foot, compared to the Rs 2,375 per square foot the same apartment will cost in Hyderabad. At one (macro) level the reason for all this is obvious: an increasingly urbanised population pushing up demand for units in the largest conurbations as part of a gradual drift away from the land, but the disparity in relative costs between conurbations is still striking. Inter market differentials of this kind are likely to be caused primarily to an uneven distribution of construction skills, with highly skilled workers drawn to areas of greater demand so increasing the unit cost of labour in specific areas of the subcontinent. Certainly we might expect other variables such as recent sharp rises in the wholesale price of steel to be more uniformly spread across the country.

In short, construction is becoming progressively more expensive in the very areas where more housing and commercial units are likely to be needed most…and that’s a real dilemma.

One answer is to make greater use of just in time delivery systems which are capable of dramatically reducing overall construction schedules: simple maths tells us that if an expensive worker is on site for a quarter of the normal building phase, costs will come down no matter how prohibitive the daily rate. And of course we have now grown used to the significance of just in time methodologies because of the prominence the issue has assumed as part of the current Brexit debate. Just as any significant inhibition on frictionless trade has potential to throw the UK economy into chaos after Brexit, so too the same frictionless technologies can help address systemic cost differentials across the Indian construction sector as well.

Modular Construction prefabricates all of the essential components of the building off site, everything from exterior walls, ventilation systems and internal wiring networks with the parts then arriving on location only when they’re needed: meaning field workers aren’t left waiting around (expensively) for the next phase of the project to get underway. Research has shown that through a combination of just in time delivery techniques and modular technology, otherwise complex units such as student accommodation blocks or hospitals can be erected on site in days rather than the months and sometimes years of conventional technologies. And an added advantage is that Modular Technology also reduces the potential for human error and snagging in the final building which can also be a major but hidden expense on any project.

Modulex Construction is the World’s largest and India’s first Steel Modular Building Company, setting out to meet the challenges posed by India’s urban housing shortages in a practical and dynamic manner. The company is at the heart of a project established by Red Ribbon to harness the potential of India’s markets and delivering opportunities for investors. Because, when it comes to investing on the subcontinent, nobody knows India and its markets better than Red Ribbon.

Red Ribbon CEO, Suchit Punnose said:

Prime Minister Modi has successfully appealed to the youthful and increasingly urbanised population that is currently driving India’s economic growth, not least through his Government’s re-energised Affordable Housing Programme the scale and scope of which has at times been breathtaking. So it should come as no surprise to learn that such an increasingly mobile population is also creating real estate hot spots (and cost differentials) through being attracted to a number of specific locations: by definition, a mobile population is difficult to keep still.

So as it seems to me the resulting cost differentials in construction across the subcontinent are likely to be a fact of life for some years to come yet. But that’s certainly not to diminish the problem, and cost disparities are a problem in India’s most expensive real estate markets, Mumbai in particular. They have real potential to distort the market.

In delivering a workable solution to that challenge most expert commentators now agree that Modular Construction is simply inescapable. No other technology offers the pace and scale of delivery needed to meet India’s housing needs and, as the article points out, it is the perfect corollary for just in time delivery systems. That’s why Red Ribbon was committed to Modulex Construction from the very beginning of the project and we remain committed to it today. I’m convinced it is not only a vital element in meeting market challenges but will also deliver on the unprecedented opportunities currently presented by the subcontinent’s burgeoning economy.

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Modular Construction: the answer to the shortage of skills in India

December 10, 2018

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Most Indians work in agriculture but next comes construction, and according to the latest Economic Survey the subcontinent’s real estate and construction sector is likely to create more than 15 Million jobs over the next five years, that’s three million every year. To put that in perspective less than 3 Million people are currently employed in the entire UK construction industry. And of the 52 Million building workers employed by Indian companies, 90% are involved in on-site construction with the other 10% busily painting, plumbing and wiring the finished product. It’s fair to say all these painters, plumbers and electricians are skilled workers…but not so the other 90%.

Because the vast majority of India’s construction workers are either minimally skilled or have no skills at all: an astonishing 97% of them aged between 15 and 65 will receive no formal training of any kind before starting work on site and, plumbers and painters aside, most of the skilled workers won’t be getting any cement dust on their boots because they’re probably office based clerks, technicians and engineers. And that’s a real problem…

It’s a problem, because coming the other way down India’s infrastructure and logistics superhighway is an unprecedented surge in demand for urban housing, fuelled by an increasingly urbanised population projected to become the biggest on the planet by 2022. India’s National Skill Development Council predicts that by then the real estate and construction sector will require a workforce of more than 66 Million, so without any obvious core of skilled workers currently able to sustain anything like growth it’s no wonder the sector is starting to show signs of stress.

