BW Communities

Realty’s Newcomers

Gurbir Singh Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[Way back in 1984, the Tata Group entered the real estate business by setting up Tata Housing Development Company as a subsidiary of Tata Sons. It stood out because most industrial houses shunned property development those days. Even the industrialists who were building up conglomerates or diversifying into new areas rarely looked at realty, then considered a messy business. On the other hand, real estate barons such as Kushal Pal Singh of DLF, the Ansal brothers (Sushil and Gopal), Ramesh Chandra with his Unitech brand in Delhi, and the Rahejas, the Hiranandanis, Mofatraj Munot with his Kalpataru Group in Mumbai, to name a few, were cementing the foundations of their real estate empires in the 1980s and the 1990s. Cut to 2012, and many traditional industrialists have embraced real estate as a big business opportunity. The Mahindras have their realty play. The Godrej property dream is being realised by a team under Pirojsha Godrej, a third generation scion. UB Group's Vijay Mallya has developed a couple of iconic towers and a mall in Bangalore on land that he inherited. The Wadias are developing their massive tracts of textile mill land they own in the heart of Mumbai. B.K. Birla's Century Textiles is on the same path. The Ashok Piramal Group has been in real estate for over 10 years and has scaled up by acquiring a couple of defunct textile mills. And there are dozens more. Meanwhile, the Tata Group set up a second company — Tata Realty and Infrastructure (TRIL) — in 2007 to focus on information technology parks, special economic zones (SEZ) as well as airports, roads and bridges. This is quite apart from Tata Housing Development Company, which has roughly 45 million sq. ft under development currently. Some of the corporate houses have got into the game as they have acres of land assets which they acquired decades ago, mostly for other businesses. Others simply see it as another opportunity that can yield rich dividends. Either way, the newcomers are challenging the hegemony of the older and traditional realty houses as they carve out their own property plays. <img src="/businessworld/system/files/images/june_12/real-estate_01_600x276.jpg" style="vertical-align: middle; margin: 5px;" height="276" width="600"> The Trigger The economic liberalisation and the real estate boom of 1994-97 set off an avalanche of investments into the traditionally-closed real estate sector. It received further impetus when the Union government allowed foreign direct investment (FDI) in realty in 2002. A huge shortage of housing — now pegged at 28 million units — is a fundamental that throws up huge opportunities. Besides, the 1994 boom, where realtors saw galloping growth and huge returns on investment, got a lot of mouths watering.   "Those who initially came in were either those with large land assets they wanted to leverage or those with a pile of cash who wanted to invest it in real estate to maximise returns," Rajeev Bairathi, property consultant DTZ's co-head of investment advisory, told BW. Among the more prominent players who entered real estate was Mukesh Ambani's Reliance Industries (RIL), though in many ways it was not a purely commercial venture initially. In the early 2000s, Reliance Land was floated as a subsidiary to service the vast needs of the group for offices and residences for its growing army of executives. Interestingly, the Reliance Land strategy was to build assets by acquiring residential properties at bargain prices during the 2003-05 real estate trough. By leveraging the group's large demand, Reliance Land was able to buy over 2,000 apartments in Mumbai, Surat and Jamnagar at very favourable prices. Later in the decade, after the split in the group, Mukesh went into SEZ development, with plans for SEZs in Maharashtra and Gurgaon. But RIL has faced problems over land acquisition since. RIL has been in realty in Mumbai's Bandra-Kurla Complex (BKC), too. It picked up an 18-acre BKC plot for Rs 1,104 crore in 2006 to develop a convention centre and a commercial hub that would include its own headquarters. However, the plot was locked in litigation for years with brother Anil Ambani's Reliance Infrastructure challenging the award to RIL.   