The realty King
With a flurry of masterstrokes, K. P. Singh has dominated the Indian real estate sector. But the much hyped DLF IPO is still to see the light of day...

The setting in late 2006 was picture perfect. The markets had witnessed one mammoth IPO by Reliance Petroleum Ltd. And K. P. Singh’s DLF was the next big wave in the wings, and K. P. Singh’s personal valuation was expected to sky rocket. As the front runner in India’s real estate development, what more could one expect? Real estate stocks were on a continuous ascendant, FDI was on the upswing and investors were falling over themselves to be a part of the Great Indian Realty Sweepstakes. But alas, the company ran into rough weather and had to pull back. Besides being bogged down by fighting with minority stakeholders, DLF had decided it wanted to restate its financial earnings on its red herring prospectus.

After what would seem like an eon for K. P. Singh, DLF is inching closer to a high stake comeback on the bourses. When one looks at the reworked red herring prospectus, the company’s business model does look promising as ever. The company claims land reserves across India of around 10,255 acres with a developable area of around 574 million square feet. The company’s balance sheet is in the pink of health, with net income for 2006 at Rs.12.42 billion (CAGR of 54% since 2004) and net profit going strong at Rs.1.92 billion (CAGR of 89%). And if one wishes for an insight into what this issue would mean for promoter valuations; the net worth at fair price of Rs.550, based on the expected mobilisation of Rs.110 billion for 202 million equity shares for the promoters (K. P. Singh & his son Rajiv, who hold over 87% of the stakeholding) would amount to a whopping $19.13 billion. And a broker who did not wish to be quoted told B&E that the going grey market price for the share was Rs.900, according to which this worth would shoot up even further to a mind boggling $31.3 billion. It is no wonder, therefore, that speculators feel that the DLF IPO would propel K. P. Singh to the topmost ranks of the world’s richest.

Of course, some things can be too good to be true, and DLF faces this very quagmire currently. For K. P. Singh, the adage, “Wait for the right time and you will have to wait forever” seems to be quite apt. SEBI is still investigating the charges by minority shareholders against DLF. And there is another issue that has cropped up recently; SEBI seems adamant to come down heavily on real estate companies that state their land valuations on futures in their red herring prospectus, which could affect DLF as well. And to top it all, while the minority shareholders issue spoilt the party last year; this time around, it seems that the entire real estate market seems to be catching cold feet.

The giant bear hug!
Besides DLF, there is still a significant amount of money expected to be raised through real estate IPOs this year. Quoting industry figures, Madhur Mittal, JMD, Triveni Infrastructure Development Company spoke exclusively to B&E, “Real estate companies are to raise Rs.16,000 crore in 2007 through IPOs... number of real estate companies seeking IPOs this year has also doubled to around 150.”

In the past year, the Indian real estate sector has seen many a fortune being built. So much so that four of the seven new Indian entrants in the Forbes Billionaire List, 2006 are from the real estate sector alone. But there was a heightened concentration risk, as RBI was of the opinion that too much of bank lending is going towards the real estate sector. As disclosed by one of the highest ranking RBI officials directly to B&E, the Government was also overtly concerned about “too much of money chasing too few assets,” which leads to creation of asset bubble. Ankur Srivastava, Managing Director, DTZ, states, “The Reserve Bank of India has already made its concerns clear and has restricted credit to the real estate sector, imposed higher provisioning norms on lending to real estate and sought details on home loans from the banking sector to curb speculative interests in the market.” RBI’s steadfast resolve to squeeze liquidity by hiking repoates, which stand at 7.75% currently, has indeed been a crucial enabler of the fall.

And the bourses are responding in kind. The domino effect has been felt across real estate companies. On March 30, 2007, share price of Parsvnath Developers stood at Rs.259 (peak of Rs.575.65), Unitech was trading at Rs.387.45 (peak at Rs.14849, after which the company went for a stock split & bonus issue) and Ansal Properties was struggling at Rs.529.5 (peak of Rs.1630.85). There has been a mammoth depletion of market value for these companies in the past three months in particular. B&E compared the value of promoter stakeholding in these companies as it stood on March 30, 2007 with its value on January 2, 2007. The value of promoter stakeholding on March 30 is at Rs.37.63 billion for Parsvnath (drop by 43%), Rs.234.4 billion for Unitech (drop by 16%) and Rs.19.87 billion for Ansals Properties (drop by 41%).