Of course all this was supposed to be addressed by 2016’s Real Estate (Regulation and Development) Act which was intended to act as a platform for local, State driven planning capable of creating an appropriate environment for improved training and regulatory structures, but so far six States out of 29 have failed to produce any plans at all under the legislation which means finding workers with the right skills in the right place will continue to be a source of real concern.

Billionaire developer Niranjan Hiranandani, head of Hiranandani Construction, has a simple enough solution: just pay unskilled workers less and reap the savings while you can. But that’s not a particularly attractive solution for anyone buying one of his apartments 76 floors up in the Mumbai skyline where quality assurance is far from being a dispensable extra. The behemoth that is Hindustan Construction Company perhaps takes a slightly more realistic approach, going on record last week to say that skills shortages have become a huge problem for the sector: 50% of its workforce needs advanced training just to use the complex machinery now prevalent on most modern building sites. With a heavy tone of understatement a spokesman for the company announced grandly that given these skilled workers are not available, “the only option is to train them”.

Well, it’s not quite the only option…

With no actual shortage of workers seeking employment in India’s urban conurbations, particularly in the light of a seemingly inexorable drift of former agricultural workers from country to town, what if the physical construction process itself could be de-skilled? Why not make a virtue of necessity and draw on this pool of former agricultural labourers to release the margins of between 20% to 70% that Deloitte India predict would follow from a wholesale deskilling initiative? These savings would go straight to the bottom line without endangering the quality and safety of the finished building. Skilled construction workers earn Rs 1,000 a day as opposed to their unskilled counterparts who earn an average of Rs 200.

And there is just such a business model on the market right now, a model with the potential to uncouple construction projects from a seemingly insoluble skills conundrum: it’s called Modular Construction.

Modern Modular technologies allow all of the building’s key components to be put together off site by specialist workers and then assembled locally at the same time as the site works are completed, not only reducing overall completion schedules by as much as 50% but also significantly reducing the need for skilled workers in the construction phase. All of the design and engineering disciplines are instead concentrated at the offsite manufacturing facility leading to labour, financing and supervision costs. Which will all be music to Mr Hiranandani’s ears…

Modulex Construction is the World’s largest and India’s first Steel Modular Construction Company, meeting the challenges of the subcontinent’s current urban housing shortages in a practical and focused manner. The company was founded by Red Ribbon as part of an innovative project to harness the potential of India’s dynamic and evolving real estate markets whilst at the same time delivering opportunities for investors through Red Ribbon platform. Because, when it comes to investing on the subcontinent, nobody knows India’s markets better than Red Ribbon.

Red Ribbon CEO, Suchit Punnose said:

Delivering on India’s stringent housing targets over the next five years presents an enormous challenge for the subcontinent, and that challenge is likely to get more testing still given the underlying demographics of a rapidly increasing and ever more urbanised population. Existing skills shortages within the construction sector have the potential to be a crucial block to meeting these targets, especially given the scale and scope of the training programmes necessary to release a further 3 Million workers into the sector every year for the next five years: never mind the attendant costs which are likely to be eye watering on any basis.

That’s why to my mind the answer has to be Modular Construction. No conventional technologies can beat it for sheer pace of delivery and, with a centralising of skilled labour in the offsite manufacturing facility, it will beat conventional construction methods hands down on overall profitability too.

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Better Smart than Big: India’s Eco Hospitality Sector

December 03, 2018

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The problem with global conglomerates is that they have global reach but monolithic thinking. Look how long it took Facebook to respond to high profile data breaches, with the hardly media shy Mark Zuckerberg virtually disappearing from the ubiquity of his own platform for weeks on end. Think of IBM: slow to the point of near extinction in responding to software innovations in the market, and poor old Kodak, slow to the point of actual extinction in meeting challenges posed by a blizzard of new, digital based technologies. So it should be a sobering thought for our current crop of global empire builders that big certainly doesn’t always best, because all too often great size comes with an inbuilt decision making stasis …in business, it’s always better to be smart.

Even so the thickest commercial hides can sometimes let in a little oxygen, which is why economists still like to look at the interesting conundrum of scaled decision making: big companies deluded into thinking they are fleet enough of foot to react on time to critical and fast moving trends, rather like an elephant finding a discarded pair of tweezers and thinking they must be good for something.

