The Rise & Fall Of Realty in India

By M H Ahssan & Kajol Singh

‘Buy land. They aren’t making it any more.’ That was the philosophy during the boom. Today, builders have the land, but no cash to develop it.

The first two results of realty companies for the Jan-March 2009 quarter— one big, one small — has confirmed the worst fears of industry watchers: property buying is a frozen glacier. On the one hand, India’s biggest real estate developer, Gurgaon-based DLF, suffered the discomfiture of seeing its net profits plummet 93 per cent to Rs 159 crore, and its sales skid 69 per cent to Rs 1,321 crore compared to the previous year’s last quarter. On the other hand, there is Bangalore-based Puravankara Projects, tiny compared to a DLF but with an uncannily similar performance — net profit fell by a humungous 81 per cent to Rs 14.6 crore, and sales fell 55 per cent to Rs 68 crore from the year-ago figure. Even compared to the immediate previous quarter of September-December 2008, which was considered the worst in a decade, sales have crashed by 18 per cent for DLF, and by 15 per cent for Puravankara. So much so that DLF’s promoters are reportedly selling 6-7 per cent stake in the company to raise Rs 2,000-2,500 crore to pay off some pressing dues.

So, it is no surprise that this is suddenly the season of new launches. Desperate builders are on an overdrive to generate some cash flow by offering huge discounts to bait buyers. Two months ago, Mumbai-based Lodha Developers launched Casa Univus, a township of 3,000 apartments, near Mumbai’s Thane suburb. Situated 14 km from the city in the middle of nowhere, the apartments came at an attractive Rs 3,000 per sq. ft, nearly 50 per cent lower than in Thane. The Lodhas claimed it was a great launch with 500 bookings in the first few weeks. That was till another builder, Everest Developers, came along and launched another project 8 km from Thane’s city centre at Rs 2,200 per sq. ft. Everest, too, claimed it had 500 bookings. But enquiries with HDFC revealed that there were hardly any applicants for home loans for these projects. Abhisheck Lodha, director of the Lodha Group, concedes: “Yes, there have been cancellations.”

Similarly, Delhi-based Unitech has launched several new projects including Uniworld Gardens II in Gurgaon Sector 47 and Ananda at North Town, Chennai, at attractive prices. Its old projects, though, are yet to be completed. It even faced street protests from 350 flat owners of its World Spa project in Gurgaon, who have paid 95 per cent of the cost but are yet to get delivery, despite a three-year delay.

A research analyst with a foreign institutional investor who recently toured several DLF and Unitech sites in Gurgaon, says she saw cows grazing at many project locations that were supposed to be underway.

Frozen Market
Despite all the claims and hype by builders, their stock is not moving. Builders depend heavily on bookings — using the initial payment of 20 per cent to kickstart projects, and leveraging the bookings to raise loans. In the absence of bookings, they are now starved of funds. According to Pankaj Kapoor, CEO of Liases Foras, a real estate rating and research agency, there are 5,115 residential, commercial and retail projects under construction, and 339 proposed projects that have either stalled, slowed down or failed to launch across six metros (see ‘Massive Pile Up’). “The commercial/office space segment is in greatest distress with 195 million sq. ft of ready and under-construction property in the market with few takers,” says Kapoor.

Consumers began withdrawing as early as March 2008, but developers took time to come to terms with it. Flush with IPO (initial public offering) money and FDIs (foreign direct investment), they thought they could hold out till the consumer blinked. That did not happen and the shakeout began last October.

The initial resistance by builders to price cuts had to do with the way the realty boom shaped up from 2005. By October 2006, the inventory for both commercial and housing stock was at its lowest. On the other hand, there was too much money chasing too little supply. New FDI norms for realty projects in March 2005 brought in an estimated $10 billion, mostly in partnership with Indian developers. Simultaneously, closely held companies took the IPO route to raise funds. In 2007, real estate companies together raised Rs 14,591 crore, 43 per cent of all IPO money raised. There was not enough stock, nor sufficient projects to absorb this money, causing a price spiral. By March 2008, though, the consumer had stopped buying as the effects of the overall economic slowdown had begun to pinch.

As consumers stopped buying and the downtrend set in, builders resorted to two rounds of price cuts. The first was last Diwali when they offered price cuts of around 10 per cent that included waiving stamp duty and offering furniture and internet connections at subsidised rates. But nobody swallowed the bait.

Second, from February 2008, there has been substantial reduction in capital values and lease rentals. For instance, in the Delhi-NCR region developers such as DLF, Supertech and JP Associates launched projects in west Delhi, Gurgaon and Noida at rates 30 per cent below what were prevailing at peak in June 2008. DLF launched a project at Rs 1,800 per sq. ft in Hyderabad, 40 per cent lower than market rates.

