In 2006, a unit of DLF, then an unlisted company, planned to set up 100 hotels across the country in the next 10 years, which included 4-star, business and budget hotels in about 50 cities. The company also planned to set up super luxury hotels in five to six cities.
The total investment envisaged was around $800 million (around Rs 3,600 crore).
Today, besides the international luxury hotel chain Aman Resorts, DLF owns eight million square feet of hotel properties. This could be equivalent to 16 to 17 properties. DLF has plans to sell both Aman, which owns 24 properties, and its hotel plots to reduce its debt which stood at Rs 22,758 crore in the third quarter of the current financial year.
Recently, the company announced that its hospitality company DLF Hotels was buying 26 per cent stake in the joint venture with Hilton International for Rs 120 crore. The idea was that the company could have the majority control and monetize the assets. Although the JV had planned to build 75 hotels, while parting ways, the company said the JV had undeveloped properties in four cities.
Wind power business was another example of how the diversification did not work well for the DLF group. Even as the company had ambitious plans in wind power and invested Rs 1,500 crore and has an installed capacity of around 260 MW, now the company is looking to sell it at Rs 1,000 crore.
Even the multiplex and insurance ventures did not prove successful, say analysts. The company planned to build 500 screens in five years in 2008. But currently it runs 30 screens.
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In 2008, Unitech had plans to invest Rs 2500 crore to develop 35 hotels across the country, over the next seven years. Later, the company scaled down the plans to build only six hotels with 1000 rooms. It sold the Marriott Courtyard hotel in Gurgaon for Rs 231 crore to a high networth individual in 2009.
Even Unitech group’s asset management foray has met with obstacles, say property consultants. CIG Realty Funds, an asset management company floated by Unitech promoters, did not raise funds for its Rs 300 crore Mumbai Redevelopment Fund after announcing it in early 2010. Currently CIG is only managing two funds launched by it earlier.
“A lot of money was available to developers during 2005-07 and developers got into all sorts of fancy asset classes such as retail, hotels, insurance and so on but soon it disappeared. It was not their cup of tea in the first instance,” says Amit Goenka, national director, capital transactions at Knight Frank, a global property consultant.
| Company | Plan | Status |
| DLF | To build 100 hotels | Owns Aman Resorts which holds 24 properties and around 16 to 17 undeveloped plots |
| Planned to build 300MW of wind power, invested Rs 1,500 crore | Installed capacity of 260 MW, looking to sell for Rs 1,000 crore | |
| Planned to build 500 screens in 5 years in 2008 | Now runs 30 screens | |
| Unitech | Floats Unitech Wireless, sells majority stake to Telenor, a Norwegian telco, launches telecom service under Uninor brand | Supreme Court cancels 2G licences including Uninor, Telenor serves compensation notice to Unitech Wireless, wants to quit the JV with Unitech. |
| In 2008, planned to invest Rs 2500 cr to develop 35 hotels over 8 years | Scales it down to six properties, sells one in 2009. | |
| HDIL | Ventures into oil and gas in 2008, bids for NELP VII, did not bag any blocks | Looks to exit the stake in HDIL oil and gas |
| Floats mutiplex arm, plans to set up 150 screens | Runs 30 screens |
After the deal to sell its multiplex business DT Cinemas to PVR Cinemas got aborted in early 2010, DLF said it did not want to sell the business anymore. The company is also looking to sell its stake in insurance venture with US based Pramerica for some time, it is yet to conclude any deal.
DLF is not the only one. Most of the liquidity-powered diversification of real estate companies during the 2005-09 boom has fizzled out as home sales dwindled, debt piled up on the books of the companies, and availability of capital dried up.
Unitech, the country’s third largest developer’s foray into telecom and selling majority stake in Unitech Wireless to Norwegian telco Telenor had its share of controversies. Unitech Wireless managing director Sanjay Chandra was taken into judicial custody for his alleged role in the 2G telecom scam. While the two partners have been on the warpath over a proposed rights issue, recently the Supreme Court cancelled the 122 telecom licences linked to the 2G scam. Licences of Uninor, the brand under which the Telenor-Unitech JV offers the telecom services, were also cancelled. Subsequently, Telenor served a compensation notice to its Indian partner and announced that it was looking for a new future and a partner in India.
Even Unitech’s hospitality plans, though it wanted to sell its hotels after developing them, did not see desired results.
“But today, there is no money to be made in these assets and cost of capital is expensive...Whatever money is coming is mainly going into debt repayment,” Goenka adds.
For instance, DLF plans to raise to Rs 6,000 crore through sale of its non core assets such as hotels, wind power to reduce its debt burden and Unitech plans to raise Rs 700 crore a year through such sale to reduce its debt which is currently at Rs 5,300 crore.
“These diversifications happen when main business is cash cow and runs on auto pilot and you believe whatever you touch will become a pot of gold.But the economic slowdown dashed all their hopes…They were forced to defocus from diversifications,” says Sanjay Dutt, chief executive of Jones Lang LaSalle.
Another instance of real estate developers' diversification going awry was Indiabulls Real Estate’s foray into retail and subsequent purchase of Pyramid Retail from Ashok Piramal Group in late 2007 for Rs 208 crore.
Indiabulls had plans to set up 30 hypermarkets in the country with a total investment of Rs 1,500 crore and expand Pyramid’s store network from 42 stores to 150 in a year’s time. But slowdown of 2008-09 impacted its cashflows adversely.
Although Indiabulls tried its best to salvage the retail business- -rebranded both lifestyle stores as well as hypermarkets and reworked operations—it finally decided to freeze the expansion plans.
Analysts say the result of Mumbai-based property developer HDIL’s foray into multiplex is yet to be seen. The company planned to set up 150 screens across the country in five years. But currently it has only 30 screens.
The company is also looking to exit from its oil and gas venture which it held 51 per cent stake. HDIL Oil and Gas had bid for two blocks in the seventh round of the New Exploration and Licensing Policy (NELP-VII) but did not bag any.
“Most of them anyways believed it was a valuation game and they could unlock the value at the some point in time,” says Dutt of JLL.
However, the realty companies Business Standard spoke to said the diversification and exits were well thought out.
“Basically, our core business is so complex and intensive, we do not get enough time to look after others. It’s a matter of strategy that we are exiting these assets,” says Rajeev Talwar, group executive director, DLF.
“We have built rent yielding assets of Rs 27,000 crore to Rs 28,000 crore and created debt which are more than covered by this assets” Talwar said.
Talwar does not buy the theory that real estate companies ventured into unchartered territories and hence met with mediocre performances. “That’s not true. Everyone diversifies from financial angle. You do not need own managerial skill sets to run them but good managements to run them. We have done it in insurance and wind business,” he says.
In a emailed response, Unitech spokesperson said: "Unitech is one of India’s leading developers involved in large-scale integrated real-estate development spanning the entire spectrum of real estate development from residential projects to commercial, retail, hotels etc. Therefore developing hotels is not a “diversification strategy” for us but part of our real-estate development business. Unitech is developing three hotels and does not have plans to sell them."
(With inputs from Dilasha Seth)