Investment bankers add weight to Jhunjhunwala's take on realty IPOs

Top private property developers say IPOs are just one source of fundraising

While a number of property developers have queued up to tap the IPO (initial public issue) markets, top stock market investors and investment bankers are not very gung-ho about property developers listing their businesses.

Recently, Mumbai-based property developer Suraj Estate Developers filed for an IPO to raise Rs 500 crore from investors. Puranik Builders has already received the nod from Sebi for an IPO. NCR-based affordable housing developer Signature Global and Mumbai-based Kalpataru are also believed to be looking at an IPO.

Ace stock market investor Rakesh Jhunjhunwala told a recent Confederation of Indian Industry event that not all property developers should list unless they have scale.

“If I was a developer I would not list. It is not a business which is susceptible to listing," said Jhunjhunwala.

The billionaire expressed his concerns about the lower return on capital of listed real estate companies.

"You know, as an entrepreneur, the question is where is the return on capital? Blue chips have a return on capital between 18-25 per cent. So one has to take steps to accentuate returns. Up till now, the real estate companies have only burned capital,” he said. 

Jhunjhunwala has a point.

Barring Bengaluru-based Sobha and Prestige Estates, all the companies in the BSE Realty Index gave a return on capital in single digit percentages in FY21, according to data from Capitaline culled by the Business Standard Research Bureau.

“IPOs are not there for everyone. Investors want to see a lot of factors such as liquidity, corporate governance and so on. Companies with smaller scale will always find it challenging to raise money compared to those with scale," said Nitin Idnani, managing director and co-head of equities at Axis Capital, speaking at the same event as Jhunjhunwala..

Bankers tend to agree with Jhunjhunwala. An investment banker who did not want to be quoted said: “The appetite for residential business models was not great in capital markets.  Residential listings have had a  chequered history in the past. A lot of wealth was eroded," he said.

The banker said returns are low due to legacy issues, land banking by developers and heavy balance sheets and huge leverages. He added that newer companies do not have these issues and, moreover, have better return ratios to show to investors.

For instance, companies such as DLF and Prestige have sold land banks and commercial portfolios to reduce debt and clean up balance sheets.

However, the banker said that the residential segment seems to be coming back and following the Real Estate (Regulation & Development) Act or RERA, it has taken a new route .

"Now corporate governance is good in most of the companies and disclosures are better. Investors who were looking to invest in only eight to nine names are open to looking at good names," he said.

Vishal Srivastava, president, corporate finance, at Anarock Capital, said that many private developers are promoter-controlled and the key requirement of going public is that the top management should be professional.

"Many real estate developers don’t have scale to create professional organisations. They should have professionals to scale up the business. Prestige, RMZ, DLF are good examples of professional management," said Srivastava.

However, some top private developers said IPOs are one avenue among many to raise funds. "When you need money for growth, you go for an IPO. If you do not need money, why would you go for an IPO? We would like to hold it 100 per cent for ourselves,” said Niranjan Hiranandani, managing director of Hiranandani Developers.

Boman Irani, chairman and managing director of Rustomjee, another Mumbai-based developer said:" We keep speaking to a lot of financial institutions for betterment of business whether it’s private equity, debt or IPO. We keep raising private equity and debt and so on.”

Irani said Rustomjee has so far not explored the IPO route. "At the right time we will," he said.