The Pied Pipers are ready to play again. The music scores have been prepared and filed with the Securities and Exchange Board of India (SEBI). Between September and December of 2009, nine realty companies submitted their draft red herring prospectuses for an initial public offering (IPO) of their equity shares. If all these issues come through, these promoters would have raised a little over Rs 15,000 crore from the primary market. It will mark the second wave of realty IPOs; the first started in late November 2006 and continued through mid-2007, when companies like DLF, Omaxe, Orbit Corp and Sobha Developers raised a similar sum of around Rs 15,000 crore. Welcome, once again, to Hamelin.
Godrej Properties Ltd (GPL), the only one among the current eight to have completed its public issue at the time of writing, has played a sweet tune, what with its Rs 469-crore issue—priced at Rs 490—getting oversubscribed four times and the stock quoting a premium of 15 per cent to the offer price last fortnight. Are the remaining offers also likely to be soothing music for investors; or will they flatter only to deceive years down the line? After all, the first flush of realty IPOs raised money at outrageous valuations, only to be currently quoting at substantial discounts.
If Godrej is one of the more prominent names that's walked down Dalal Street, there's Nitesh Estates at the other end of the spectrum. Nitesh who? Well, its promoter is a former nationallevel tennis player Nitesh Shetty, who had started an outdoor media business (hoardings) with Rs 10,000 that he borrowed from his mother. Shetty became a real estate developer when the owner of a building, on top of which he had a hoarding, wanted it redeveloped.
That paved the path for Shetty's entry into the sector, and today he is a developer focussed on premium and affordable properties in south India. His board of directors includes former ONGC chairman Subir Raha and tennis pro Mahesh Bhupathi, among other luminaries. What's refreshing about Shetty, other than his antecedents, is that he isn't fixated on the "land bank" bogey, something that realty players in the boom of 2006-07 were manically obsessive about. DLF, for instance, made the 10,000 acres it owned a major plank of its IPO. The sheer number of acres owned mean nothing if most of that land is not suitably located. Also, cost of acquisition—particularly in high-cost locations like metros—may make the ability to break even difficult.
Shetty, for his part, has little land (194 acres) in his inventory. Instead he's focussed on joint development and joint ventures with land owners. It's a model that Adi Godrej has followed since 1991—a model that some brokerages didn't think much about, if you go by their advice to avoid the GPL issue. Says Adi Godrej, Chairman, GPL: "Maybe some of the brokerages and analysts did not study our model carefully. We had stumbled upon this model by accident through our first project in 1991." Edenwoods, a realty developer, had run into trouble with a project in Thane, a suburb on the outskirts of Mumbai. That happened around the same time Godrej was looking to enter property development.
"HDFC (Edenwoods owed the housing finance major) suggested we look at Edenwoods. So we formed a joint venture with Edenwoods and renamed it Godrej Edenwoods. We quickly repaid HDFC. We have followed this model ever since," adds Godrej. If Godrej is steering clear of land acquisitions, that's also because he remembers how the group burnt its fingers in the mid-nineties when it aggressively acquired parcels of land. The projects duly ran into trouble because of the high cost of acquisition during the boom times. "We learnt our lessons and have since stuck to the joint venture model," he adds. Another cardinal rule that many of the new issuers are following is to stay in the location that you know best.
Lodha Developers—today managed by a foreign-educated, secondgeneration scion—is the largest developer in Mumbai. And it isn't in a hurry to go anywhere else (except for a "pilot" project in Hyderabad). That's because it owns a little over 4,200 acres in the financial capital. Started by Mangal Prabhat Lodha (who is also a BJP MLA from the tony constituency of Malabar Hill in central Mumbai) in 1980, the company now has his son Abhisheck Lodha as Managing Director. Lodha, a graduate from Georgia Institute of Technology, USA, stresses on the quality of management bandwidth—that the company has more than 500 professionals, engineers and management graduates managing operations.
Even a company like Sahara Prime City (from the Sahara Group) isn't exactly playing up the 8,000 acres it owns across the country. Says CEO Sushanto Roy, elder son of founder Subroto Roy: "The ability to develop and monetise the land bank is more important than the land bank itself." Sunil Mantri, Chairman of Sunil Mantri Realty, which is planning an IPO this year, points out that a land bank can be an albatross around your neck when you need cash fast. "A land bank is an asset that you cannot easily liquidate when you are in trouble," says Mantri.
That's something those who raised big money during the boom times discovered to their discomfort during the downturn. Many of them had to raise more cash through qualified institutional placements (QIPs, which are equity investments by institutions) in the summer of 2009 when the markets were subdued.
Almost $2.7 billion (Rs 12, 420 crore at current rates) came in from different institutions into realty companies including Unitech (two issues), Indiabulls Real Estate, HDIL, Sobha Developers, Orbit Corp., Parsvnath Developers and Ackruti City between May and October 2009, according to one estimate. Profits for the year ended March 2009 and for the six months ended September 2009 plunged for most players, except for a couple of exceptions (see story on Peninsula Land: Solid Foundations). Stock prices have also crashed by as much as 60 per cent in some cases from their issue prices.
The carnage notwithstanding, Vinod Sharma, Head of Research at Anagram Stockbroking, says there still is an appetite for IPOs in the market, but he isn't sure how long it will last. "Institutions will be eager, but there will be fatigue and a lack of enthusiasm from the retail investors after a few issues." Even Godrej got only 38 per cent subscription from retail investors. Ritesh Vohra, Director of Saffron Asset Advisors, which manages two Indian realty-focussed funds raised from overseas investors, is even more circumspect.
"The US subprime is a fig leaf behind which Indian realty is hiding. Even today, the Mumbai and Delhi markets are overheating—prices have climbed 50 per cent in the past six months—and this is a clear danger signal." Gautam Mehra, Executive Director at PricewaterhouseCoopers, doesn't expect investors to bite as valuations are on the higher side. It's not all grey, however. Outside of Mumbai and Delhi, the situation is more stable with steady demand and prices not moving up in a hurry.
A report by real estate consultants Jones Long LaSalle Meghraj titled Emerging Trends in Real Estate Finance says realtors are likely to raise at least $2.45 billion (Rs 11,270 crore) in the near future and the Indian realty sector will need $23.66 billion (Rs 1.08 lakh crore) 2010-12 to cater to the unmet demand for homes alone. Adds Godrej: "The demand and growth will be in affordable homes in the Rs 25 lakh zone. That is where we will be."
Clearly, the key is what the new property pashas plan to do with the money they collect and into what kind of projects they pump that money. One also needs to see how much is going into acquiring land—and where? If some of these promoters are using a part of the proceeds to retire debt— Kumar Urban which plans to raise Rs 450 crore has a 1:1.1 debt-equity ratio and is planning to retire a lot of the high-cost debt with the issue proceeds— that's not a bad idea at all.
The key, of course, will be pricing and whether the valuations achieved will be able to be sustained over a period of time. The first round of realty IPOs clearly proved that the valuations they received during the boom times were unsustainable. For investors, the task is to not be enchanted by the music, but to take a discerning look at the colours of the pipers' clothing, their motives and the direction of their footsteps.