Unitech March quarter profit halves to Rs3.6bn

Unitech has reported a 52% decline in its net profit at Rs360.28 crore for the quarter ended March 2008, against Rs747.96 crore in the year-ago period.

The total consolidated income for the January-March quarter declined by 26% at Rs1,197.13 crore, compared to Rs1,627.29 crore in the same period last fiscal.

However, for the financial year ended March 2008, the company’s net profit rose by 27% at Rs1,661.86 crore from Rs1,305.83 crore in the previous fiscal.

Total income increased 26% at Rs4,280.11 crore in 2007-08 as compared to Rs3,388.09 crore in the previous fiscal.

The board, in its meeting held today, recommended a dividend of 12.5% for 2007-08 fiscal.

Lavasa township gets fresh funding valuing it at Rs 10,000 crore

Axis Bank has picked up a 2.5% stake in Lavasa corporation, a subsidiary of Hindustan Construction Company (HCC), engaged in the development of a township in Lavasa near Pune, for Rs250 crore valuing the project at Rs10,000 crore. The township is spread over 100 square kilometers and being developed in four phases. The first phase is expected to be completed in 2009-10. The entire project is expected to be completed by 2020. HCC is already positioning Lavasa as an educational centre for hospitality, higher education and management.

Lavasa has issued convertible preference shares and convertible debentures to Axis Bank.After the conversion of the debentures at the end of 5 years, the equity shares of current promoters will go down. At present, HCC holds 29 per cent stake in the project, while 16 per cent stake is held by Avantha Group (LM Thapar Group) and Venkateshwara Hatcheries holds 13 per cent. HCC is expecting a total revenue of Rs 1,470 billion (US$37.4 billion) over the next 10-15 years from the Lavasa hill station

Amby Valley, which is a competitor town hill city, created real estate first and then focused on infrastructure later. Correcting that, Lavasa is doing just the opposite, creating footfalls first by getting the roads, hotels, education centres and then setting up the real estate. Moreover, the Lavasa homes will be more affordable, entry level condominiums will begin at Rs 27 lakh that will dot the lake. Damanhole, on the other hand, as yet some years away, will boast the more exclusive residences, all bordering the golf course, with vantage views of the lake.

The star attraction at Lavasa is the waterfront; all development springs around it. To prevent the lake from drying up prior to the monsoons, HCC has built a mini dam that has created a reservoir holding of 1.8 million cubic metres of water.

Lavasa houses an Oxford University India Business Centre that will conduct business research and impart training to new generation corporate leaders.

Earlier, Lavasa had announced the setting up of a Hospitality Learning Centre by the Ecole Hteli de Lausanne (EHL) of Switzerland. The first batch for this centre will also begin in 2009.

Promoting the health platform, Lavasa has signed Apollo Hospitals to set up an integrated healthcare and wellness destination and a 50 bed multi-speciality hospital. The healthcare and wellness centre will be spread over 200 acres with the hospital slated to be ready by 2009.

Lavasa is 200 kms from Mumbai and 75 kms from Pune. The town hill will house 3 hotels managed by Novotel, Starwood and Fortune chains. Lavasa is soliciting interest from key non-industrial businesses, like convention centres, educational institutions, spas and medical centres. An 18-hole golf course is being laid out, a club house planned and, eventually, shopping centres.

Three revenue streams for Lavasa - lease rentals, the sale of apartments and single family homes and fee.

Have attached some pictures of Lavasa. Enjoy the luxury on the hills :)

40 million square feet (Rs 80,000 crore) of construction facing delays

According to industry estimates, around Rs 8,000 crore of real estate projects covering over 40 million square feet are facing delays. Delays have been caused because of various reasons : tardy government approvals, stop-work notices from the municipality, construction delays, labour unavailability and so on.

Construction costs for large commercial projects is Rs 2,000 per square feet which been growing by over 20% every year, and the developers are carrying a compounded interest burden of 30 to 40 per cent after three years.

The cost of construction has almost doubled in the last 3-4 years given the steep increase in the price of input and construction costs and an increase in interest rates. Steel and cement prices which form the main components of construction costs besides labour, have risen by over 50% since Dec 2005.

By 2008-end, Mumbai and its suburbs will add 15.4 million square feet of office space, which analysts say will have a sobering impact on property prices. Office rentals in Mumbai’s central business district such as Nariman Point have increased 50 per cent in the last three years and places such as Worli and Lower Parel saw a 30 to 40 per cent increase in this period.

Most of the delays are because of government approvals. In Mumbai, over 56 approvals need to be taken from environment and forest department, pollution control board and others. This approval stage takes over a year to complete delaying the whole process.

With lack of funding from banks, PE investors and cash in hand, developers are now rushing to moneylenders to borrow money for completion of their projects. Moneylenders provide loans @ 20-40% which makes completion of the project even more expensive.