These tactics have not worked, except where the project is nearing completion or offers ready possession. “The buyer has tasted blood,” says Parimal Shroff, a senior lawyer with a large real estate practice. “He knows the builders are desperate to sell.” Besides, current home loan rates of 9-10 per cent, while lower than the 13-14 per cent highs of mid-2008, have still not reached 2004-05 levels of 7.5 per cent. The buyer, therefore, still sees no reason to buy.

What Is The Bottom Of The Trough?
According to Kapoor, realty prices rose three-fold over three and a half years. But the fall in prices over the past nine months has only been 31 per cent. “Prices are poised to fall by 30-40 per cent more by November,” he forecasts. “Prices may fall even below the fair value. It is only by November that we may see 2005-level trading.” This perception is backed by an Edelweiss Securities survey of visitors at a four-day property exhibition held in April. Eighty-four per cent respondents felt property prices were still too high and expected a 10-30 per cent fall.

Even as the consumer waits, projects that kicked off in 2006-07 to meet the supply shortage are now maturing, creating bloated supply. In the six metros, 53 per cent of the 930 million sq. ft of available realty stock is unsold, putting downward pressure on prices and lease rentals (see ‘Massive Pile Up').

But how far can builders drop prices? People like Sunil Mantri, chairman of Mumbai-based developer Mantri Housing, and broking house Jones Lang LaSalle’s MD Anuj Puri say it is unlikely prices can fall any further without developers having to sell at a loss. Others like Pranay Vakil, chairman of Knight Frank Property Consultants, believe differently. “The price cuts are only for bookings for new projects,” Vakil points out. “The price reduction in near-completing projects is marginal.”

Builders also claim that the high land acquisition price in recent years has made pricing fairly inelastic. For instance, in 2005, Mumbai-based Oberoi Constructions bought GlaxoSmithKline Burroughs Welcome’s 23-acre pharma unit in Mumbai’s Mulund suburb for Rs 221 crore. This translates to Rs 2,225 per sq. ft for the raw industrial land. With development and construction costs, Oberoi would be selling at a loss if the price tag for apartments falls below Rs 5,000 a sq. ft.

How Stressed Are Developers?
Slumping sales have begun to take their toll on developers’ numbers. DLF’s full-year revenue for FY09 slid 28 per cent to Rs 10,541 crore. For Puravankara, it dropped 21 per cent to Rs 445 crore. A review of brokerage firms’ forecasts and the first nine-month performance of some top firms show that their fall in revenue is likely to be between 26 and 45 per cent. Unitech, India’s second-largest developer, which sold 7.15 million sq. ft of property in FY07 and 8.7 million in FY08, will do less than 5 million sq. ft in FY09.

As the property market plummets further, profit margins are being increasingly squeezed. DLF’s FY08 margins of 53.5 per cent slid to 42, 39 and 34 per cent for the first three quarters, respectively, of FY09. A good example is its Moti Bagh project in Delhi that it opened a year ago at Rs 12,000 per sq. ft, with a handsome margin of 60 per cent. Today, it is quoting at Rs 6,000 per sq. ft. The margin, just 22 per cent.

Most analysts are sceptical of the recent rally in realty companies’ share prices signalling a rebound. Putting a ‘sell’ on the DLF, Unitech and HDIL (Housing Development & Infrastructure) stocks, Amit Agarwal, analyst at Ambit, notes in a report: “Sales volumes are still down 80-90 per cent YoY and property prices continue to drop… Increase in cancellations has increased the pressure of already stretched cash flows for all three real estate companies.”

HDIL, promoted by Rakesh Wadhawan and the third-largest listed company by market cap, is in a particularly rough patch. So is Akruti City. Both of them have grown mainly on the back of Mumbai’s slum redevelopment projects by exploiting the transferable development rights (TDR) released from re-housing slum pockets. They now face the challenge of evaporating TDR prices that have crashed from Rs 4,200 per sq. ft in January 2008 to less than Rs 1,000 per sq. ft today. Sastha Gudalore, an analyst at Alchemy Shares & Stock Brokers, foresees HDIL pulling out of Phase II and III of the 276-acre airport slums rehab project in view of the crash in TDR prices. The possibility could become real, as Sudhakar Shetty, a Mumbai-based realty investor who holds 30 per cent stake in HDIL’s Mumbai airport development, says: “We are considering a possible exit after we complete this (Phase I) rehab component.”

