It's - The - |
When
Unitech purchased 340 acres of land in Noida in May 2006 for Rs 1,583 crore,
it raised a lot of eyebrows. After all, it was the country's largest land
deal.
Few months down the
road, the Greater Noida Development Authority auctioned 290 acres of land
for Rs 1,640 crore. Surely, it was just a matter of time when a new player
would win the "largest land deal" trophy.
This year, DLF purchased
110 acres of land in West Delhi from the DCM Sriram Group (apparently
outbidding Unitech). The price? Rs 1,750 crore.
Unitech step aside.
DLF take a bow.
Did you notice the
figures? The number of acres has consistently fallen but the price to
purchase the decreased number has only risen. The scent of money is strong
in the real estate business. In fact, so alluring is its aroma that it
has even lured foreigners to our shores. In 2005, FIM Ltd, a company incorporated
in Mauritius and managed by the San Francisco-based Farallon Capital Management
LLC, bought 60 per cent equity in Indiabulls Real Estate Company Private
Ltd (IRECPL) for Rs 5.1 crore. Morgan Stanley invested $68 million in
Bangalore-based Mantri Developers. Merrill Lynch invested $50 million
in Panchsheel Developers.
If they are not teaming
up with real estate players, they are opting for real estate funds that
invest in developers. In 2004, the Securities and Exchange Board of India
(SEBI) permitted venture funds to invest in local real estate. To cite
a few examples, GE Commercial Finance Real Estate invested in an $800
million fund that is building IT parks. Calpers and the Oregon Public
Retirement Fund have invested $100 million each in the IL&FS India
Realty fund. Dawnay Day International has entered into a joint venture
- Dawnay Day AV Financial Services- to offer wealth management and property
investment services. But the UK-based investment company plans to invest
$1.5 billion in Indian real estate over the next two years.
For the benefit of
the foreigners who did not make it here, the companies have gone abroad.
Ishaan Real Estate, Hirco, Dev Property Development, Unitech Corp Parks,
Eredene Capital (Saffron), Trinity Capital, and West Pioneer Properties
Ltd have all listed on London's Alternative Investment Market (AIM).
Despite the potential
of this sunrise sector, not all fund managers have dabbled in real estate
stocks and no dedicated real estate fund has been launched till date.
Their reluctance is understandable.
Valuating
Stocks
In 2006, real estate consultancy firm Knight Frank was given the task
of valuing Indiabulls Financial Services' real estate business. The firm
placed it at Rs 21,569 crore and stated that the stake of Indiabulls in
the company was Rs 15,125 crore. This took place before the demerger of
the real estate business into a separate entity called Indiabulls Real
Estate Ltd (IBREL). Scoffers and critics wanted to know how the valuation
was done.
Their wish was granted
a few months ago when Gulam Zia, Head of Advisory Services,
Knight Frank was interviewed on CNBC-TV18. According to him, the valuation
for Indiabulls (where the real estate angle was concerned) was "pretty
much on the conservative side". The interviewer made note of the
fact that the holdings in the projects were valued at Rs 15,000 crore
while the current market cap (at the time of the interview) was in the
whereabouts of Rs 6,000 crore. The issue at stake was whether "in
hindsight it was a lofty appreciation that had a lot to do with prices
of some stocks when the exercise was conducted".
We quote Zia's answer
verbatim: "We are not exactly equipped to get into the exact status
of holdings of these properties, as the holding patterns are not clear.
The valuations that we are talking about are sheer real estate valuations
of the entire assets under that; how much of the properties are already
under the holdings, or those that are under cross holdings, etc, are things
that are not directly considered. As far as valuations go, we just assume
that all these properties are under the company's possession."
Valuation seems to
be the bane of the industry. Being a new industry, there is no tested
methodology for valuation of real estate stocks. Analysts in the more
developed markets of the West perform semi-annual and annual valuations
of company's property holdings. But valuation of real estate assets in
India is a different ball game altogether.
When looking at the
company, an analyst will have to understand the business approach. Is
the company focused on commercial, residential or retail space? Which
segment is more lucrative? Is its expertise just related to a particular
geographical belt or does it operate on a national scale? Does it have
a substantial land bank?
Most companies end
up being valued on the land bank they possess, not on the revenues they
generate. Yet, valuing the land bank is fraught with ambiguity. Location
is of prime importance. Is the land located in a metro or Tier II city?
Is it on the periphery or centrally located? What is the size of the land
bank? How much of it is legacy and how much is paid for? If paid for,
then has it all been purchased at a recent price?
Putting a price to
land bank would be tough. An analyst may value the land bank based on
fair market value (FMV). According to FMV, it would be the price demanded
by the seller and paid by the buyer when there is no compulsion on either
side.
Now let's say a developer
has picked up a huge land bank towards township development. Naturally,
real estate prices in the vicinity would leap. Consequently, the land
bank will be priced highly. Say a year or two down the road, the developer
aborts the project and decides to sell the undeveloped land. Chances are
slim that he would get the quoted market prices. So even if the land bank
is rightly valued, it is to be seen whether or not the company will realise
the actual gains.
Regulatory approvals
for projects also remain an area of concern. Legal issues and stay orders
could delay projects substantially. The execution capabilities of the
management are crucial. Can the developer deliver within the constraints
of time, cost and quality? Does it have a good standing with banks and
financial institutions?
That's not all. Determining
the Title is not easy either. And this leads us to the issue of whether
the claimed land bank is identical to the actual holdings. If that was
not frightening enough, then you should know that a number of real estate
projects tend to have hidden liens. The latter is a legal claim on the
property that acts as a security for the payment of a debt.
Positive
outlook
Though the issue of transparency continues to dodge the sector and valuation
is a tough call, there is money to be made in real estate. But looking
at the factors that go into determining profitability projections of realty
stocks, a general positive view on the sector is insufficient. Smart stock
picking is what will make the difference. Companies of all hues and market
cap operate in this space. The move by the SEBI to come out with tighter
norms, standard disclosure procedures and ownership and agreement statuses
of the land bank will benefit investors. The number of companies getting
listed is on the rise and the BSE Realty Index, comprising of 11 stocks,
will certainly help as a benchmark. But one can well understand the reluctance
of most fund managers for the time being.
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