4th highest in terms of FDI
Constitutes 8% to the GDP
$126 Billion dollar
High Input Cost:
Increasing Labour Cost
Land Cost comprises of 40% of the total
project now as compared to 20% in 2005
Government intervention of building
minimum 20% affordable housing putting
extra burden on developers and ultimately
on the rest 80%
The construction sector
generates the highest level of
direct and indirect employment
for about 40 million people
Approvals and Procedural Difficulties
There are almost 50 approvals or more need to be
taken for starting a real estate project
Properties with Banks under
Rs 27,500 crores
High Cost of Financing
• The group has its presence in Mumbai since past 27 years and till date; it has developed 33 projects with saleable area of
• In Mumbai, Oberoi Realty has focused on 4 micro markets (Goregaon east, Andheri east, Mulund and Worli)
• It has 13 ongoing projects with saleable area of 10 msf and 11 planned projects with an 10 msf.
What makes Oberoi Realty stand out
• Strong brand name in premium housing segment
• Low debt company Unlike other real estate companies in the
listed market space, Oberoi Realty has a very strong balance
sheet with cash balance of INR 3.7 bn and D/E of 0.1
• Revenue recognition happens early as they are not in the
business of taking 20% now and 80% later
Key Ratios and Financials
Particulars FY 17 FY 16
EBITDA Margin (Including Non Operating
Income/ Total Revenue) 53.17% 49.29%
EBITDA Margin (Excluding Non Operating
Income/ Total Operating Income) 51.18% 47.76%
PAT Margin 32.34% 29.75%
RONW 6.84% 8.64%
ROCE 6.22% 8.60%
Debt/Equity 0.15 0.09
• EBIDTA Margin for Malls and Commerz
stood at 93% and 95% respectively
• EBIDTA for only residential business
stood at 46%
• Debtor days 31 days
Creditor days 471 days
Inventory days 1,025 days
• Low footfalls post demonetization and increasing inventory would create short term issues
• With RERA act coming into play, every company will be forced to deliver on time. On time delivery is one of the
distinguishing factor for Oberoi Realty which would be lost
• Delays in projects due to formalities of getting RERA approvals
Unitech started as a consultancy firm for soil and foundation engineering and has grown to have the most diversified
product mix in real estate comprising of world-class commercial complexes, IT/ITes parks, SEZs, integrated residential
developments, schools, hotels, malls, golf courses and amusement parks
Particulars FY 13 FY 14 FY 15 FY 16 FY 17
Margin Ratio 13.40 5.67 22.55 (33.42) (14.85)
Margin Ratio 8.36 1.57 (4.74) (45.03) (25.38)
Particulars FY 12 FY 13 FY 14 FY 15 FY 16
ROCE 2.73 2.28 1.17 5.9 (6.63)
ROE / RONW 2.05 1.84 0.6 (1.17) (8.98)
Financials and Problems with Unitech
• Unitech has delayed completion of 74 projects which are either
held-up or stopped across the country.
• Due to non-completion and non-delivery of flats within the
stipulated time, the company has faced 958 litigation from home
buyers with National Consumer Disputes Redressal Commission
• 13,337 units of home are yet to be offered for possession to the
home buyers under these 41 projects
• Bank of America Merrill Lynch downgrades Unitech to
• RERA act will further deepen the problems
What is Unitech doing to resolve its problems
• Unitech is increasing its focus on project delivery against launch and sale of
• Adoption of new models such as JDA (Joint Development Agreement) and
partnering with other real estate players
• Unitech also partnered with Godrej Properties for completion of a project
• Even though there was focus on the execution front, progress remained
stymied due to liquidity crunch
• Falling margins need to be aligned Increasing operational efficiency
• Outsourcing some of the operations to speed up the completion of projects
• Sales crossed ₹ 8000 cr. in March 2016, beating DLF Ltd and
Prestige Estates Projects Ltd.
• The company’s four largest projects are Palava City in
Dombivali, the Park in Worli (including Trump Tower), New
Cuffe Parade in Wadala and World Towers in Upper Worli.