The latest example is Hilton Hotels, which this month unveiled its “Travel with Purpose Campaign” designed to reduce the group’s global carbon emissions by, wait for it, reusing old bars of soap left behind by its guests. Good luck with that: the Hilton Hotel chain on the subcontinent has properties with in excess of 1000 rooms pumping out as much carbon as a Victorian glue factory, so you might be forgiven for thinking the odd bar of soap is unlikely to make much of a difference. But the Hilton monolith is simply reacting (monolithically) to the unsurprising revelation that most of its guests are now placing environmental concerns at the top of their list when deciding where to stay. Hilton knows this because it conducted an expensive survey of 72,000 of its guests in May this year.

Of course it could have saved its hard earned cash and had a look instead at earlier newsletters on this site (amongst other places): sustainability concerns have been a key trend in the Indian Hospitality sector for at least the last decade and are becoming progressively more important. Hilton’s laborious, too little too late response is yet another example of big not being better. Big, in this case, is positively bad.

The companies that are instead best placed to make the most of eco trends are not operating out of densely occupied concrete blocks. They are strategically positioned in India’s mid market hospitality sector, with Lemon Tree Hotels and Eco Hotels being prime examples: smaller in scale and with sustainability ingrained into the fabric of their buildings (rather than in last minute memoranda urging staff to pick up discarded soap). As a result Lemon Tree Hotels is currently valued at 17 times EV/EBITDA and since completing its successful IPO in March of this year the company’s shares have risen in price by an impressive 28 per cent.

Both companies find themselves carried forward by a relentlessly upbeat market outlook, typical of which is JLL India: “The hospitality industry is witnessing a new buoyancy” and Anarock Capital, where Shobbit Agarwal had this to say: “Stocks of listed hotel companies are on a new high due to improving fundamentals increased occupancy levels, higher revenues and average room rates seeing 5 to 6 per cent year-on-year growth”.

Quite so, we don’t need an expensive survey to tell us that.

And it also has a great deal to do too with a recent surge in India’s domestic and overseas tourist numbers as well as an increasingly affluent middle class demographic prepared to put their money where their heart is…Hilton Hotels might take note.

Red Ribbon Asset Management is the founder of Eco Hotels, the world’s first carbon neutral mid market hotel brand, offering “green hospitality” as part of a progressive roll out across India which intended to take full advantage of current market opportunities on the subcontinent. The brand offers sustainable living without compromising on standards of hospitality and is designed to cater to commercial and recreational travellers alike.

 

Red Ribbon CEO, Suchit Punnose said:

I’ve always believed in the essential flexibility and virtue of smaller business platforms, capable of responding quickly and effectively to market opportunities as well as medium term market trends. Because, to paraphrase Keynes, over the medium term a business that finds itself rooted in a fixed strategy can also all to often find itself dead. Just look at the object lesson provided by the once all powerful Kodak Corporation.

And the sheer pace of change and market innovation in the subcontinent’s hotel and hospitality sector at the moment makes that lesson all the more compelling. Mid market groups like Lemon Tree Hotels and Eco Hotels are quite simply better placed to respond successfully to rapid innovation and key demographic changes. Not least because they have both been positioned from the outset to anticipate a sustained and progressive move towards sustainability based tourism and business travel. Sustainability is built into their DNA.

That’s why I’m particularly proud of the part Red Ribbon has played in founding Eco Hotels and helping with its strategic development, anticipating exciting developments in Indian markets capable of generating above market rate returns for our investors. So, whilst like the Hilton Group, I’m sure Eco Hotels will be encouraging guests not to waste soap, the company has a lot more to offer in the future.

 

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A Sense of Understatement: Modular Construction and Indian Real Estate

October 08, 2018

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Mitsubishi Corporation announced this month its first ever investment in Indian Housing: it will invest $25 Million in Chennai through its subsidiary DRI India and plans to build 1,450 new homes on a 186,000 square meter site. And as if you needed any reminding of the buoyancy of Indian real estate, three quarters of those units have already been sold. Mitsubishi expects to earn more than 10 Billion rupees on the project within four years so it was probably with a sense of understatement that a Mitsubishi spokesman told the press last week that: “…middle-income earners (in India) are expected to expand, boosting housing demand.”

No prizes for original thinking there.