Property prices in many areas look to be at the end of their tether even as major real estate stocks are now south bound. Brijesh Bhanote, Vice President, Sales & Marketing, Vipul Ltd. spoke on the overheating thus, “The price rise was the steepest between January 2005 and March 2006. We won’t see appreciation of this kind because even though demand is still buoyant, the entry level investments have gone up many fold… There has been a slowdown in the past 5-6 months but the rise in real estate prices has had a bigger impact than the rise in interest rates.” He feels, however, that speculators will in fact be the worst hit and not genuine buyers. Adds Srivastava of DTZ, “An EMI to purchase an apartment (whose cost has increased by around 50% in the last two years – conservative estimate for most cities) has increased by almost 83% in the last two years. The attractiveness of buying residential real estate for leasing purposes is on the decline as residential yields have fallen in the last 2-3 years. Another major impact of rising interest rates is its effect on land valuations.”

G. P. Savlani, Resident Director, CREDAI, while talking to B&E, asserts that, “Largely, the boom in the real estate market is not speculation driven, or else developers themselves would not be making these investments.” In fact, he cites this as a case of simple demandsupply economics. Delhi, for instance got tremendous hype due to the endeavours being taken to make it a world class capital city with tremendous infrastructure development; the Commonwealth games playing a crucial role as well. He, in fact, feels that as long as there is a supply crunch at places, prices will continue to rise, so speculation hasn’t been as high as is believed.

Is there a ripple effect?
While the real estate boom in India is just beginning to lose some semblance of sanity, the market in the US is in the middle of a decline, after having spiraled ridiculously out of control in the recent past. Mittal of Triveni comments on the situation in the US, “Nationally, the overall outlook seems reasonable: 7% appreciation for 2006 and fl at for 2007. According to the forecast, a third of the nation’s 100 largest metro areas (accounting for 60% of US population) are expected to see modestly falling house prices.”

Around the year 2000, the US Fed had softened its monetary policy considerably in order to boost the economy. This resulted in a massive diversion of funds to the real estate sector, with heavy borrowing from banks. Later on, in the light of the bubble that developed, the Fed went on rate hike spree, increasing interest rates for 16 times in a row. The drop has hit hard. US home building stocks have fallen by over 50% from their peaks in the last two years. Comments Marc Faber, noted investment guru and columnist for B&E, “The latest housing boom (1998-2006) was far larger and reached higher extremes of speculation than any previous post-Second World War boom...” And he also projects that the downturn that is going to follow will be as severe, if not more than previous peaks. The ripple is being felt across the Dow Jones and the S&P Index as well. Indeed, the recent $36 billion acquisition of Equity Office Properties (office property owner) by private equity firm Blackstone Group was a rare burst of good news. But the fact remains that the Fed will be compelled, sooner or later, to take some drastic softening fiscal measures in order to bring the sector back on track. While there are signs of cooling off in the EU as well, the blow hasn’t been so severe. Asian markets, on the other hand, are in a buoyant stage, despite some corrections from time to time, largely because of the growing Asian economies.

According to RREEF research (real estate equity investor & part of Deutsche Bank), global real estate activity touched $580 billion in 2006, around three times its value in 2001. Investment in US was at $310 billion (growth of 20%), while in EU, the investment was at $212 billion (growth of 20%). Investment in Asia Pacific reached $63 billion in 2006, five times its value since 2000. If one were to consider investor appetite for 2007, there’s good news for Asia Pacific region. For the US, the report suggests that new capital allocated to real estate in 2007 will actually be less than its value in 2006. However, an additional $70 billion is expected to be allocated to real estate in the EU. Prospects for Asia Pacific continue to remain strong, limited largely by access restrictions across these markets. But one disturbing feature about Asia Pacific markets is the marked volatility in rental returns in these markets.

As the trends indicate, the slowdown in the Western economies does not impact the Indian real estate sector. So, as Savlani of CREDAI states, “The Indian real estate market is not greatly impacted by the changes that have been happening across the world.” In fact, the overheating fears that are being raised across the board in India appear to be grossly misplaced. While there is a marked correction going on in different parts of the country, this does not mean by any logic that the Indian market is facing any of the alarming ‘bubble’ signals that have made the US housing sector run out of steam recently.

