Seven lessons realty players picked up from the slowdown

As reality bites, companies make significant changes to their
business models to tackle high debt burden & demand slump.

Therecent economic slowdown has hurt the real estatesector, with the five largest firms seeing a 75% erosion in their combined market capitalisation. Burdened with debt and struggling with poor growth, companies have made significant changes in their business models and strategy. Here are seven lessons they have learnt.

FORGET NATIONAL, STAY LOCAL

Pan-India expansion plans of developers like DLF,Unitech and Indiabull Real Estate have been undermined by highlyleveraged balance sheets, high borrowing costs and slower execution. DLF still earns almost 30% of its revenues from Gurgaon despite its presence in over 20 cities. It recently sold prime land in Mumbai to cut down debt. Godrej Properties, despite the pedigree of a large business group, earns 60-70 % of its revenues from Mumbai and Ahmedabad, even though it has projects in 12 cities.

THE SMALLER, THE BETTER

Small regional players like Thakker Developers, Kolte Patil Developers, Puravankara Projects, Sobha Developers and Oberoi Realty have better balance sheets than larger peers. Their stocks have also fared better.

FROM RAISING FUNDS FOR GROWTH TO SURVIVAL

Before the slowdown, Realty firms had plenty of easy money. And they used it to grow. Not any more. In the peak of real estate boom in 2008, PE funds invested $6.8 billion in real estate which dried up to $0.85 billion in 2011, as per a report by Jones Lang Lasalle on decoding private equity real estate exits in India. Attempts by Raheja Universal and Lodha Developers to go public were upset by poor stock market response, making PE funds unsure of exit opportunities. DLF is raising funds by selling noncore assets, Godrej Properties raised funds through a QIP and HDIL is generating funds by selling transfer of development rights (TDR) and floor space index (FSI) — all to lighten the debt burden. Earlier, companies were building land banks and were rewarded for it in the stock market. Now, they are conserving cash to payback creditors.

SOUTHERN MARKETS FARE BETTER

Led by Bangalore and Chennai, realty prices in south Indian cities have remained relatively stable compared to Delhi and Mumbai. The prices in these markets had not soared as much as markets like Delhi and Mumbai. Consequently , south India-based developers like Sobha Developers, Prestige Estates, Puravankara Projectsperformed better in the last 2-3 quarters compared to other companies such as DLF, HDIL and Godrej Properties. While the BSE Realty Index shed 14.5% in the past six months, the Bangalore-based Sobha Developers and Prestige Estates, the only gainers in the index, logged gains of 22% each.

RE-EMERGENCE OF PARTNERSHIP MODEL

Realty developers are going back to the partnership model — developing property jointly with the landowner. This, according to Anshuman Magazine, chairman and managing director (South Asia), CB Richard Ellis, was always around. However, during the boom period, ambitious developers started buying land and developing projects on their own. Now, partnerships are back. Godrej Properties, for example, trades at a premium valuation compared to other large multi-city developers due to its asset-light partnership model.

Source: economictimes.indiatimes.com