India Inc is realising that it’s wiser to hold on to the goose that lays golden eggs, rather than to sell it, particularly if the price of gold is rising. In the first stage of the real estate boom a number of companies capitalised on their land assets by selling off them to developers. But now the companies are realising that there’s more money to be made out of retaining the real estate.
Many companies, including those in sectors such as apparel, jewellery and tobacco, are turning their physical assets into a long-term revenue generator by forming joint ventures with construction companies for development of the property, rather than bringing a one-time funds infusion into the balance sheet.
Take jewellery maker Rajesh Exports, for instance. The company, which has 32 properties spread across Bangalore and Kerala, took a board nod early this year for development of these properties. Rajesh Exports chairman Rajesh Mehta said in a statement: “We feel that even though the development may require time, it would be worth it as it would fetch very attractive valuations compared to selling of the land bank.”
He is not alone in taking a different view on real estate assets. Another one is cigarette maker GTC. The company, which has assets in prime locations in Mumbai, Hyderabad, Baroda etc, has already initiated moves to develop part of its assets. Its 2.75 acre land at Hyderabad, for instance, is being developed into a mall, which would include a four-screen multiplex.
In this property, GTC would own 50% of the built up area, while the entire investment for the development would be made by its partner. Says GTC chairman Sanjay Dalmia: “I don’t believe in selling land. We would rather add value by developing it through strategic joint ventures, thereby enhancing shareholder value.”
It’s the same scene in various other parts of the country. For instance, in Gurgaon, textile company House of Pearl Fashions (HOPF) recently entered into a 47.5: 52.5 joint venture for a commercial project on a 9-acre plot on the Delhi-Jaipur highway with Delhi-based real estate firm Ansal API. As per the deal, Ansal API would obtain the necessary government approvals and construct the property.
Similarly, Orient Craft, one of India’s largest textile exporters, entered into a collaboration with real estate firm Besteck for developing a 6 lakh sq ft IT space in Gurgaon. Transport Corporation of India (TCIL) and tobacco major DS group are also looking for long-term partnerships with realty firms.
“Going forward, this will be the most viable option for both, companies having surplus land assets as well as developers. While the developer does not have to block a one time capital, the land partner has a source of recurring earnings,” says CB Richard Ellis South Asia chairman & MD Anshuman Magazine.
Big real estate companies have a clear preference for outright ownership of land, but even they are waking up to partnerships as an alternative route to expand business. “Land is a scarce resource and is welcome in any form that it comes,” says Unitech managing director Sanjay Chandra.
It makes perfect sense too. According to market watchers, a property sale only brings in a one-time gain to the company, and it figures in overall earnings only for that particular year. Development of the property, on the other hand, they argue, tends to create a revenue source, which would reflect in all future earnings and provides reason for a re-rating of the company by investors.
There are also examples to show how those who sold out completely have lost out in returns. Industry experts say that on an average, returns from converting land as equity in real estate development would yield more than double the amount that accrues from the outright sale of land.
The most recent case was DLF’s acquisition of 38-acres from DCM Shriram Consolidated for a whopping Rs 1,675 crore. For DLF, this property is part of a larger 65 acres block. The real estate major estimates the project to yield Rs 12,000 crore in 2-3 years. Sources say that the entire project would be developed by DLF at an estimated investment of just about Rs 6,000-7,000 crore.
In Mumbai, the various textile mills that were sold-off to companies such as DLF and Indiabulls a few years ago, have already started yielding returns.
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