• Lodha group has projects in all 4 segments of Mumbai’s real
estate and they have a good mix of high end as well as high
Fitch maintains “B” rating with negative outlook
Though the sales booking bounced back in February and
March this year with bookings of ₹ 6,920 cr. in FY17 from
₹ 6,430 cr. in FY16, the negative outlook reflect the near-
term risks to the company's credit profile, in particular
refinancing risk associated with sizeable maturities, including
financing for its London project, over the next 12 months.
Moody’s downgrades Lodha Developers to B2
Moody anticipates that any reductions in home loans from
the union budget on Feb 1st will not lead to any near-term
material improvement at the high-end of the real estate
market and LDLP is mostly represented across the luxury
and mid-tier segments. Upgrading of rating will require
credit metric like revenue/debt to be above 55% and
homebuilding EBIT/Interest exceeds 2.0x on a sustained
The Way Ahead
Taking advantage of GST
• As GST gets implemented, warehousing will be
determined by the efficiency of the operations as
compared to the location.
• According to Abhishek Lodha, the group is building a
new portfolio, under which a 150-acre warehousing and
logistics park is being developed near Mumbai.
• CBRE claims that demand of warehouses remained
strong in 2016.
Opting for HDFC Property $500 mn. Fund
• HDFC is set to launch a $500 million offshore
fund that it has been planning since early
2016, a company executive said.
• The fund will invest up to 40% in office
spaces and the rest in residential projects
with a focus on affordable housing.
• Lodha group is planning to build 9 million sq.
ft of office space and should consider this
Go for IPO
• Lodha group can restructure it’s capital by
going for IPO and reduce leverage.
• Lodha Group can look for investments from
marquee American investor KKR & Co.
• KKR & Co. wishes to spend around $150
million in the IPO.
• The stock market listing will also aid the
company’s plan of starting a real estate
investment trust (REIT) as it seeks to
expand its commercial property portfolio.
Learnings from UK business
• Lodha Developers is expecting sales
revenue of 1.5 billion pounds (over
Rs 12,000 crore) in the next three
years from two ongoing housing
projects in the central parts of this
• The company should take forward
its learnings about quality and
design from the London market to
• DLF has an asset heavy model as its portfolio is heavy on high end commercial spaces that are leased out.
• The company has Rs 14,000 crore of inventory in its ongoing projects which includes Rs 3,000 crore of inventory in ready
projects (mostly commercial projects) .
• The company remains focused on its strategy of executing its ongoing projects to create finished un-launched inventory.
• On weak collections and continued spend towards construction and overheads (including interest), the company faced
cash flow deficit in Q4 (on the expected lines), increasing the debt by Rs 700 crore to Rs 25,100 crore (includes net debt
of Rs 7,000 crore in DCCDL).
• Strategies that are being executed currently are
• Create a high quality long term portfolio
• Reduce debt and improve the quality of debt
• Focus on Core market
• The company has improved its profitability by focussing on completing existing projects
• It has obtained the approvals for developing 2.5 mn sqft for Chennai IT SEZ
• But the strategy to not start new projects has impacted its estimated revenues for the next 2 fiscal years
• They also do not have presence in tier 2 and tier 3 cities and may miss out on the high growth that is expected
2012 2013 2014 2015 2016
Inventory Turnover Ratio Investments Turnover Ratio
Fixed Assets Turnover Ratio Total Assets Turnover Ratio
Asset Turnover Ratio Debtors Turnover Ratio
2012 2013 2014 2015 2016 2017
DLF Revenues and Profit
• The projects developed by the Group span across 9 states including 30 cities. Group is presently at the helm
of 46 projects which add up to a total of 31.8 million sq ft of space which is under development.
• The notable residential projects helmed by Group which are presently under construction include Forest Spa
and Palm Greens in Noida and Spa Village in Faridabad.
• The group has a diverse portfolio in both commercial and residential project areas.
• Omaxe has reduced its debt equity ratio over the past 2 years
• It has improved its profitability as it has concentrated on tier 2 and tier 3 cities projects completion which
showed high growth
• Omaxe has to improve on its ability to deliver its projects on time with the advent of RERA
Asset Light is Right
• Asset-heavy and vertically integrated models offer superior control, but they tie up significant capital and
prove less flexible in a fast-changing environment.