In recent months, there is a move to develop the property in alliance with Mumbai's Wadhwa Developers. break-page-break Down south, Mallya has also got into realty, though in a limited way. His UB Group held a large parcel of land on Vittal Mallya Road where it developed UB City, an iconic real estate project. The project includes the 500,000 sq. ft UB Towers, which mostly serves as the company's headquarters, as well as well-laid out service apartments over 800,000 sq. ft, which were developed in alliance with Singapore-based Oakwood Group. This was, however, a one-off project by the UB Group. A more concerted bid was made in the past decade by Essar. The Ruias-led group floated Equinox Realty as an independent business vertical. After about six years of work, the company has developed a high quality, 1.2 million sq. ft Equinox Business Park in Mumbai, and is in the process of setting up a 216-acre Vadinar residential township in Jamnagar. Equinox today has nearly 300 acre under development as township residences and commercial offices. Some smaller groups merely traded in land. They sold surplus holdings to make windfall gains when land prices began going through the roof. For instance, DCM Shriram Consolidated sold its 38-acre Swatantra Bharat Mills estate in West Patel Nagar to DLF in August 2007 for Rs 1,700 crore. It was the country's largest private sector land transaction then. Similarly, the sick public sector giant National Textile Corporation (NTC) sold five of its 25 mills in the heart of Mumbai between March and July 2005 for a humungous Rs 2,020 crore. It included Jupiter Mills, Apollo, Mumbai Textile, Elphinstone and Kohinoor Mills No. 3 — totalling 50 acre. The sale proceeds have been used to pay off retrenched NTC workers and refloat some of the mills that had the potential to be revived. <img src="/businessworld/system/files/images/june_12/THE-NEW-REALTY_585x197.jpg" style="vertical-align: middle; margin: 5px;" height="197" width="585"> Good performers such as Hindustan Unilever (HUL) and Siemens too have consolidated their operations to free up land and estates to improve their cash flow, but have not entered the real estate sector. In April 2012, HUL sold off its former training centre, Gulita, in Mumbai's Worli to the Ajay Piramal-promoted Piramal Realty for Rs 452 crore. More than a decade earlier, in 1998, Siemens sold off some 2 acre of its office estate in Mumbai's Sakinaka to consumer goods entrant P&G for Rs 13.5 crore — a big sum then. The latter went on to construct its country headquarters there. "They may not be in real estate, but they made more money selling land than in their core industries," remarks Pranay Vakil, chairman of property broking house Knight Frank India. But there are those who came in purposefully as real estate developers over the past 10-15 years. Property consultants Cushman & Wakefield, in a survey released during the second big boom in 2006-08, reported that as many as 200 corporate entities had amended their memoranda of agreement (MoA) to include real estate operations such as residential and commercial development, SEZs and software parks, hotels, malls and amusement parks. Such companies ranged from textile manufacturer Standard Industries to tyre cord producer Nirlon and Shalimar Paints. Says Mumbai builder Niranjan Hiranandani: "Three kinds of businesses came into real estate in recent years — those looking for a one-time windfall opportunity, those that had long-term ambitions, and those who were sitting on plenty of land." Textile Realtors Textile companies have leveraged their land assets to maximum advantage. Some private mills have sold their land to other developers — Standard Mills hawked off its Mumbai Worli unit to Sheth Developers for Rs 135 crore in 2003. The more astute have preferred to do it themselves. Many of these, including Phoenix Mills, promoted by T.B. Ruia, Bombay Dyeing and the Ashok Piramal Group, are now textile companies only in name as their primary activity has shifted to property development. B.K. Birla Group-promoted Century Textiles, which holds 40 acre in Worli, was the last of the city's textile mills to shut its operations in 2007 and is currently developing a first-phase, Rs 600-crore commercial project for leasing to banks and service sector companies. This mass movement to realty has come because of the exponential rise in land prices in Mumbai — an unprecedented 20-fold increase in the past decade. Land cost in NTC auctions in 2005 were at around Rs 7,000 a sq. ft; it ballooned to Rs 14,000 per sq. ft by 2007 and the latest auctions of Bharat Mills have fetched over Rs 41,000 a sq. ft. A similar transformation is not seen in Kolkata's limping jute mills as land does not command the same kind of premium. The transformation of the textile district of Mumbai — Parel and central Mumbai — has also been facilitated by a regulatory regime that has encouraged industrial units to shift out of Mumbai and the amendment of development control rules (DCR) that allow textile mills to exploit their land as realty. <img src="/businessworld/system/files/images/june_12/real-estate_02_600x300.jpg" style="vertical-align: middle; margin: 5px;" height="300" width="600"> An interesting case study is Ashok Piramal Group, which used its land assets to diversify into real estate, while holding on to its core textile functions too. The group kicked off its entry into real estate by incorporating Piramal Holdings in 1997 and developing Mumbai's first