As predicted in one of the earlier posts, RBI has again increased the CRR and repo rate, making life more difficult for the developers. Real estate stocks are taking a beating in the stock market with each day. DLF is already trading below their IPO price.

Banks lending for realty very very selectively

With the correction in the real estate sector, commercial banks have become choosy in lending to new development projects. Besides increasing the interest rates, they have asked promoters to increase their share in project funding to mitigate the risks.

The economic uncertainty and runaway inflation is likely to impact the real estate prices, and this is already evident in some pockets in Mumbai. Corporation Bank chief general manager M Narendra said the situation in the real estate sector will be different from last year. There will be a correction, he asserted.

The RBI has declared the real estate space as a sensitive sector under its prudential norms. The sector thereby attracts higher risk weightage (banks have to set aside higher amount of capital for real estate exposure) and the lending is closely monitored.

A senior executive with Dena Bank, said, “Banks do not stop taking exposure just because the outlook for a particular sector is bad. Some players are competitive and remain ahead of others”. Bank of India is not entertaining any new proposals from real estate sector since last year, according to executive director G S Vedi.

However, there is no 100 per cent ban on extending credit to the existing clients.

Banks are also asking for higher contribution from the promoters and developers in a move to secure their position. For example, banks are asking for a hike in the contribution from 25 per cent to 30 per cent, a senior State Bank of India executive said. Hence, the promoters have a higher stake in project completion and loan payment. Keeping with the rising cost of funds and the need for additional capital for risky assets, the banks have increased the lending rates for real estate projects.

The real estate companies are now paying prime lending rates for new projects. The PLRs of most public sector banks is in the band of 12.25 to 12.75 per cent. A year ago, lending was done at a PLR below 10 per cent rate, said the Dena bank executive.

According to Reserve Bank of India data, the banking sector gave Rs 53,897 crore to the real estate sector as on February 15, 2008. The year-on-year growth in credit deployment was 26.7 per cent (Rs 17,361 crore) as against 79 per cent (Rs 18,770 crore) a year ago.

The growth in loans to commercial real estate remained high, notwithstanding some moderation, RBI said in its macro-economy report for 2007-08.

Emaar MGF valuation

Emaar MGF issued an IPO in Feb 2008 in the price band of Rs 610 - 690 per share valuing the company $16bn (Rs 66,000 crore) at the higher end with a PE multiple of 256.44 times compared to 74.99 for larger rival DLF and 48.72 for Unitech at that time.

The prices were revised twice to settle at Rs 530 - 630 but this also meant an expensive valuation- PE of ~200. Finally, Emaar had to withdraw the IPO given the low subscription in the dangling Indian market facing a huge global meltdown.

According to its IPO prospectus, Bennett Coleman and Co. Ltd and New Delhi Television Ltd had invested Rs25 crore each, while IFCI Ltd had invested Rs50 crore in the pre-IPO phase at Rs 455 per share valuing the company at $10bn.

Recently, Emaar Group of Dubai decided to convert Rs922 crore invested through preference shares into equity at a conversion rate of Rs300 per share, which is less than half the price at which the company wanted to IPO. The conversion is benchmarked to Citigroup’s investment in the company in 2006, valuing the company at $6 billion.

Emaar MGF has recently announced that it will go for an IPO in 12-18 months. Its anybodys guess what the valuation of the company will be.

Reality check for Indian Realty...

As on 13-June 2008, the index of the top 10 Indian Real Estate companies "Indian Realty Index" (consisting of DLF, Unitech, Sobha, Puravankara, Peninsula, Parsvnath, Omaxe, Indiabulls, HDIL and Akruti) was down 20% as compared to a year ago.

Of these, the biggest losers were Sobha, Puravankara, Parsvnath and Omaxe each of which lost about 50% of their market capitalization in the last year (18-June-2007 till 13-June-2008).

DLF, Unitech, Peninsula and HDIL have each seen their share prices drop in the range of 15% - 30% during the same period.

While IndiaBulls has remained flat, Akruti has been the only Indian real estate developer that has witnessed a 150% increase in its share price during this period. Akruti's stock has appreciated as much as 270% when the Sensex was at its all-time high in mid-January 2008. Akruti has been involved in slum redevelopment projects in Mumbai which usually offer high IRRs.

Even in the current market scenario, the median enterprise value to revenue multiple and enterprise value to EBITDA multiple stands at 7.8x and 13.4x respectively. This is mostly inflated by Akruti and DLF, both of which have PE ratios of 69x and 44x respectively.

Overall, the Indian Realty Index has underperformed the Sensex. The latter has increased 8% during the same period (18-June-2007 till 13-June-2008).

The Indian Realty sector has finally experienced a reality check as most of the top developers have significantly underperformed key market indices such as the Sensex and S&P500.

The key question investors are asking is if this trend in value erosion is going to continue due to increasing inflation and interest rates and an evident pricing mis-match between developer and potential realty investors or if there is going to be a slow and steady stock price recovery as developers and investors assume the intrinsic value to be much higher than the current market valuations of these realty companies. It gets even more interesting as real estate developers are desperately looking out for funds to finance their current/planned projects.