The United Nations has repeatedly forecast that the subcontinent’s current population of 1.3 Billion will overtake China by 2022, making it the most populous in the world so yes, middle-income earners on the subcontinent are indeed “expected to expand”…and how. Added to which India is already the fastest growing large economy on the planet, with an increasingly urbanised population so the demand for new homes will indeed be “boosted”. Look no further than the burgeoning conurbations of Mumbai and Bangalore. Mitsubishi might not be winning any prizes for economic analysis anytime soon but its decision to invest in the subcontinent’s real estate sector makes perfect business sense.

Of course, in the overall context of the economic phenomenon that is India, 1,450 homes is a drop in the Ocean. Just to keep pace with current housing demands, the subcontinent needs to build 856 new homes every hour (using up Mitsubishi’s contribution in less than two hours).

And that provides a graphic illustration of why Modular Construction is now at the top of the subcontinent’s political agenda.

Modular Construction is literally changing the shape of the world we live in: not just for homes but hospitals, bus stations and offices too…if it can be built at all, it can be built quicker and more efficiently in a modular format. So if, like India, you need to build nearly 900 new homes an hour, it should be obvious where to look for the solution. Indeed, having announced this week that the United Kingdom Government will commit an additional £2 Billion to affordable housing projects, Theresa May could usefully take a leaf out of Prime Minister Modi’s playbook.

And that’s not the half of it…with recent concerns over air quality in India’s conurbations also making the news recently, modular construction technologies also provide a ready answer to environmental concerns. Its technology eliminates high moisture levels occurring in traditional building materials, with units being constructed off site and indoors well away from adverse weather conditions. That not only protects the integrity of the structure but prevents excess moisture building up in the wooden framing too.

Modulex Modular Buildings Plc is the World’s largest and India’s first Steel Modular Building Company, working to meet the Challenge of India’s urban housing shortages in a practical and focussed manner. It was established by Red Ribbon to harness the full potential of India’s dynamic and fast evolving markets, delivering exciting opportunities for investors because, when it comes to investing on the subcontinent, nobody knows its markets better than Red Ribbon.

Red Ribbon CEO, Suchit Punnose said:

Mitsubishi’s entry into the Indian Real Estate sector should come as no surprise to anyone: major Japanese consortia have been leading the wave of inward investment into the subcontinent in the wake of key initiatives such as Delhi’s high speed rail system. But the article is right to characterise Mitsubishi’s commentary on the strength of the sector as a wild understatement. India is currently the fastest growing large economy in the World, with a burgeoning and increasingly urbanised population that is projected to be the largest on the planet by 2022. That will inevitably make the subcontinent’s real estate market an attractive proposition for any investor.

But none of that should beguile us from forgetting the sheer scale of the housing challenge India currently faces, in common with other leading global economies. Traditional construction technology simply can’t deliver to the scale and pace required by projected demand on existing governmental programmes. No wonder then than Modular Construction is a policy priority for Prime Minister Modi’s Government. It’s only a question of time before others follow suit…

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Modular Construction: A Global Construction Solution

September 14, 2018

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Lets get straight to the point: the UK construction industry has a problem, three problems to be precise. First, an aging demographic (mostly with their own homes) combined with a impoverished younger population (mostly without); secondly, a lack of new companies entering the sector (think Carillion) and, third, a marked decline in skilled labour that isn’t likely to improve anytime soon with Brexit on the horizon. All of which makes the UK Government’s target of building 300,000 new homes every year until 2020 look distinctly shaky if only because, according to Arcadis Target, this would require 400,000 new skilled workers to be added every year from 2017(one every 77 seconds). Not particularly likely given lack of skilled workers is a core component of the problem.

But the proof of the pudding is in the eating. In 2017 the Government fell 80,000 short of its target (nearly 30% short), which is why Modular Construction has now leapt up the list of UK Policy priorities: if you can’t change the system, change the method and no existing building technology is better equipped to deliver quality housing at pace than Modular Construction. In fact, off site prefabrication delivers units at three times the rate of conventional technologies so its just what the Government needs to meet its target…

Except no matter how hard Government seems to try, modular construction in the United Kingdom is still at cottage industry levels, largely because of the first of those three factors we just mentioned: an aging demographic and an impoverished younger population acting together effectively to staunch demand for innovation.

How different then things are on the subcontinent.