• Asset light model offers the following advantages:
• Better ROA : Assets are removed from the balance sheet
• Lower profit volatility : Costs are more variable in nature. Net income not dependent on utilization
• Greater flexibility : Low dependence on legacy assets improves flexibility Respond faster to changes in demand
• Higher scale driven cost saving : Benefits of assets ownership without intensive capital investment
• Created in 1990, GPL pioneered the concept of Asset Light development model in the real estate sector
• JV model, Development manager fee model & Redevelopment model Share of revenue / profits from sale
• Outsourcing of architecture and construction to good vendors ensures a lean structure / operations
• GPL is the first real estate company in India to have ISO certification Enhances the strong “ Godrej” brand
• Early monetization of projects. A unique Co-investment platform offers better deals to PE investors
• CII – Sohrabji Godrej Green Business Centre (a group company) offers advisory services to the industry in the areas of
green buildings, energy efficiency, water management
• ~15% revenue without any capital investments Design, marketing and sales of projects on a fee basis
Acquisition JDA with local
Pan India contract
with Pelli Clarle Pelli &
PG Patki Architects
Pan India contract with
Mitigation of Investment Risk Mitigation of Execution Risk
• In 2006, while RE sector was booming in India, Tata Housing had negative net worth of 10 crore
• Brotin Banerjee assigned with turning around the firm ( without using the TATA brand!! )
• No quality land bank, no borrowing capability and no employee willing to join the firm
• Initially company targeted the low margin affordable housing segment (Value Homes @ 5 – 15L / unit)
• When the RE sector crashed in 2008, the best on affordable housing paid off as demand remained strong
• Existing developers sold property in tranches, but THDC adopted “Construct quickly & move on” approach
• “Tata Value Homes” formed in 2009 to focus on affordable housing Contributed ~500Cr. To top line by 2012
• Company adopted a “ Joint development model” to develop projects on prime land without initial debt
• JDA’s were signed with land owners for a fixed amount with a ceiling (floor and cap model)
• Alternately, a JV was formed (majority partner) and with owner getting a fixed percentage of topline
• Company diversified into various segments ( premium & luxury ) to de-risk the business
• Created affordable housing brands like Shubh Griha & New Haven
• From a turnover of 36 Cr in 2007 company achieved turnover of 1100 Cr in 2016 CAGR 46%
Private Equity Investments in Real Estate
within Indian real
Structured Equity Investors
PE investment peaked in 2007–08 and then fell in 2009–10. Since then, a gradual and a steady growth in PE activity has been
1. Opportunistic investments
Sequence of events
• Through PN 3, DIPP allowed FDI into real estate in 2003
• Huge scope and underlying demand, India attracted PE both India and foreign
• Investment scene started upward trajectory with issue of PN 2, sped till GFC
• Majority of the funds denominated in US dollars and Singapore dollars indicating keen interest of foreign investors
• Few funds focused on residential and retail, 66% had diverse options
• This phase saw investment activity peak in India, various eye catching deals
• Many investors gained multiple returns, a few suffered losses due to GFC
• Profit losses caused by- entry price point, developer credibility and intensity of due deligence
2. Structured Equity Investors
Sequence of events
• Scenario turned upside down owing to GFC , was a dry spell for investments
• Only USD 3.9 billion raised in over 5 years
• Limited funds but showed more focus
• More participation from Indian investors
• Structure equity became the preferred route 2009 ownwards
• This phase saw bottom of investment activity and its recovery to some extent
• Attractive entry point for investors helped achieve good investment returns
• The structured equity route, a better focus on asset classes and geographical locations, and a more intensive due diligence were a few other key factors behind the good returns
3. Long term partnerships
Sequence of events
•Phase started with positivity surrounding the elections and in anticipation of a government led by Narendra Modi.
•Fundraising activity started to pick at a good pace even before the election results and continued to get better following its outcome
•Focus on longterm partnerships, largely platform-level deals, with developers that have an established track record
•Creation of public markets for commercial assets in the form of REITs
•Appetite for industrial and warehouses is increasing; passing of GST Bill also helped seed up investment.
•Shortages in quality retail space and increasing rental values have attracted PE players towards the retail segment in the last two years
•Despite demonetisation and an overall poor scenario in the real estate industry, PE inflows saw 62% increase
•With change in regulatory framework, country looking way more attractive to investors – both foreign and domestic – than ever before
•Developers under pressure due to RERA and demonetisation, developers would be open to providing good entry points to the long-term
Why PE firms are investing in India?
