Realty slowdown spells opportunities for Godrej

Singapore: For Pirojsha Godrej, who leads India’s third-largest developer, the pain in the real estate market is spelling opportunities.

The son of billionaire Adi Godrej and chief executive officer (CEO) of Godrej Properties Ltd expects the firm’s best year ever for new project acquisitions as sluggish sales and a newly passed regulatory bill forces smaller developers out of business. The real estate arm of the Godrej conglomerate joins a select group of large developers weathering the downturn, as smaller players are struggling with unsold inventory and a funding squeeze and buyers flock to brand-name firms that can successfully finish projects.

“Conditions aren’t going to get any better than this; there is some amount of distress with many banks taking over projects, some of the promoters have lost control of their companies,” Godrej, 35, said in an interview in his Mumbai office. “We have a strong ability to invest capital at this point and we are very happy with our sales in a weak market.”

Developers without scale may struggle to stay afloat as new regulations passed last month place costly restrictions on them, said Godrej, who estimated that only a few hundred of the few thousand developers will survive the tough conditions. Godrej, by contrast, is seeing brisk business, with residential sales more than doubling in the quarter ended 31 December from a year earlier.

“Weaker developers are facing a harder and harder time both in terms of accessing customers and capital at reasonable costs,” said Godrej. “With the real estate bill coming in, it will only increase pain for them.”

Regulatory bill

The introduction of the new bill requires more disclosure from developers and penalizes them for failing to do so or attempting to change the terms of contracts that have been agreed upon. Developers currently pre-sell homes to buyers at lower prices before obtaining approvals, to fund land acquisitions and generate money to complete other projects. With the new law, they will be allowed to sell only after getting all approvals, and have to use 70% of the proceeds to finish the project. That will restrict their ability to divert funds to other unfinished development and crimp cash flows.

India’s real estate market has been sluggish as the inventory of unsold homes rose across all major Indian cities, according to data from Liases Foras Real Estate Rating and Research Pvt. The number of months it would take to sell all the stock rose 16% to 43 months as of 31 December from a year earlier, the data showed. A healthy market normally should have about 12 months of inventory, the research firm said.

Developers’ cash flow from operations has not been sufficient to cover their finance costs since the fiscal year ended 2012, according to a Moody’s Investors Service report. The aggregate cash flow from operations for six developers tracked by Moody’s was at Rs.300 crore in the fiscal year ended March 2015, dropping from Rs.3,000 crore in 2011, while total interest costs rose to Rs.3,600 crore from Rs.2,900 crore in 2011, the data showed.

Anand Piramal of Piramal Realty Ltd and Sunteck Realty Ltd’s Kamal Khetan are among those who have said they would seek to purchase distressed assets or tie-up with developers that are struggling to sell homes.

Godrej, among the largest land-owners in Mumbai, sold 93% of the units it marketed in the first phase of its 35-acre ‘Trees’ project in the northern part of the city, an area in which the developer owns 3,500 acres including a privately controlled mangrove reserve that is five times the size of London’s Hyde park.

Top markets

The firm will focus on its top four markets of Mumbai, National Capital Region (NCR) which includes Delhi and its surrounding areas, Bengaluru and Pune, Godrej said. The developer joined with smaller developers for projects in Noida, near Delhi, and Mumbai in the last quarter and expects to sign many more such joint-venture deals this year.

Godrej Properties posted a 53% increase in profit to Rs.213 crore in the nine months ended 31 December. Net debt rose 14% to Rs.2,532 crore in the December quarter from the previous three months even as average borrowing costs declined to 10.34% from 10.55%. The level of debt is not a concern for the firm because of its strategy of using low-cost financing, Godrej said.

“We expect next year to be better if rates come down and GDP picks up,” Godrej said. “Its an exciting time to take advantage of the current weakness to gear up for the upturn.”

Credits Live Mint

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