mall, Crossroads, in central Mumbai, and following up with a second, larger mall-cum-parking-hub in south Mumbai called CR2. Simultaneously, the flagship Morarjee Goculdas Spinning & Weaving Company was split into Morarjee Realties and Morarjee Textiles, which continued with the original textile operations. Later, in 2005, Morarjee Realities and Piramal Holdings were merged to form Peninsula Land, which undertook among the earliest projects on mill land in Mumbai. These include the well known Peninsula Business Park developed on the Parel unit of Gokuldas Morarjee Mills and the high-end residential complex in a second unit of the mill, also in Parel, called Ashok Towers. Peninsula Land thereafter did a joint venture with Swan Mills at Sewree, in Mumbai, to develop the Ashok Gardens project. The company also expanded its land bank through acquisitions. For instance, in 2005, it picked up a majority stake in the defunct Dawn Mills from its promoters Ravi and Nirmal Ruia. The 6.5-acre mill today has transformed into a swanky commercial office complex nearing completion. break-page-break A comparison between the financials of Peninsula Land and Morarjee Textiles shows why textile tycoons prefer selling homes and offices to spinning yarn. Peninsula Land recorded sales of Rs 779 crore for FY 2010 and a net profit of Rs 250 crore. Sales fell to Rs 501 crore in FY2011, but the company still made a profit of Rs 191 crore. With the realty business gripped by recession, the first three quarters of FY2011 saw sales of just Rs 201 crore, but there was still profit after tax of Rs 74 crore. Morarjee Textiles, on the other hand, has over the past three years recorded sales in excess of Rs 300 crore, but turned in a net loss of Rs 6.2 crore in FY2010, and a marginal profit of just Rs 4.6 crore in FY2010-11.   In the case of Bombay Dyeing, where realty accounted for about 25 per cent of the company's Rs 1,950 crore turnover in FY2011, the promoters — the Wadias — are very clear on the direction of the company. They are currently developing high-end residential and commercial property in their two mills spread over 55 acre in central Mumbai and are looking to exploit their substantial land banks in other centres too. "We will essentially become a real estate firm in years to come," Bombay Dyeing managing director Jeh Wadia told shareholders last year. Those With Cash Piles Then there is Bharti Airtel, which made galloping profits in the early telecom years and was looking to deploy it to get maximum returns though Bharti Realty. Says DTZ's Bairathi: "Bharti did not have large land parcels, but it had a substantial cash pile; and it had domain knowledge as it was already in the business of acquiring and developing a large network of offices for itself." Bairathi, who has watched Bharti from close range, says the company formed a realty arm quite early on to take on the complex task of identifying, buying and leasing operational centres and offices all over the country as part of its telecom business. From an adjunct to the telecom operations, Bharti Realty grew to set up captive retail stores after the group inked a cash-and-carry joint venture with global retailer Walmart. By 2008, the group had poached senior DLF executive David Rebello, and launched its own independent realty business. Focused on north India and the national capital region, Bharti Realty has been since buying land as if there is no tomorrow. It has picked up three land parcels totalling about 20 acre near the Delhi airport, investing close to Rs 1,000 crore with the intention of developing upscale commercial offices and malls. The company's website says the projects at Aerocity hospitality district near the T3 terminal will have a humungous 1.5 million sq. ft. of offices and retail shopping. Bharti Realty is also developing its maiden mall, a 360,000-sq. ft project, in Ludhiana. Clearly, the focus of the company is on large format spaces — commercial offices, IT parks, and retail areas for leasing. It is also developing commercial offices on Gurgaon's Golf Course Extension Road as well as an IT park in Manesar, Haryana. <img src="/businessworld/system/files/images/june_12/real-estate_03_600x359.jpg" style="vertical-align: middle; margin: 5px;" height="359" width="600"> Ironically, Bharti Realty has recently been in talks with realty giant DLF to buy out two of the latter's 25-acre plots in Noida that have clearances for developing IT parks. The deal is being valued at Rs 250 crore. Bairathi estimates that Bharti has deployed about Rs 2,000 crore in acquiring land banks, and it is hungry for more. The company declined to participate in this story. Leveraging Brand Value "We neither had a cash pile nor did we carry the dowry of a large land bank," says Anita Arjundas, managing director and CEO of Mahindra Lifespaces, the realty arm of the Anand Mahindra-led M&M Group. Recounting M&M's foray