Rather than an aging demographic, India has an increasingly youthful population, increasingly urbanised and increasingly wealthy as well as being drawn inexorably to live and work in the subcontinent’s major conurbations (Mumbai and Bangaluru in particular). And it is this demographic trend that is creating a surge in demand for affordable urban housing added to which, unlike the UK, India has no shortage of new construction entrants or skilled labour.

Again, the proof of the pudding is in the eating… Knight Frank’s latest India Real Estate Report found a surge in the number of new project launches for the first half of this year, up by 46% and with a marked increase in affordable housing starts too (making up 51% of supply). Most Indian Cities are also showing exceptionally strong rental growth, with Bengaluru in the lead at 17% year on year. All in all it’s a very different picture from the UK but what the two countries do have in common is housing targets: specifically those established in India by the Affordable Housing Programme which are if anything tougher than those confronting the UK Government.

That’s where Modular Construction comes in, because in contrast to the position in the former mother country, off site prefabrication on the subcontinent is very far from being a cottage industry. Favourable economic conditions and underlying demographic trends have instead made it an essential component of India’s drive to meet its public housing targets by 2022. The sheer pace and quality of delivery offered by modular technologies (not only for homes but hospitals, schools and office buildings too) simply can’t be matched by conventional building techniques: something the UK Government seems to be waking up to, if perhaps a little too late.

Red Ribbon set up Modulex Modular Buildings with the intention of building on these demographic and economic trends, recognising the outstanding capacity of Modulex to deliver above market rate returns for investors by tapping into high demand levels in India’s real estate markets. Modulex provides an exciting opportunity for investors to participate in this key sector of the fastest growing large economy in the world.

Red Ribbon CEO, Suchit Punnose said:

I found it interesting to compare the current strengths and weaknesses of the Indian and UK construction sectors where the same three factors for change seem to be working in wholly opposite directions (to India’s advantage). But more than that, I was also struck that both sectors have now come to the conclusion that view modular construction has to be a key component in delivering the significant number of new units required in each country. I know, for example, that the House of Lords Technology Committee has recently started an investigation into the advantages off site prefabrication offer in helping meet policy targets which seem at the moment to be running away from the Government. Perhaps though, as the article points out, that may all be too little too late.

For our part, and with Red Ribbon’s roots set deep in the Indian markets for over a decade now, it is a trend we have obviously been following with great interest for some years. That’s why we decided to take a pivotal role in establishing Modulex Modular Construction on the subcontinent and its why we remain excited at its prospects of delivering above market rates for our investors in such a resurgent real estate market. We firmly believe Modular Construction will play an essential part in India’s future.

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Eco Hospitality as part of India’s Climate Change Agenda

September 14, 2018

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What exactly do we mean by Eco Hospitality? McDonalds has its own unique take on things, announcing plans to serve rice at tourist resorts on the subcontinent: rice with extruded cheese or spicy packet sauce. Take your pick. And PepsiCo India has a global sustainability agenda as well, planning to reduce the size of its Lays and Kurkure snacks in a valiant effort to “limit the company’s global footprint”. No sign yet of any plans to reduce the price of the smaller bags though. But beneath these slightly risible gestures there is a serious point. We have all witnessed the cruel after effects of the recent monsoons in Kerala, which have displaced hundreds of thousands and claimed the lives of hundreds more. And global warming is widely identified as a key factor behind the unusually heavy rainfalls.

So its welcome news that with or without extruded cheese on our rice and smaller bags of crisps, the subcontinent is already working at the forefront of global climate change policies, especially since the United States withdrew from the Paris Climate Accords last year, and India certainly knows what Eco Hospitality means because Eco Tourism is now an integral part of its economy.

Take one small example: operating at the epicentre of this month’s flooding in Kerala, the Tourism Department announced an initiative last month which will literally light up tourist spots by installing solar powered street units, including along the entire length of the beautiful Kovalam Beach where LED lighting systems link the seashore to local thoroughfares. The solar units are also hooked up to the Internet through a mobile app that will monitor power usage and report in if units are damaged or tampered with. It all costs Rs 31 Lakh but will save the State much more in electricity costs and, much more importantly, will help preserve the State’s precious environment for the future. There are also plans to extend the project to Varkala and Akkulam.

It might seem slight and insignificant given the scale of the recent disaster, but when Kerala recovers (as it will), it is one step further forward towards addressing the environmental issues that contributed to last week’s events. And on any basis it’s a lot better than extruded cheese and a bag of crisps.