• Relaxed FDI norms
• Govt regulations on banks to reduce credit given to real estate sector
• Government’s push for affordable housing
• Shortages in quality retail space and increasing renta
How PE have helped real estate in India?
• PE makes up 75% of funds propping up in property market
• Refinancing debt
PE investment deals in real estate
• Warburg Pincus invested US $ 268.4 million in Piramal Realty for a minority stake in the company
• Blackstone Advisors India invested US $70 million in a commercial project of Salarpuria Sarrva
• Kotak Realty Fund, has raised US$ 250 million for projects across India's top six property markets
Real Estate (Regulation and Development) Act, 2016
The act was passed by parliament last year and the Union Ministry of Housing and Urban Poverty Alleviation had given time till May 1,
2017, to formulate and notify rules for the functioning of the regulator.
01 Establishment of the regulatory authority:
Each state and Union territory will have its own
regulator and set of rules to govern the
functioning of the regulator
• It is mandatory for all projects pertaining
to commercial and residential real estate to
mandatorily register with the Real Estate
Regulatory Authority India[RERA].
• Builders are required to submit the original
approved plans for their ongoing projects
and the alterations that they made later.
The details of all registered projects will be
put up on a website for public access.
• Developers can’t invite, advertise, sell, offer,
market or book any plot, apartment, house,
building, investment in projects, without
first registering it with the regulatory
03 Reserve account:
The promoter of a real estate development firm
has to maintain a separate escrow account for
each of their projects. A minimum 70% of the
money from investors and buyers will have to be
Continual disclosures by promoters:
Home buyers will be able to monitor the
progress of the project on the RERA website
since promoters will be required to make
periodic submissions to the regulator regarding
the progress of the project.
05 Standardisation of sale agreement:
The Act prescribes a standard model sale agreement to be entered into between
promoters and homebuyers.
To ensure that violation of the Act is not taken lightly, stiff monetary penalty (up
to 10% of the project cost) and imprisonment has been prescribed against
1. Commercial and residential
projects including plotted
2. Projects measuring more than
500 sq mts or 8 units.
3. Projects without Completion
commencement of the Act.
4. The project only for the
purpose of renovation / repair /
re-development which does not
involve re-allotment and
marketing, advertising, selling or
new allotment of any apartments,
plot or building in the real estate
project, will not come under
PROJECTS UNDER RERA ADVANTAGES OF RERA IMPACT ON PRICE
1. Governance and transparency
2. Project efficiency and robust
3. Standardization and quality
4. Enhance confidence of
5. Attract higher investments and
6. Regulated Environment
7. Consolidation of sector
8. Safety of money and
transparency on utilization
9. Balanced agreements and
1. Due to stipulated compliances and
regulations, the project launches may occur
with lesser frequency than before.
2. The sale of projects on a carpet area basis
is likely to result in the per square feet price
of the project going up by about 40% to 50%
of the price based on the super built area.
3. In accordance with RERA guidelines, a
price readjustment may be in order.
4. Transfer of risk will lead to price rise -
Initially the risk on account of delays, quality,
changes, etc. was borne by the buyer.
Customers were forced to bear the cost of
the default. Now, since the risk will be borne
by developers, there might be consequential
premium that flat purchasers might have to
IMPACT ON INSURANCE COST FOR CONSTRUCTION AND LAND
1. Shift from debt financing to equity financing as prelaunch
concept may end.
2. Funds for land and approval cost to be made through equity,
leading to rise in cost od capital.
3. Increase in launch time as finer details such as complete
drawing, utilities layout, etc. will need to be finalized before
launching the project.
IMPACT ON REAL ESTATE AGENTS
1. Broker segment- unorganized and unregulated. Approx a USD 4
billion industry, with an estimated 5,00,000 to 9,00,000 brokers.
2. Real estate agents need to register themselves, to be able to
facilitate a transaction.
3. Agents responsible for disclosing all the appropriate
information to the customer and for helping them chose a
4. Less profit earned due to increased cost of compliance.
5. RERA to filter out the inexperienced, unprofessional, fly-by-
night operators, as brokers not following the guidelines will face
hefty penalty or jail or both.
