DLF's Worli realty deal looks like a distress sale

If any proof were needed that Mumbai’s property market is downtrending, the DLF deal to sell a prime 17-acre piece of land in Worli in central Mumbai to the Lodha group, should convince all skeptics.

On Monday, a deal was announced to sell the plot, which has a developable floor-space index of around five million square feet, for Rs 2,727 crore. Considering that DLF bought the property for around Rs 702 crore in 2005, it looks like a four-fold increase in seven years. A great deal for DLF, right?

Wrong.

Actually, it looks more like a distress sale. Of the total deal price of Rs 2,727 crore, Rs 1,500 crore is debt. DLF will get only around Rs 1,227 crore in cash. Its Rs 702 crore investment has not even doubled in seven years. It’s gone up around 75 percent. A debt fund giving you 9-10 percent per annum would have doubled your money in the same time.

The markets sent the DLF share price down by 2 percent on Tuesday in pre-lunch trades. Clearly, they don’t think much of the deal.

[caption id=“attachment_417476” align=“alignleft” width=“380”] For DLF, the benefit is that it gets Rs 2,727 crore of debt off its books - and that is the real gain. Reuters[/caption]

For DLF, the benefit is that it gets Rs 2,727 crore of debt off its books - and that is the real gain. This is why Abhisheck Lodha is cock-a-hoop. “I think we have paid one-third or one-fourth of deals which have happened in the area in the last couple of years,” he told Business Standard.

But if this is true, it means that the ever-rising price of property in Mumbai (and other metros) is really a rigged price. It means that when the deal is between knowledgeable equals, the real market price may be just a third of what we have come to expect.

Even in comparison to recent deals in central Mumbai, DLF did not get full value. According to BusinessLine , “the valuation of DLF’s land is lower when compared with Indiabulls’ deal in 2010 for 8.39 acres of NTC land for Rs 1,580 crore.” (DLF got Rs 1,227 crore for 17 acres.)

In 2010, Lodha made an even bigger deal in Wadala, a central Mumbai area which has seen a lot of property development, that looked pricier. It bought a 25,000-square metre plot for Rs 4,050 crore. It was called the “costliest deal” in the city at that point, reports The Indian Express.

For the five million square feet of saleable floor space at Worli, the DLF deal can be valued at Rs 5,000-5,500 per sq ft. Other property in the area retails for around Rs 30,000 per sq foot - nearly five to six times the price paid by Lodha. Of course, the Worli property will take a couple of more years to develop and sell, but even taking the future time and costs into account, Lodha will probably triple his money.

DLF, however, had an urgency to sell, given its mile-high pile of debt. On 30 June, its debt was as high as Rs 22,680 crore - too high even for the country’s largest builder. DLF has been conducting a firesale of properties to bring down debts, and apart from the Worli land (now sold to Lodha), it is in talks to sell its Aman Resorts and wind power projects. It wants to bring down debt by around Rs 5,000-8,000 crore by the end of this year.

That DLF has just about managed to get a tolerable deal from Lodha is clear from this statement of the company’s Senior Executive Director Sriram Khattar. He is quoted by Business Standard as saying: “We are pleased with the transaction. There is a price discovery in large deals and whatever best price you find you go ahead.” (Italics ours)

Given the weak state of the property market right now, the number of buyers who would have been interested in buying DLF’s largish slice of real estate could have been counted on the fingers of one had. Oberoi Realty and Runwal Group were said to be the only two parties really interested - and neither was willing to buy the property beyond Rs 2,400 crore (including the debt).

Lodha walked away with the property because he appears to have had the liquidity to buy it off quickly. He has been on a property buying spree over the last few months. In June, he bought land in south Mumbai for Rs 600 crore and then Washington House from Uncle Sam for Rs 375 crore.

Lodha apparently has plenty of cash. He has already paid Rs 500 crore to DLF, and the balance will be paid over the next three months. In February this year, Lodha packed off Deutsche Bank with a cheque of Rs 2,542 crore, buying out the latter’s stake in Cowtown Land Development, a company which builds projects in Mumbai.

Lodha’s loaded, and this is helping him cut deals that are steals.