Another good example of an Indian business looking to work in harmony with its environment is Lemon Tree Hotels where every hotel in its chain on the subcontinent will now adopt a stray dog from the local area and give it a home in the lobby. As history tells us, small steps can make a difference if we take them together. And as Eco Hotels has also demonstrated with its innovative “green hospitality” brand, the concept doesn’t just make environmental sense: it makes good commercial sense too, with lower operating and capital costs factoring into a leaner business model. Lemon Tree’s shares jumped 2% in a single day on 17th August, so the model is obviously working.

Red Ribbon Asset Management is the founder of Eco Hotels, the world’s first carbon neutral mid market hotel brand, offering “green hospitality” as part of a progressive roll out across India which is designed to build and expand on economies provided by the platform in conjunction with explosive growth in the Indian tourism sector (and mid market hotels in particular). The brand offers sustainable living without compromising on standards of hospitality and will cater for commercial and recreational travelers alike.

 

Red Ribbon CEO, Suchit Punnose said:

I think we were all shocked to witness the scale of the devastation that has unfolded in Kerala this month, and our best wishes and sympathies go out to all of those who have been so severely affected. But it is right too that we try to understand the reasons behind this, the worst monsoon flooding in India for more than a hundred years and its difficult to resist expert suggestions that global warming and avoidable harm to the environment could well be a major cause. So it is obviously important that we should try to do something about those long-term trends as well.

I am proud that India is working at the cutting edge of climate change policies across the globe and, in however small a way, those policies will I am sure help to make Kerala a safer and more secure, even more beautiful place to live in the future. Eco hospitality is a vital part of that equation for an area which is so heavily dependant on international and domestic tourism. As the article says, small steps taken together can change the world.

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Interest Rates: What the Reserve Bank of India can teach the Bank of England

August 16, 2018

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Inflation, as it happens, is also attracting considerable attention not only on the Monetary Policy Committee of the Bank of England but also at the Reserve Bank of India which anticipated recent events in Threadneedle Street by raising its own interest rate to 6.5%. That came hard on the heels of a hike of 0.25% in June, which was the first rate increase on the subcontinent for more than four years. And given the two Central Banks now appear to be moving in ever closer lockstep on the issue, it’s no surprise that the smart money in the City is on Urjit Patel to replace Mark Carney as Governor when the first overseas national to hold the position returns home next year to spend more time with his money. Urjit Patel is currently Governor of the Reserve Bank and his own three-year term ends next July. Mark Carney’s time is up next June, so If nothing else, it looks like good timing.

And should Urjit Patel eventually end up in the hot seat he could do worse than draw some lessons from the underlying reasons that are driving inflationary growth in India at the moment, which stand in stark contrast to those troubling the former mother country. As a seasoned economist he might also remind himself of the old adage that there is no inflation in a graveyard: consumer demand can only fuel inflation if consumers have something to spend.

The UK’s headline inflation rate of 2.4% is barely driven by consumer spending at all for the simple reason that domestic consumers have very little surplus income to spend. Such pressure as there is on that front is driven rather by the biggest rise in UK consumer borrowing since the global financial crash of 2008. Of much greater importance is the increased cost of imported goods due to a weakened sterling coupled with (inevitably) ongoing fears over Brexit, so the decision to raise rates last week had much more to do with bolstering the value of sterling going forward (although, in the light of market movements in the aftermath of the announcement, that may itself be something of a triumph of hope over experience).

Now lets take a look at India.

Last’s week’s 0.25% rate rise on the subcontinent was primarily a response to rising crude oil prices on international markets. India has spent 12% more on imported oil since April this year, reflecting an upward pressure in key prices and, to a certain extent, a 3% depreciation in the value of the rupee against the dollar over the same period (dollars being, of course, the lingua franca of oil). But that’s nothing in itself to be worried about because there’s a reason why India is buying all this extra oil: it is (quite literally) fuelling the economic expansion which is now expected to see India’s GDP grow by 7.25% this year; and with limited reserves of its own the subcontinent is bound to be vulnerable to adverse price movements on global markets. That is a necessary cost of its startling economic success.

And as for the other element of the inflation equation, we hardly need reminding of India’s unprecedented surge in consumer demand. With the fastest growing population on the planet, an increasingly younger demographic and steadily rising rates of average income, very little of this is leveraged with debt (unlike the UK) but India’s annual consumer inflation rate still hit 5% in June (the eighth month in a row that it has exceeded the 4% medium term inflation target). But again, that is hardly a cause for significant concern either, bearing in mind that the RBI target has an upper tolerance of 6%, which is above the current inflation return. After all, there’s no inflation in a graveyard.

