People in India swear by the success of the real estate sector, understandably so, for it is the country’s second largest employer and contributes to approximately 5 per cent to its GDP. The sector received foreign direct investment (FDI) of about Rs 21,370 crore between April 2007 and March 2009, second only to the services sector.
However, with the collapse of Lehman Brothers in September 2008, cracks in the rosy lens appeared to show, and what followed crippled the liquidity-centric real estate market in India completely. With demands dipping to all-time lows and FDI drying up, real estate players were forced to think out of the box and devise innovative strategies indicating a sea-change of guard.
Raising funds
The year 2007 witnessed real estate companies raise substantial capital from the primary market, with DLF hitting the market first and many following suit until mid 2008, when we saw the equity market meltdown, closing the primary market almost instantly, even forcing already floated IPOs to withdraw.
Reeling under the liquidity crunch and given the weak market conditions and sentiment, many listed real estate players took to the Qualified Institutional Placement (QIP) route under which public companies raise capital through equity participation from a few large Qualified Institutional Buyers (QIBs), either by way of issue of equity shares, fully and partly convertible debentures, or any other securities other than warrants that are convertible into equity shares. The QIP route has gained popularity as it enables an issuer company to raise capital in as soon as 7 days and requires far less approvals from Stock Exchange Board of India. This has not only helped companies meet their immediate debt liabilities but has also helped to keep the working capital rolling, in times where investors/customers were shying away from investing in real estate.
Both, the issuing company and the QIBs benefit. The August 2008 amendment to the DIP guidelines enabled the issuer and QIB to mutually arrive at a valuation close to the real market price, which can be as recent as two week average share price, as opposed to the six month average prescribed prior to the amendment. For the 24 companies that raised capital of as much as Rs 17,000 crore through QIPs between March and the first week of September, the current mark-to-market value put together works out to an amount of Rs 23,208 crore for the same period, which means returns of more than 35 per cent and only five QIPs are trading below their issue price, states SMC Capitals report on QIPs.
The most popular QIPs were those of Unitech, Ansal Propeties, Indiabulls Real Estate, PTC, HDIL and Sobha Developers. It seems the road for QIPs has only been cleared as there are approximately 50 companies waiting to go the QIP way.
Creating demand
Hit by the global economic downturn and resultant drop in the purchasing power, instability in jobs and growing interest rates, real estate players were quick to realize “affordable housing” was their best hedge against unpredictable markets conditions. Many companies have changed strategies and embedded this mantra in their core ideology for any future expansions. Eighty per cent of the real estate developed in India is the residential space, and the rest consists of office, shopping malls, hotels and hospitals. Though most of the big players attempted to diversify into ancillary sectors such as hospitality, SEZs, hospitals and retail, off late, many such projects are up on the blocks for sale with most of such players sticking to hardcore real estate activities and either shelving or putting on hold their plans for diversification in the near future.
Reports from Goldman Sachs and Mc Kinsey in 2008 speculated a shortfall of approximately 30 million and 25 million units, respectively, of affordable housing in India. Further, according to a Knight Frank report, the market size is set to reach the Rs 3,00,000 crore mark by 2011. A common theme emanating from these reports is that there is a clear “dearth” of affordable housing besides painting an ambitious picture for this segment in the long term. The Annual Report 2008-2009, Ministry of Housing and Urban Poverty Alleviation states that as part of economic stimulus measure, an amount of Rs 5,000 crore has been sanctioned by the Ministry for building one million houses for EWS/LIG/MIG in partnership with government, private, co-operative and financial services sector.
With the economy regaining a positive mood on account of synchronised measures taken by governments across the world, the real estate companies are betting big on affordable housing for reasons ranging from; re-election of the government; rising employment rate; increase in FDI and attractive interest rates for home loans.
Mrinal Kumar is a Principal Associate and Avnish Sharma is an Associate with Amarchand & Mangaldas & Suresh A. Shroff & Co. Views expressed here are personal.