Indiabulls Real Estate (IBRE), the fourth- largest builder by market cap, entered late in the game of assembling land banks and, therefore, bought land at very high prices. This restricted the company’s manoeuvrability on pricing and rentals. For instance, land for its two flagship commercial projects — in Jupiter Mills and Elphinstone Mills — in Mumbai was acquired through hard-fought auctions from the National Textile Corporation (NTC). Jupiter’s 11 acres was acquired for Rs 276 crore in March 2005, and Elphinstone Mills’ 7.75 acres for Rs 446 crore in July 2005 at Rs 7,000-8,000 a sq. ft.

With the slowdown, its estimated leasing target of Rs 300-350 per month per sq. ft has been shaved by half with deals being signed for Rs 170-190 per month a sq. ft. Gagan Banga, CEO of IBRE, however, denies the company is stressed. “When we bought the mill land, commercial rentals were Rs 100 per month a sq. ft and FSI (floor space index) was just 1.33,” he says. “Now, we have FSI of 4.0, giving us 5 million sq. ft of rentals for Jupiter and Elphinstone by 2010. At an average 185 per month per sq. ft our earnings will be Rs 1,100 crore a year from the two projects. This compares well with DLF’s annual rental revenue of Rs 700 crore.”

The Debt Trap
Many developers face a debt trap, having borrowed heavily to acquire prime land and speed up development during the 2005-2007 boom. By mid-2008, most of these realtors had drummed up high debt-equity ratios of 0.8-2.0. This would have been manageable had these companies maintained a sustained cash flow. However, with negligible sales, they are in for big trouble. Many of them would have been in serious default had it not been for the Reserve Bank of India directing banks and financial institutions to help them restructure their loans. These loans have to be ultimately paid after the rollover period; and given the current market scenario, cash flows could be worse a year later.

Unitech, for instance, availed of short-tenure borrowings of around Rs 8,400 crore to fund its telecom foray and create a land bank of 9,000 acres, for much of which only token money has been paid. Deferred liability for its land payments accounts for Rs 1,914 crore. It also used these funds to launch multiple projects in different centres, spreading itself thin.

The company now wants to reduce its debt to Rs 7,000 crore by this May-June and is hoping to restructure its short-term debt of Rs 2,500 crore maturing in FY10 through sale of equity of its telecom company Unitech Wireless to Telenor, asset sales, conversion of debt into equity and fresh pre-sales. While Rs 380 crore is expected from the stake sale to Telenor, it was hoping to raise Rs 1,100 crore from various assets sale. For instance, it sold its 200-room Gurgaon hotel for Rs 230 crore, but only part consideration has been received. Again, its bid to sell its office complex at Delhi’s Saket for an estimated Rs 500 crore has so far not succeeded.

In recent weeks, Unitech has raised Rs 1,621 crore through a qualified institutional placement (QIP) aimed at easing the high debt burden. This has led to a 13 per cent post-issue dilution in the promoters’ stake to 51 per cent. This also represents a valuation of Rs 12,470 crore, 85 per cent down from its peak valuation of over Rs 85,000 crore in January. However, despite the funding, Unitech failed to complete its repayment of Rs 500 crore to mutual funds that was due on 19 April. Likewise, its target of raising Rs 1,000 crore from pre-sales seems far-fetched as it will have to book 10,000 flats costing an average Rs 50 lakh each to reach its target. Attempts to get responses from Unitech, DLF and Parsvnath by Bw drew a blank.

DLF presents a better picture but a closer examination shows the company may also be slipping into a debt quagmire. Loans on its books have risen 28 per cent to Rs 15,777 crore in FY09 from Rs 12,277 crore in FY08. Much of these funds have been used to acquire expensive land such as the 17.5-acre Mumbai Textile Mills in 2005 for Rs 702 crore. Also in Delhi, DLF purchased the 38-acre DCM Sriram Mills property in August 2007 for a whopping Rs 1,675 crore. The company also has outstanding payment for land acquisitions to the tune of Rs 5,962 crore. On the other hand, its sales numbers are on a downward trajectory — from Rs 2,981 crore and Rs 2,527 crore in the first two quarters of FY09 to Rs 790 crore and Rs 56 crore in the third and fourth quarters, respectively. The company, though, has managed to raise and restructure some debt. It had raised over Rs 3,000 crore from a consortium of banks. It is also attempting to raise Rs 1,000 crore from the sale of around 50 acres of prime plots in Mumbai, Bangalore, Lucknow and Gurgaon.