So unlike the Bank of England, the Reserve Bank of India (although pursuing a similar monetary policy) has in reality simply trimmed its inflation projections rather than run scared of them, confident in the knowledge that it is not only still working within existing tolerances but also harnessing unprecedented economic growth. That’s why it has been able to maintain its well-rehearsed policy of neutrality: encouraging growth and keeping inflation under control. Urjit Patel might not be able to take that particular policy with him if he comes to London next year.

Red Ribbon Asset Management has placed India at the heart of its investment strategies since the company was founded more than a decade ago, and nobody understands the subcontinent’s potential for growth better than Red Ribbon. With an unrivalled knowledge of market conditions on the subcontinent, the Red Ribbon Private Equity Fund offers a unique opportunity to share in the potential of the fastest growing large economy in the world.

 

Red Ribbon CEO, Suchit Punnose said:

I had heard that Urjit Patel was being tipped to take over as Governor of the Bank of England when Mark Carney moves on next year, and for my part I think he would be an excellent choice. Certainly it would be a matter of great pride for every Indian to see him take the helm and build on his policy experience on the subcontinent, perhaps even (as the article points out) adding some of the subcontinent’s current economic sparkle to the UK economy.

And it is also interesting to note the radically different reasons for the Central Banks in each country making virtually the same monetary policy announcements in virtually the same week. Inflation is not always an enemy of sound economic growth, and in India’s case it seems rather to be an inevitable product of its own success. As the article says, there’s no inflation in a graveyard.

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India’s urban challenge and Modular Construction

August 16, 2018

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We must run as fast as we can just to stay in one place… and if you want to go anywhere we must run twice as fast as that.” (Alice in Wonderland).

As well as having an engaging smile, indeed sometimes only an engaging smile, the Cheshire Cat’s advice to Alice demonstrated wisdom beyond his nine lives. We would be well advised to remember it when considering the real estate challenge facing India’s economy as it comes to terms not only with the fastest growing population on the planet but also a radically increased urban population. Mumbai and the New Delhi Conurbation are already creaking at the seams, so staying in one place is no longer an option: now we need to run twice as fast to get anywhere.

And as we have commented previously on this site, when it comes to sheer speed of delivery Modular Construction will always have the upper hand over traditional construction techniques, making it singularly well suited to meeting the demands of India’s rapidly expanding population. Modular units are pre-built offsite in a controlled environment where the weather matters less and logistical barriers barely matter at all: think about building anything from scratch on site in Downtown Mumbai in the middle of summer and you’ll get some idea of the problem. Just in time supply chain efficiencies, including progressive stacking of modules on site, also then ensure maximum speed of final delivery without any of the “dead time” delays frequently associated with traditional construction methods.

But how does that all work out on complex construction projects? Using Modular Construction to create a small block of flats is one thing, but what about a 100-room Hotel?

Well, as it happens, that’s not a problem either.

The Marriott Hotel Group decided last year to adopt modular construction technology on some of their newest hotels and other major and mid sector hotel chains have been following suit with projects ranging from four star hotels through to boutique eco hotels. Marriott kicked off its initiative with a commitment to build 50 hotels using prefabricated guestrooms and bathrooms as well as a 97 room signature hotel entirely constructed with modular technology (and, take note, completed two months ahead of schedule). As their International Chief Development Officer, Eric Jacobs put it: “Construction is the next frontier for innovation and modular technology is leading the wayBy working with our modular partners we can open hotels faster, put associates to work earlier and generate revenues sooner”.

Quite so…

And its not just hotels either: modular construction is currently being used across the subcontinent to deliver student housing, hospitals and public buildings of all shapes and sizes. Getting just where India needs to be… by running twice as fast.

Red Ribbon played a key role in setting up Modulex Modular Buildings, recognising the company’s outstanding potential to deliver above market rate returns for investors through its ability to tap into high demand levels in Indian real estate markets. The company provides an exciting opportunity for investors to take advantage of this key trend in the fastest growing large economy on the planet.

 

Red Ribbon CEO, Suchit Punnose said:

I was interested to read about the Marriott Hotel initiative because it deals with a misapprehension that I sometimes come across, that modular construction is appropriate only for smaller scale projects. In fact nothing could be further from the truth. From my own work on behalf of Modulex on the subcontinent, I know that this fascinating and innovative technology is equally at home on major construction projects as well including, as the Article says, Hospitals and Schools. I’m convinced the technology has a major part of play in meeting the huge challenges currently facing India’s real estate markets.