In fact, reports suggest the Indian real estate sector to be worth around $14 billion and currently growing at 30% per annum. In a recent conference in Chennai, M. Murli, CMD, Shriram Properties Ltd., stated, “The real estate market is not a bubble and thus I don’t expect it to burst. I expect the market to grow for the next 20 years. We need to enhance transparency and build trust.” Infrastructure development is taking place at breakneck speed and there is still a huge gap to fulfil. All over India, just 8-9 SEZs are operational, while around 230 SEZs have been formally approved. According to an article by Bundeep Singh Rangar, Chairman, Indus View, in FDI magazine, the retail sector is another huge catalyst, with more than 200 malls expected to be set up by 2008, creating 20 million sq. metres of retail space in India. Further, Rangat projects demand for commercial space to approach 112 million sq. metres by 2012-13. Interestingly, even in the residential segment in urban India, the housing shortage is expected to touch 22 million units by year 2008.

And in line with this buoyancy, FDI in Indian real estate, which stood at $600 million in 2006, is expected to sky rocket to $16 billion by 2012, hardly signs of a market that has moved past its prime. Leading this bandwagon is Emaar MGF (JV between Emaar Properties PJSC Dubai and Indian developer MGF Development Limited), which has committed an unprecedented sum of $1 billion in FDI for real estate projects across the length and breadth of India. Part of the project is a plan to set up 100 Formula 1 budget hotels across India in a tie up with Accor. States Emaar Properties Chairman Mohamed Ali Alabbar on the move, “Alongside master-planned residential communities & special economic zones, we regard the hospitality sector as integral in our growth strategy for India.”

Along with Emaar, other companies such as Royal India Raj International, Pegasus Royalty, Citigroup Property Investors and GE Commercial Finance are expected to bring in a collective capital of $8 billion between them. DLF itself has recently tied up in a JV with the Al Nakheel group of the UAE to build integrated townships in the suburbs of New Delhi & Mumbai. Planned investments for this project are expected to be to the tune of $20 billion.

So how will the DLF IPO fare in the market ultimately? While all indicators for the real estate sector in India are buoyant, one cannot really give a satisfactory answer to this question today, considering the whipping real estate stocks have taken recently. For K. P. Singh, the first imperative is to convince the SEBI to give the go ahead. And then it’s a matter of deciding what time the IPO should be launched so that it gets the desired response. For a company that is so well positioned to exploit development opportunities in a sector that’s on the verge of taking off , performance of the IPO is of critical importance. But a further delay of the IPO only means more unnecessary delays in DLF’s plans.

And what about the billion dollar question of whether the K. P. Singh’s net worth post the IPO will make him the world’s richest man? Well, with his long cherished realty ambitions at stake, chances are high that a pre-eminent position in the Forbes list won’t even be figuring among the top three concerns in K. P. Singh’s mind as on date!

They know where to ‘land’!

If I could live all over again, I would buy every square inch of Manhattan”, famous words from one of the first real estate mogul John Jacob Astor, the man who envisaged in the 1830s that New York will soon be world’s greatest cities, hold right for every tycoon in the business today. Be it Astors, Roosevelts, Beekmans and Rockfellers of early 19th century who withdrew money from their core businesses to cash in on the boom in real estate or John Tishman & Joseph Durst (he is known to have started with just $3 at the turn of the 20th century and today ranks amongst the largest developers in New York) – all started with almost nowhere and amassed big fortunes, becoming the top real estate families in the world. Donald J. Trump’s brush with bankruptcy in the early 1990s (when two thirds of his net worth got eroded and he was in debt for almost $2 billion) is anything but forgotten. But by the year 2000, he rebounded and today his worth is over three billion dollars. And arguably, he is one of the top most real estate investors in the world. Tom Barrack, Sam Zell & Li Ka-shing, Chairman of Hutchison Whampoa have also become the stuff for legends with their daring travails...

Real Estate Tycoons In India

K. P. Singh :- Chairperson, DLF Universal Ltd.
Former army officer, built one of the India’s finest cities, DLF city in Gurgaon by acquiring land from farmers at relatively cheap prices and later striking gold. Plans to do a colossal listing of flagship company, DLF Universal, right now undergoing various crises.

Ramesh Chandra :- Chairman, Unitech Ltd.
Started a consulting firm in India after doing structural engineering from U.K. Later on, he diversified into residential real estate projects in Gurgaon and then into southern & eastern India.

Pradeep Jain :- Chairman, Parsvnath Developers
Started as a real estate broker and then finally moving into land development in 1990 after leaving the family business. Flagged of his property odyssey from small towns in North India and then capitalised on capital New Delhi.

Vikas Oberoi :- MD, Oberoi Constructions
Mumbai based real estate firm was carved out of profits from saffron business by Vikas Oberoi’s (who took charge in 1997) father in 1985. Morgan Stanley’s real estate arm has only recently invested $152 million.