In the realty market, the relationship between DLF and DAL (DLF Assets Limited), the privately promoted company of DLF chairman K.P. Singh, is something of an enigma. Much of the sales booked by DLF are purchased by DAL, but little is known of how much DAL has finally offloaded to end-users. Sales to DAL form an important part of DLF’s balance-sheet with DAL contributing 43.5 per cent to DLF’s revenues and 35 per cent to the company’s profit before tax for the October-December 2008. However, analysts say the large receivables from DAL are a big concern the company and its promoters will have to address.

HDIL, too, faces the problem of mounting debt. From Rs 3,100 crore at the end of FY08, HDIL’s debt is now touching Rs 4,300 crore, of which about Rs 3,000 crore has been borrowed for the Mumbai airport rehab project. HDIL got itself a breather in March this year by rolling over Rs 2,500 crore of its maturing debt. But it is doubtful whether its current cash flows will meet the additional interest burden.

Delhi-based Parsvnath Developers is a good example of the host of over-leveraged realty companies that could turn turtle. Raising about Rs 1,000 crore from its IPO, Parsvnath locked up most of this by successfully bidding for a 123-acre housing plot at Chandigarh for Rs 821 crore in June 2006. The project has stalled and Rs 517 crore has been frozen by Parsvnath’s JV partner, the Chandigarh Housing Board. Then, in 2007, it bid for a seven-acre BEST bus depot land in Mumbai’s Kurla suburb, and announced a Rs 620-crore commercial and housing project. The project is yet to see the light of day. Today, it has virtually shut shop in Mumbai and employees have not been paid for over eight months.

Delhi-based Omaxe has over Rs 1,500 crore debt on its books. It has rolled over Rs 600 crore for a year that was due in September this year, but with sales of just Rs 735 crore for the first nine months of the current fiscal, can it meet its loan commitments? With housing and commercial property not selling, Omaxe promoter Rohtas Goel has announced a business plan to develop airstrips and jails in Uttar Pradesh!

“Those who expanded exponentially in the 2006-08 period on the back of high value purchases will find it difficult to survive,” says Shroff. “The best bet for them is to exit these undeveloped or incomplete projects at the earliest.”

Another form of debt that has not yet found its way into analysts’ reports is the money builders owe to their contractors. An investment banker says, “It could collectively be as large as the amount owed to banks and FIs.”

Regulation Needed
The real estate sector is amongst the largest revenue generators, with $72 billion in 2008 compared to IT/ITES’s $64 billion and telecom’s $31 billion. Yet, it is the most unregulated sector as far as the consumer is concerned. Funds raised for a particular project are diverted to complete other projects or square a maturing loan. Delivery schedules are seldom met and there is no way that errant builders can be penalised.

“Realty firms are like banks. They hold consumers’ money in trust; but when they violate that, there is no remedy,” says an investment banker. “In China, when private builders went out of control on delivery schedules, the state enforced regulation allowing bookings only after construction reaches the first-floor stage.”

Writes Shaleen Garg on the website Gurgaonscoop.com: “I would like to connect with fellow owners in ‘Raheja Atlantis’ who are suffering… Possession is delayed for over two years. We have paid up to 95 per cent of the price long time back. Even if the builder agrees to pay us Rs 5 psf per month, the penalty would amount to only 2.8 per cent interest on the capital deployed.”

Till the government brings in regulation to penalise such defaults, consumers such as Garg will continue to suffer.

AFFORDABLE? NOT REALLY
Demand for housing, market players agree, is unlimited — so long as the price is right. Facing close to no demand for expensive three-four-bedroom apartments, builders are taking the ‘affordable housing’ route to attract customers. For instance, Puravankara Projects, one of Bangalore’s largest developers, launched a low-cost housing subsidiary, Provident Housing & Infrastructure, promising 64,000 homes in the Rs 10-20 lakh range. But that is hardly affordable to people who need it the most and, not surprisingly, in the past three months, this segment has also seen sluggish sales.

The real demand is in low-cost housing. “The low income housing group segment, which has a monthly income in the Rs 7,000-25,000 range, is estimated at 21 million households and is a $270-billion market,” says Ashish Karamchandani, CEO of Mumbai-based management consulting and merchant banking firm, Monitor Group (India). “Unfortunately, it is underserved and uncontested.” A study of the housing market by the Monitor Group conducted for the World Bank showed that despite the high demand, builders were averse to enter the small format homes (225-300 sq. ft) segment in the price range of Rs 3-9 lakh. Those who have done so, have had good response from buyers. Karamchandani cites the case of the Mumbai-based Neptune Group that has completely sold its Phase I ‘budget’ homes — 600 apartments — at Ambvilli on Mumbai’s outskirts, pricing the one-bedroom and two-bedroom homes at Rs 4.7 lakh and 8.4 lakh, respectively.