And as a matter of interest, Marriott certainly wasn’t the first company to enter the market with a modular construction hotel: Red Ribbon’s own Eco Hotels have been doing that since the company’s inception and I’m very proud of the part we’ve played in its growth: because at Red Ribbon we don’t just believe in the theoretical value of modular technology, we’ve been using it for years.

 

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No Carillion for India: The Subcontinent’s Tough New Audit Regime

August 16, 2018

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English Law requires an Auditor to be a guard dog not a bloodhound, and that’s why Carillion collapsed in a Multi-Billion Pound insolvency with KPMG’s partners left wondering how to spend their bonuses while they wait to give evidence the House of Commons Finance Committee. But as with so much else over recent years, India’s Government is marching resolutely out of step with the former mother country: intent on improving matters by introducing stronger new audit regime and in the words of Finance Minister P.P. Chaudhary, strengthening the “fabric of corporate governance”. It seems India won’t have its Carillion moment.

The new National Financial Reporting Authority was set up in March with a brief to provide independent oversight of the audit profession and to “…investigate chartered accountants and their firms” (a wide brief on any basis) while doggedly digging into the conduct of even the largest listed and unlisted companies. In advance of the new Agency formally coming on stream, the Ministry of Finance served thousands of notices to companies thought to be falling short on minimum compliance thresholds, going so far as to deregister those who weren’t cooperating. In its sheer audacity the new initiative brings to mind the innovation and overarching ambition of Demonetisation.

There has in consequence been a marked uptick in auditor resignations: thirty so far in 2018, which is double the number for both full years 2016 and 2017 and clear evidence that the new initiative has teeth.

And as if that wasn’t enough, The Securities and Exchange Board of India (SEBI) is also getting in on the act: recently barring Price Waterhouse, Bengaluru from certifying company accounts for three years. Interestingly, it also mandated payment of penalties for wrongful gains (audit fees in other words). KPMG’s Carillion Partners might wish to count their blessings they weren’t working in Mumbai.

The emergence of this tougher regulatory climate is the best possible news for the Indian Economy, which has historically been dogged with horror stories of lax or minimal oversight. Businesses investing into the subcontinent simply cannot afford that level of uncertainty, and this at heart is the fundamental fact behind the reform programme. India’s rapidly growing economy needs a resilient regulatory structure and the innovations now on foot not only go to meeting that objective, they are likely to be the envy of many developed economies too.

Perhaps the new climate is best summed up by the Chairman of EY:  “There is heightened risk awareness now with much more effective external regulators. The new focus on governance has driven up the risk perception in the eyes of auditors and made them much more compliant in their approach.”

Exactly so…we don’t need another Carillion in Kolkata.

Nobody understands the fundamentals of the Indian economy better than Red Ribbon Asset Management, which has placed the subcontinent at the heart of its investment strategies since the company was founded more than a decade ago. Drawing on an unrivaled knowledge of local markets with an expert team of more than a hundred advisers working in India’s economic hot spots, the Red Ribbon Private Equity Fund offers unique opportunities to share in the potential of this, the fastest growing large economy on the planet.

Red Ribbon has been specialising in India’s Markets since the company was founded more than a decade ago, bringing an unparalleled expertise to its investment policies on the subcontinent with specialist sectoral advisers working from it’s Head Office in London in conjunction with more than a hundred local experts on the ground in the subcontinent itself. And by drawing on that body of expertise The Red Ribbon Private Equity Fund now offers an opportunity to secure above market rate returns in this, the fastest growing large economy in the World.

 

Red Ribbon CEO, Suchit Punnose said:

When Red Ribbon Asset Management started out more than ten years’ ago, I was often asked whether regulatory structures on the subcontinent were robust enough and resilient enough to give the level of assurance investors could expect from more developed markets, and in those early days it was sometimes difficult to give an unqualified yes.

But not anymore…India has changed so much over the intervening decade, with radical and cutting edge initiatives being introduced every year to push back against unacceptable business practices.

Anyone investing in India today can expect to find all of the regulatory certainties and safeguards they would expect from developed markets and the initiatives on audit referred to in the article (a crucial matter for any investor) are simply the latest element in that cycle, albeit a very important one. It is all part of the process that is making India one of the most exciting and fastest growing markets in the world.

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