Lavasa to Lodha: Is the revival in real estate IPOs for real?
Even though Lavasa Corporation may have set the IPO wheel rolling, execution skills of the developer, his track record, visibility of earnings and the demand and price sustainability is what can prop up the realty market. And with investors demanding that IPO candidates hold a sizable number of assets and not too much debt, realty companies are in for a tough ride.
After a lull of four years, it seems India's real estate sector is back with a bang. First, Hindustan Construction Company's (HCC) real estate arm Lavasa Corporation, announced that it is planning to raise Rs 750 crore through an initial public offering and now it seemsMumbai's largest real estate player Lodha Developers too is planning a $1 billion (Rs 6,000 crore ) initial public offering later this year thanks to improved investor sentiment and soaring stock markets.
According to a Bloomberg report, the IPO will value Lodha at as much as $10 billion and the shares are likely to start trading by next year.
Ironically, both these companies had proposed IPOs in the past but the plans were shelved due to a lacklusture stock market.
In fact, in 2011 six big ticket real estate IPOs were expected to raise over $2.9 billion or Rs 13,000 crore. But these plans were deferred time and again due to the volatility in the stock markets. Instead, they raised money through the private equity route or by selling land parcels.
"The shelf life for every investment is limited. At that time private equity and individual investors pumped money into promising but unlisted companies in the hope of a later exit through IPOs. And now that the new government has announced various initiatives to pull the real estate sector out of this slump and with the Sensex hitting record highs, builders feel it is an apt time to get listed," said Pankaj Kapoor, MD at real estate consultancy firm Liases Foras.
Lodha is one such company that has strategically built itsland parcel over the last few years in both India and London and has been on a shopping spree since 2012.In 2010, Lodha bought 250 acre plot in central Mumbai for Rs 4,050 crore from the Mumbai Metropolitan Region Development Authority. Of this, 23 acres have been It announcedan over Rs 10,000 crore project called New Cuffe Parade in Wadala on a 23 acre segment of the total parcel.
InAugust 2012, it bought a 17-acre plot from DLF for Rs 2,727 crore in the heart of Mumbai. Today it is constructing six towers of 75 storeys each and 12 villas around a six-acre park on the 70 feet high elevated plot in Central Mumbai. In November 2013, Lodha stepped up its ante and boughtMacDonald House in prime central London that housed Canadian consulate in UK for over Rs 3,120 crore.This was followed by another purchase near London School of Economics, where Lodha picked up up one more property on Carey Street for about Rs 1,000 crore.
With over 35 million sq ft of development in Mumbai and a land bank estimated at 3,500 acres in Dombivilli, the Lodhas have become the maharajas of Mumbai's real estate sector.
Today, over 25 percent of Mumbai Metropolitan Region belongs to the Lodha Group, said Kapoor, adding the company's Thane, Kanjur and Dombivili assets are major cash cows.
"Lodha is by far the largest developer in Mumbai when it comes to volumes and supply. Given the huge land assets they own, they can easily be valued at Rs 6,000 crore," said Kapoor.
The project, titled New Cuffe Parade, will come up at Wadala and is spread across 23 acres over the next five to seven years. The project will comprise commercial as well as residential towers, company Chairman and Managing Director Abhisheck Lodha told reporters here.
Most experts believe Lodha is financially sound.
"If you have assets of Rs 10,000 crore, it does not matter even if you have debt of Rs 10,000 crore on your books," said an industry expert on condition of anonymity.
Moreover, the company has successfully built its brand through aggressive marketing and advertising. Also, its track record to buy undisputed titles, get approvals and launch projects has been quite clean.
Thirdly,rising property values and stronger demand for properties have made it easier, and more profitable, for builders to sell.
However, the real estate sector is still one of the most unloved ones in the stock market due to lack of trust in financial statements published by realty companies.
In 2012, equity research firm Veritas had hammered DLF and raised doubts about the company's disclosed book equity and asset base. The report had said, "DLF has undertaken questionable related-party transactions to boost the value of DAL (DLF Assets) prior to its acquisition by DLF, thereby subverting the interests of minority shareholders via a higher purchase price for DAL."
According to the Veritas report, DLF inflated sales by at least Rs 11,236 crore and profit before tax by Rs 7,233 crore through its dealings with DLF Assets, a firm floated by the company's promoters.
Ever since the company launched its IPO in 2007, the stock value has eroded immensely. From the IPO price of Rs 525, the stock today trades at Rs 211! The company's sales have consistently declined since then, while debt has risen significantly, but the underlying value of real estate is apparently not represented in the stock price. This is evident from the stubbornly high property prices in the National Capital Region.
With the whole industry most unogranized and companies playing with their books,its not a wonder that the sector continuesto languish below its 2008 peaks even though the broader index is scaling new peaks every second
"In the past there have been cases of over valuation. Sensex has gone past its previous peak but realty index is one-sixth of its peak. So I doubt people will buy at very high valuations as they have been burnt in the past. But realtors are desperate to get listed due to theirheavily indebted balance sheets. Wit equities doing well, listing is the only way out for investors to get profitable exits but one must be careful of vested interests in IPO valuations," cautioned Kapoor.
So even though Lavasa Corporation may have set the IPO wheel rolling, execution skills of the developer, his track record, visibility of earningsand the demand and price sustainability is what can prop up the realty market. And with investors demanding that IPO candidates hold a sizable number of assets and not too much debt, realty companies are in for a tough ride.
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