into property business in 1997, Arjundas says it started with the formation of Mahindra Realty, initially an offshoot of the steel joint venture, Mahidra Ugine Steel Company. "When Anand Mahindra took over the reins and reviewed the group's focus, he saw real estate development as central to India's growth story, as a part of building India's infrastructure," says Arjundas. Leveraging the M&M brand, the group kicked off its realty play in partnership with the Tamil Nadu government in 1997 by setting up an industrial township near Chennai spread over 1,500 acre. The Mahindra World City Developers, in which the state government held 11 per cent equity, initially opened in 2002 as an auto ancillary export hub. It later accommodated IT services too, and now has 60 companies with a combined export value of Rs 4,500 crore. Having set up the industrial infrastructure, the company is developing residential and other support infrastructure, toppings that will provide lucrative returns. The success of its Chennai ‘World City', an integrated business city, won an invitation from the Rajasthan government to replicate the project in Jaipur. The long-gestation model, initiated by Mahindra Realty, is now being tested out at the 3,000-acre Jaipur World City project in which the Rajasthan government holds a 26 per cent stake. "Learning from Chennai, Jaipur has come up faster and the first 500 acre of infrastructure is already in place with 37 functioning IT companies that include Wipro, Infosys and Deutsche Bank. The ‘World City' model is the first successful public-private partnership in township development," says Arjundas. The company has so far sunk in Rs 1,000 crore in the Jaipur project and expects an additional deployment of $2 billion over 20 years. On the corporate front, the Mahindras expanded the business by first acquiring GE Shipping's real estate division called Gesco in 2000, after it was drafted as a white knight to avert a hostile takeover bid by the Dalmias. Anand Mahindra then merged Mahindra Realty and Gesco to form Mahindra-Gesco. Mahindra Realty had meanwhile developed among the first of Mumbai's high-rise luxury buildings, Mahindra Towers, at Tardeo, and had begun acquiring additional land parcels in Pune, Delhi and Mumbai. Mahindra-Gesco was among the first to list in 2001, and again was the first to do a public funding through a qualified institutional placement, raising Rs 500 crore in 2006. break-page-break Mahindra Lifespaces, as the company was rechristened in 2006, has been active in residential projects too. It picked up industrial land in an auction by ICICI Bank of bankrupt company GKW, and has developed an 8-acre residential project with 250 units in Mumbai's eastern suburb of Bhandup. "Recession hit us hard with almost zero sales over 5-6 months in 2008-09. Our market capitalisation fell from Rs 4,000 crore in 2006 to Rs 1,250 crore now. But we weathered it well, and continued with construction," says Arjundas. The ability to tap cash from the M&M system — a luxury not available to an independent builder — kept the company afloat till fortunes revived, she adds. The consolidated results of the company for FY2012 show sales rising to Rs 700 crore from the previous year's Rs 610 crore, while net profit too has grown 10 per cent to Rs 119 crore from Rs 108 crore in the same period. For the $1.3-billion Godrej Group, primarily identified with consumer durables, "the rationale for entering property development was a combination of three factors: a sizeable land bank, a strong brand we could leverage, and the substantially higher margins," Pirojsha Godrej, the newly-appointed managing director and CEO of Godrej Properties, told BW. Significantly, the massive 2,000-acre sprawl owned by Godrej & Boyce in Mumbai's north-east suburb of Vikhroli is a land asset that has largely remained locked over issues such as the Urban Land Ceiling Act (ULC) and coastal regulation zone (CRZ). Unknown to most, Godrej Industries entered real estate early launching its first residential project, Godrej Edenwoods, in 1991. It was, however, in the mid-2000s that the group floated Godrej Properties and identified realty as a major growth area. "A few years down the line, property development will be the group's largest business," group chairman Adi Godrej had said in an interview he gave in 2006. In pursuit of that vision, Godrej Properties adopted the joint development model as its main driver. "The joint ventures with landowners worked well as we did not need to lock up scarce capital for buying land," says Pirojsha. Godrej Properties has executed or has in the pipeline as many as 14 such joint ventures, including the most recent one with Jet Airways for the development of 1 million sq. ft of commercial office space in Mumbai's Bandra Kurla Complex. Jet had acquired the 2.5-acre plot in an auction almost a decade ago, but has been unable to go