I guess only time will tell...

Impact of commonwealth games on Delhi Residential prices

Sharing something I had written some time back on the commonwealth games...

In 2010, New Delhi will play host to the Commonwealth Games, the third largest multi-sporting event in the world, with tens of thousands of visitors descending upon the city. To prepare for this, Delhi is planning for a major overhaul of its urban infrastructure as well as its sporting facilities.

Interplay of the growth drivers

The 2010 Commonwealth Games are being touted as Delhi’s ticket to the list of world class, ultra modern metropolis. To determine what will lead to this transformation, we need to look at what the growth drivers for the residential real estate will be – developers and end users. Developers have been buying land prior to the games and will announce residential townships on this land post the games when the value of land has significantly appreciated. Land value will be derived from the infrastructure – roads, metros, buses, commercial establishments, schools, hospitals, hotels and other common amenities – that is being developed to ensure the smooth completion of the games. The society would gain at large from better infrastructure, amenities and commercial/ convention centers.

While the citizens in process would be the biggest gainers because of better living standards, the developers would announce residential townships post the games as the basic amenities would allow them to charge a premium. The citizens (end users) would be more than willing to pay the high prices for the given better standards of living. Both rental and capital yields will increase in the areas.

DTZ estimates that with the international tourist forecast for Delhi being 18 lakh in 2010 and of domestic tourists being 35.8 lakh in the same year, Delhi would need around an additional 10,412 star rooms for foreign tourists. This will be supported by significantly improved road and transport infrastructure, expansion of the Delhi airport and general up-gradation of civic infrastructure in the city. These, inter-alia, include the project of the Link Road from the Games Village site to the Jawaharlal Nehru Stadium and Bye Passes at Mahipalpur and Masoodpur for improvement in airport connectivity.

Examples of impact of other events on residential sites– Global and India

Sporting events of these kinds are increasingly being seen as vehicles for urban renewal, a catalyst to create jobs, increase investment and transform the landscape of the city. The 2002 Commonwealth Games in Manchester were aimed primarily to ‘regenerate’ the area. The focal point of the regeneration was East Manchester which had been the worst affected. Residential rates post the games have increased by over 80% in the region.

Closer home, similar changes are taking place in Pune that is preparing for the Commonwealth Youth games to be held in October 2008. Infrastructure developments are taking place, though at a slow pace, leading to an increase in the residential market prices. Developers have announced the building of townships around the infrastructure developed post the games. Belawadi, centre of the games in Pune has already seen residential rates shoot from Rs.2000 per sq feet to Rs. 10,000 sq feet.

Similarly, the build up to the Asian games in 1982 saw an unprecedented construction spree with stadiums, the games village, hotels, flyovers, roads and even Pragati Maidan being built. South Delhi was a region that had already begun being developed, but it was only after the 1982 games that saw this region increase in importance. Three of the four flyovers developed at the time, the Moolchand, Sewa Nagar and Oberoi flyovers were in south Delhi. The development of this site probably had the largest urban impact on the city due to its correlation with the development of south Delhi, the most expensive residential site in Delhi with rates of Rs 30,000 per square feet in some areas. The reason that the games had such a deep impact on the development in south Delhi was because they provided the region with the necessary infrastructure to develop. It provided the region with broad roads and flyovers for swift movement of traffic and other infrastructure as well such as water, electricity and other civic amenities.

The current state of affairs show similar developments in East Delhi

The urban landscape of East Delhi too, is set to change dramatically with many infrastructure projects being pushed through in time for 2010. Infrastructure investments have already increased dramatically in the region with a new bridge being built at Wazirabad, the metro phase 2 being constructed, and numerous flyovers and roads in the pipeline. There are indeed ambitious plans afloat ranging from improving street furniture to setting up more power stations before the 2010 deadline. Land has been amassed by builders like DLF, Ansal, Unitech and Emaar.

Delhi is attempting to give itself a major facelift due to the games, and develop a whole portion of the city, East Delhi and the Yamuna riverfront, which until now has been largely neglected. As Delhi expands rapidly and space runs out, the until now undeveloped Yamuna riverfront, largely inhabited by slum dwellers and vegetable growers, is looking like prime real estate. Townships that are expected to come up in that region would be able to charge high rental/ capital values given its infrastructure. The banks of the Yamuna are the largest open space left in the city, as well as the largest groundwater recharge zone. The 25 km stretch along the river has 97 sq km of prime land, 7 per cent of Delhi's total area.

Conclusion

Approximately 80% of the demand in the real estate sector in India lies in the residential segment. The housing sector is currently growing at 30-35% per annum. The present plan for the Commonwealth Games may be a recipe for an ecological and financial disaster, or they might finally put the city, and the country, on the world map. The Games, with some smart marketing, may just follow in the footsteps of Asian Games to transform East Delhi into a residential haven.