IMPACT ON SMALL DEVELOPERS
1. Strong financial and execution capability is required to launch a project. With frequent delay in obtaining approvals, debt funding
not an ideal route for developers.
2. Smaller developers would find it difficult to meet their cash flow requirements due to prohibition on pre-sales until a project is
3. Implementation of RERA may entail initial hiccups across the states and hence the more established and bigger developers would be
at an advantageous position compared to the small and marginal developers when it comes to adhering to regulations.
4. Small developers may merge or tie-up with large developers and then co-develop properties. Expected to witness large scale
Real Estate Investment Trust (REIT)
What is REIT??
Investment vehicle allowing investors to earn income produced in a income generating real estate asset.
Reason for Introduction - Liquidity
a. Attract private Investment
b. Free Up Capital
c. Monetize Assets
d. Increase in entry and exit opportunities for
Reason for Introduction - Business
a. Transformation of Business from asset heavy to asset light model
b. Focus on core competency
c. Segregation of operations and infrastructure
d. Easier avenue to raise capital for small developers
e. Many banks have hit the sectoral caps
Reason for Introduction - Financing
a. Replacement of Bank debt to long term equity
capital – Lower cost of capital
b. Reduced exposure for Banks
Reason for Introduction – Corporate Governance
a. Improvement in transparency, disclosure standards and
professionalism within the sector
b. Informed decision-making enabled for investors
c. Sign of maturity of Indian RealEstate Sector
a. Approximately $121 billion or 1.73 billion sq ft of occupied commercial real estate across office, retail and warehouse
segments could potentially benefit from the REIT opportunity
b. The ready commercial space eligible for REIT investments amounts to 277 million sq ft, accounting for 44 per cent of total
office stock in India. The REIT-eligible commercial office stock is estimated to have a total value of $44-53 billion. In retail
assets, the estimated value of REIT-eligible stock (completed and under-construction malls) is around $20-24 billion.
Grant infrastructure status to real
estate sector – Will reduce the risk
weightage assigned by RBI
Allow developers to raise funds
Streamlining of approval mechanism
Expedite digitization of land records
Release surplus land – monetize
Create robust physical and support
1.The foreign direct investment policy enforced conditions with regards to project status, project size, lock-in periods, etc. due to which the eligible stock of real estate projects for foreign investors was limited predominantly to large projects with development size of over 0.54 million sq. ft. Owing to relaxation in FDI norms in 2014 and 2015 the entire real estate stock is now accessible to foreign investors. 2. Private Equity (PE) players have replaced banks and are currently the biggest source of institutional finance for Indian real estate industry. Rising non-performing assets, higher risk provisioning and mounting losses in the real estate industry have led to significant reduction in credit offered by banks 3. Shortages in quality retail space and increasing rental values have attracted PE players towards the retail segment in the last two years. Eg. Blackstone’s purchase of L&T Realty’s Seawood Mall and GIC’s investment in Sheth Developer’s Viviana Mall) 4. With affordable housing getting infrastructure status and end-users getting access to cheaper funds, private equity investors may find the segment to be very lucrative. The government’s focus on ‘Housing for All’ also creates opportunities for investors, as the sector will need far greater funds than what is currently available to developers. The implementation of the Real Estate Regulation Act (RERA) will also improve project deliveries. Consequently, the demand for affordable housing, is expected to remain strong in the coming years and PE investors will look for projects that show good prospects.
2.The real estate sector has largely relied on refinancing, to meet its debt servicing obligations, given the negative cash flows. The sector has seen significant interest from non-banking finance companies and private equity investors for refinancing debt. Such refinancing provides a cushion for developers to hold prices despite slow sales.”
Blackstone Advisors India invested US $70 million in a commercial project of Salarpuria Sarrva Realty LLP. Located at Knowledge Park, which is an office park Hyderabad, it is the first investment by the firm in the city. The project is being developed into an office space of about six million square feet and its construction is likely to be completed within four to five years.
Real estate private equity fund of the Kotak group, Kotak Realty Fund, has raised US$ 250 million from institutional investors for equity investments in realty projects across India's top six property markets including Mumbai, Delhi, Pune, Bengaluru, Hyderabad and Chennai over the next 24 to 36 months.
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