it alone because of the serious cash flow problems it has faced. Godrej Properties has notched up sales of just Rs 453 crore in FY 2011 and Rs 420 crore for the first 9 months of FY2012. Though profit-after-tax has been reasonably good — Rs 131 crore in FY2011 and Rs 58 crore for the three quarters of FY2012 — the rapid scale-up of the realty business has not been anywhere near the target Adi Godrej dreamed of in 2006. The joint-venture model has the inherent problem of slow decision-making and has worked against rapid growth. <img src="/businessworld/system/files/images/june_12/real-estate_04_600x300.jpg" style="vertical-align: middle; margin: 5px;" height="300" width="600"> Godrej Properties's vision of a high-growth company may, however, be realised with the Vikhroli land now opening up to development in recent months. The company has launched several residential and commercial projects after ULC and CRZ clearances have come through. Among these is a 2 million sq. ft township of commercial and residential buildings called The Tree. Industry sources say about 600 acre had now opened up for development. To speed up Vikhroli Estate's development, Godrej & Boyce has signed up Godrej Properties for managing development for a flat fee of 10 per cent of revenues. It's Not All Hunky Dory Some companies have had their noses bloodied and have exited as fast as they had entered. A classic case was D.B. Gupta — the promoter of pharmaceutical company Lupin Laboratories, who had set up Landmark Developers over a decade ago. Landmark built Mumbai's first suburban mall in 2002 — The Hub, in Bandra. The company also developed and sold a few standalone properties such as Star TV's suburban headquarters on the Andheri-Kurla Road, The Masterpiece. However, Gupta exited The Hub, selling it to investors for close to Rs 200 crore, and wound up property development activity following pressure from Lupin investors against risky real estate positions. Electronics major Videocon was similarly an early mover in the late 1990s with company chairman Venugopal Dhoot deploying profits made from selling television picture tubes into real estate. Some of Videocon Realty & Infrastructure's early projects included the reconstruction of the burnt down Handloom House (Fort House) in south Mumbai, and the commercial office building, Videocon Tower, at Delhi's Jhandewalan Extension. It has also done a residential project along Mumbai's Napean Sea Road called The Wilderness. A spokesperson for the group conceded the company had virtually exited from realty. Others who had shortlived real estate forays include Emami Realty, Lloyd Steel and Satyam promoter B. Ramalinga Raju's property and infrastructure venture, Maytas, which shut down under a cloud of scams. Says Bairathi: "Many of these groups that failed treated real estate as a short-term foray. Realty is a tough business that needs to be supervised by a CEO and governed by checks and balances. You cannot treat it as an arm of your core business, or a kind of arbitrage operation." Property broker and consultant Jones Lang LaSalle's chairman and country head, Anuj Puri, points out that the realty business still continues to function on personal relationships with a high degree of cash dealings. Corporates have often failed to grasp these nuances. "Some have failed because they could not understand how the approval process works," Puri adds. Hiranandani puts it another way: "Property development requires a set of entrepreneurial skills that are quite different from corporate or industrial skill sets." But the consensus is: corporate entry has improved business practices. Hiranandani acknowledges real estate has seen big changes. "Every 10 years, I have seen a 100 builders leave the industry, and another 100 new ones join. The Rahejas, the Mittals survive. Siraj Lokhandwala, the Majithias and Ranbir Maker have bowed out. Meanwhile, there has been a merger of old entrepreneurs with the new corporate leaders. You see far better quality and professionalism today." Jones Lang LaSalle's Puri agrees. "Corporates entering real estate has introduced processes and transparency where there was none. It has created branding and pushed the importance of delivery schedules." And some are all for more corporates entering the fray. Says Shashi Kumar, head of real estate investment advisory at Birla Sunlife AMC: "More corporate houses should get in. It will help clean up the industry." gurbir(dot)singh(at)abp(dot)in (This story was published in Businessworld Issue Dated 04-06-2012)

Gurbir Singh

BW Reporters Gurbir Singh is an award-winning senior journalist with over 30 years experience. He has worked for BW Businessworld since 2008, and is currently its Executive Editor. His experience ranges from covering 'Operation Bluestar' in 1984 to pioneering coverage of the business of Media & Entertainment and Real Estate for The Economic Times.