The key question to people’s mind would be that at times when real estate, by and large, appears to be sluggish, how is it that you are going out and launching such large townships? Where do you see demand coming from? How sustainable would this demand be in all of your large projects?
Our sense is that the real estate market certainly is going through a slowdown as you correctly alluded to. But there remains strong demand for good projects in good locations where the developer is fundamentally one that the customer can trust to deliver on time and so on. So I think we have seen for example last year by far our best ever year for sales. We for the first time crossed Rs 5000 crore in sales, growing about 80% year on year. So I think that’s a testament that there remains demand for good quality projects. That said, we are also extremely bullish about the sector as a whole. I think this is a sector that is obviously a very cyclical one and during a down cycle, people tend to feel that the down cycle will last forever and that is also true actually of the up cycles. But our sense is things are probably close to bottoming out. The economy is starting to pick up and our expectation certainly is that the decade ahead will be an extremely strong one for Indian real estate.
Do you think the investor in the real estate market is missing and whatever incremental demand is coming really is from buyers and genuine people who want to occupy the house?
Yes and I think that is quite typical again of down cycles is what you tend to see is that the investors are the first to leave the market. Obviously, end users are still in the market and still want to purchase a home. In fact, the down market is obviously often a good time for them to purchase a home in terms of the price per square foot they can achieve, the various deals available in the market. So yes I think the investors particularly in a market like NCR have dried up a little bit but again this is very much a factor of the cycle where in that that will also expect pickup over the years ahead.
Let us talk about the certain key projects as well and we will talk about the ones which probably are looking slightly sketchy but have to start off with that response that the Nodia project has gotten. From what we understand, it has been a stupendous response. Half of the active living area has been sold as well. Did you anticipate this and more importantly, was this the first phase and are there more phases coming in that large parcel?
Yes, this was a very important launch for us. Actually, it is a first launch in a totally new market that we have had in several years and Noida was the last major real estate market in the country in which we did not have a presence so we have added two projects there over the past year. This is the first of those projects to actually get launched and we are extremely encouraged with the response as you rightly pointed out. About 600,000 square feet worth over Rs 300 crores sold in the first day of the launch. This is a very large project. It is a township project so there is much more to come and I think it was important for us to get the project started off on a strong note. But yes the project is about 4.5 million square feet. So we have substantial further phases in area to be launched, which we again expect to see do quite well. I think the point for us that it is very important is that this really establishes us as with a good first step in Nodia which is clearly a market that we see a lot of opportunity and in one way we would like to greatly expand our presence.
It is quite surprising because NCR was actually amongst the worst hate in the sector down turn. Do you really think you can sustain this kind of run rate in the days to come, or will you ease back on planned projects especially in the NCR region and this project that we were just talking about?
No, we think it pays to be a little bit contrarian in this sector. It is the exact right time to be adding new projects because people are so pessimistic. NCR is the biggest city in India. It is one of the fastest growing cities in India and whether it is Gurgaon, Noida, Delhi itself, there is a huge amount of opportunities. So I think the present weakness which is very much true in very slow market and has been for two-three years is actually we see an opportunity to strengthen our portfolio, get into the right set of projects. We remain confident that with the right developers and the right locations, there continues to be quite strong demand as is evidenced with this Noida launch.
One side of the story is that your sales have picked up and your sales have crossed 5000 but about your margins. What about the realisation per square feet? Are you compromising on that in order to generate sales?
No, not at all. If you look at both the realisation per square foot, for example, last year when we did Rs 5000 crore was by far the highest we have ever achieved but I think realisation per square foot to us is not a very important metric because it will get vastly boosted depending on the cities you are selling in. So for example, last year we sold a lot of space in Mumbai which as you know is a more highly priced market and therefore in places like BKC and Vikroli the average price we sold at was actually extremely high. So I think of course margin is extremely important and we do think given the structure of most of our new projects has profit sharing and development management fee including this Noida township that our margins actually will rise. We do have a few far older projects and commercial projects that are at lower margins and once those work themselves through the system we expect margins to rise quite considerably. But I think combinations of booking growth margins and obviously overall return on capital is what we will be most focussed on.
What is the debt equity for you? I do not think it will too alarming but nevertheless just fill me on the numbers and more importantly with the belief that interest rates are on their way down does that augur well for companies in the real estate space? What would the borrowing cost be because as I understand while the base interest rates for AAA plus corporates is obviously very low lending to real estate companies is still happening at a fairly high interest rate level?
Our total company level debt is about Rs 3000 crore which we think is extremely manageable given the scale of the company. We are not seeking to be a zero debt company. We think debt is a very reasonable part of our growth plans and actually our ability to both access debt capital and the cost of debt capital we feel is quite attractive so our average borrowing cost today is about 9.2-9.3%. I think with our brand and with our track record we are able to access debt capital so I do not see any concern for us on that front.
What about the Bangalore market because you recently acquired a 12-acre land parcel as well in South Bangalore with an intention to develop about one million square feet of residential project? Now this is clearly a departure from your usual strategy to enter into a JV agreement to undertake projects, give us more details and where do you see this project headed in terms of timelines, aspirations, etc?
Actually it is not a departure at all from the strategy, we have a few ways that we acquire projects; one as you rightly pointed out is through direct joint ventures with the land owner, a second model we have been using for the last four or five years is acquiring land but doing it in partnership with our foreign institutional investment partners. So we have a Godrej Real Estate Investment platform through which we last year raised US $275 million and so this acquisition you mentioned in Bangalore is actually through that platform. And in terms of the Bangalore market, it is another very critical market for us. It has been one of the steadiest performing markets in the country driven largely by how well the commercial real estate market there has done with all the IT companies and other companies there continuing to do well. So Bangalore is another key focus city for us, in fact of all the cities wherein the four that we are now disproportionately focussing on to take our growth hopefully to the next level and those are Mumbai, NCR, Bangalore and Pune, which cumulatively account for about 50% of the residential real estate market in the country.
Credits ET Realty