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Real Estate: Plotting A Revival

DLF is scripting a growth story through a three-pronged strategy of monetising its completed inventory, reducing debt to zero level and augmenting its rental business

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The long winter for the real estate sector may finally be giving way to the green shoots of spring. Hobbled by a protracted period of stagnation and capital woes, the sector is showing signs of coming off a long bend in the road. This is true of, at least as far as its biggest player, DLF, is concerned. “We are today at a net debt of Rs 4,000 crore (after QIP and excluding DCCDL debt). Over the next few quarters we will be close to being net debt zero,” says Ashok Tyagi, DLF’s Group CFO. The debt issue “yesterday’s story”, he declares.

The Gurugram-based DLF, India’s largest commercial real estate company had run up a peak debt of Rs 25,096 crore in 2017, and its pipeline of new projects had all but dried off over the past three-four years.

But all that is set to change for the better. The company says it plans to start launching a host of new projects across Gurugram, Delhi and elsewhere by June-end. It also expects to become a zero debt developer by then.

However, this time around, DLF is proceeding with utmost caution. It’s charting its growth plan with a “low risk” strategy. “DLF will adopt a ‘low risk’ strategy of growing its cash flows by monetising its completed inventory, reducing debt to near zero in the development company and adding rental income via new build outs,” says Tyagi.

To augment cash flows DLF is banking on the sale of its completed inventory of approximately Rs 12,300 crore, more than half of which is in Gurugram and the rest in various cities across the country (Gurugram: 6.8 million square feet (msf), rest of India: 6.6 msf). It is bullish on the key markets it is operating in – Gurugram and other micro markets like Kochi, Lucknow and Panchkula which are showing signs of revival. According to Adhidev Chattopadhyay, an analyst with ICICI Securities, this would give DLF the first mover advantage going forward. Rajeev Talwar, a whole-time director and CEO of DLF concurs. “There is a growing preference for completed products as there is no GST for ready-to-occupy apartments. We are in a position where a customer can walk into any of our projects, choose his flat and move into his home in a couple of weeks,” says Talwar.

The company has mitigated all risks in the development business by changing its business model to “build and sell”. This will have an impact on the residential business. “The focus is clearly on selling high-value, high-margin products going forward,” says Talwar. The company has started work on a 8-msf project in Mid-Town in Delhi in which GIC has a stake. It has also embarked on a new construction cycle for certain projects in and around NCR and Hyderabad.

The rental portfolio of 32.8 msf across the country has also helped DLF mitigate business risks across geographies. “The company is bullish about the rental business and is looking to add more space in Gurgaon,” says Tyagi.

With GIC as a JV partner in the rental business, the company is looking to monetise its development potential of 19 msf over the next few years. Incidentally, the company has already pre-leased 90 per cent of its soon-to-be-completed 2.5 msf Cyber Park project in Gurugram and another 1.6 msf space in IT SEZ in Chennai. These two properties will contribute in excess of Rs 390 crore on stabilisation, the company feels. In March 2019, DLF announced another joint venture with Hines through its subsidiary DHDL, in which the latter will hold 67 per cent stake while the remaining 33 per cent will be held by Hines. Together they will develop 2.9 msf in Gurugram on a 11.76 acre plot. The total investment by the joint-venture partners in this project is about Rs 1,900 crore.

Tackling Debt
Efforts to prune the debt, however, has been a longstanding exercise at DLF. According to company insiders, DLF took a conscious decision in 2016 to become a net debt-free company over the next three years or so. “At the time, it was a bold decision; the real estate sector was probably at its lowest point of the decade,” says a sector expert. On 1st May, 2016 the Real Estate Regulation and Development) Act, 2016 was introduced. DLF suspended all sales to comply with the rules. The same year in October, the country went in for a massive demonetisation exercise. Over the next few months there were companies across sectors which were defaulting in repayments and servicing their debt obligations.

The company was faced with a challenge, and the management put together a hand-picked team to lead project “Game Changer”. In August 2017, the company formed a joint venture with Singapore’s sovereign wealth fund GIC for its rental arm DCCDL or DLF Cyber City Developers. The gross proceeds from the transaction were approximately Rs 11,900 crore. The promoters committed the entire amount to paring the company’s debt.The year 2018 started on a good note for the sector till it hit an air pocket mid-year — the NBFC and IL&FS crises. Liquidity had virtually vanished from the markets for smaller developers, which cast a shadow on the entire sector. The focus on sales continued during the year, with the management keeping an eagle’s eye on it. The company had achieved sales of Rs 1,788 crore by Q3 of FY 18-19. It had guided the market that it will achieve Rs 2,250 crore in sales and was well on the path to achieving it.

In March this year, DLF launched its qualified institutional placement (QIP) offering 17.3 crore shares to eligible qualified institutional investors at an issue price of Rs 183.40 per share and raised about Rs 3,173 crore. The QIP received an overwhelming response, it was over-subscribed by two times on the first day. Marquee investors like Oppenheimer, UBS, HSBC, Marshall & Wace, Myriad, Key Square, Goldman Sachs, Indus, Eastbridge, Tata Mutual Fund and HDFC Mutual Fund bought into it.

Worst Not Over
While the DLF’s graph is certainly on the mend, not all is hunky dory for the sector following the NBFC crisis. Developers are finding it hard to raise money, which raises the probability of a wave of defaults by various companies. According to research firm Liases Foras, developers need to repay about Rs 1.29 trillion to lenders. As a Credit Suisse report reiterates, NBFCs and housing finance companies (HFC) have played a major role in credit supply in recent years, accounting for nearly 25-35 per cent of incremental overall credit. While bank credit growth in the last two years averaged at a mere 7 per cent, strong 20 per cent-plus growth in NBFC credit aided overall credit expansion beyond 10 per cent. As per realty consultants ANAROCK data, more than 5.75 lakh residential units are running behind schedule across the top seven cities. These were launched in 2013 or before. A major factor contributing to this delay is the liquidity crunch developers are experiencing due to tepid sales. “While consolidation in real estate is already happening, it may gain pace more rapidly now because of the liquidity crisis,’ Anuj Puri, Chairman, ANAROCK Property Consultants said recently.

With liquidity drying up, sluggish home sales and mounting inventories, problems mounted when non-bank lenders increased exposures to developer loans which were not protected by rental revenues in recent years.

The key question for all and sundry is: Is the sector on the road to recovery? The last two weeks of March saw two major fund raisings from the market. Blackstone’s REIT of Rs 4,750 crore and DLF’s QIP of Rs 3,200 crore shows that the markets have an appetite for the reality sector. A number of reality funds focused on commercial, residential and affordable housing are armed with war chests and will cherry pick projects that can give a good return. These include Kotak Reality, Axis Reality and Motilal Oswal among others.  

However, the worst is still not over for the sector, and developers need to brace themselves to face consumer ire over delays and non-delivery. They need to get their act together and work towards completing the stalled projects.

Amidst the turmoil there seems to be a silver lining for DLF with its debt story behind it. DLF’s new business strategy of “low risk” high-profit margin products, positive cash flows may well work to their advantage in the near and long term as markets start picking up.  


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