Lehman Bros to invest Rs 760 cr in Unitech's realty proj

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Lehman Brothers Real Estate Partners will invest USD 175 million (Rs 760 cr) n the company's Mumbai project. The project is jointly promoted by Unitech and local Mumbai partners Western Expressway JV.

Lehman Brothers Real Estate Partners and Western Expressway JV will each contribute 50% of the cost.

Unitech and Partners will develop this project via Western Expressway JV.

Talking about the real estate industry, Sanjay Chandra , MD of Unitech said they are delaying the USD 700 million Sigapore REIT for the next six to eight months.

Access to capital is not as easy, but a lot of private equity and debt is available, Chandra said. Also the cost of capital is higher, but enough is available for the larger companies. Office rentals are also higher this year than the last, he said.

Chandra informed that Lehman Brothers will put in Rs 760 crore for 50% stake in the Mumbai project.

Excerpts from CNBC-TV18's exclusive interview with Sanjay Chandra:

Q: There has been a lot of concern in the market about availability of capital for real estate companies over the last few months; could you just start by telling us what's happening with that USD 700 million cap-raising plan from Singapore that you had thought about earlier?

A: The USD 700 million cap-raising plans for a REIT which the Unitech Corporate Parks was planning. So it was an exit route for which we were raising; with the current market scenario we had actually way back in April announced that we will be delaying that till the markets are better but that cap rate fortunately was not coming into our cash flows. It was an exit to the funds so it did not affect our business at all.

Q: When are you doing it now?

A: No firm date yet, at least for the next six to eight months we have no plans of doing any REIT in the Singapore market.

Q: Are you adequately capitalised to execute all your projects over the next 6-12 months because there is some concern amongst investors on whether access to capital will be as easy as it was in 2006 and 2007?

A: Access to capital is not as easy as it was in 2006-07, but for quality players there is sufficient capital available. Public market seems to be a window that is not very open right now, but there is a lot of private equity which is real estate specific available; for instance, the deal with Lehman Brothers' real estate partners is one such example.

So private equity is available, debt is available and the cost of debt is up. In 2007 we were borrowing at 10% and now we are borrowing at about 13%, but for people with a good track record and with an asset base, there is enough asset-based lending available.

Q: Talking about Koliwada project - the money that Lehman is putting in - how much of Unitech stake do they get with the money allocation they have put in and do you still need to raise a certain amount of cash for this entire project aside from the money that Lehman is willing to pump in?

A: This project is for about 18 million sq ft development which would take us eight-nine years to develop. What we have agreed with Lehman to start our relationship with the Lehman Real Estate Fund is to get them to co-invest with us in the first million sq ft of that project and for a 50% stake in that project, Lehman is putting in Rs 760 crore of capital and then there would be commitment towards construction cost also. We own 50% of the entire 18 million sq ft project so that would value our stake in that project little over Rs 13,000 crore.

Q: To get back to fund raising issues - while there is certain amount of capital available via the PE source or debt, is valuation becoming a different issue? We just had a REITs IPO for another real estate company didn't do too well. It fell 10% on the first day and they had to price it on the lower end of the band. Do valuations for many of the real estate companies have to be relooked when they look to raise cash?

A: What we are seeing today is that the private market is giving better valuations than the public market. So today is the time to do more private deals than public deals. Public market is very volatile so you will not get the right valuation. So in the private market you can still get decent valuations today.

Q What's the state of the market now, we keep hearing conflicting reports on what's going on in the real estate market, would it be fair to say there is some sluggishness if not in prices, then in the off tick in the last three to six months?

A: Since December, to the last quarter of the financial year, fresh bookings were relatively slower, but the first quarter of this financial year the pace has gone up a lot more. So we are seeing end-user customers coming back because all the speculative demand was competing on a lot with the products. So the product which we had actually sold in the market in the past was actually coming back into the market. As that stock gets depleted we are seeing a pick up in residential end user sales.

In terms of office rentals, it's been as good as what it was last year and actually the rentals are higher than what they were prevailing last year. We are seeing a big demand, where earlier most of the office demand was coming in from the multinational tenants, now all of a sudden we are seeing a lot of the large Indian corporates also wanting to move into these better new modern buildings. So we are seeing a whole new range of customers coming in and currently we don't have an office availability for the next 14-15 months delivery. So that's a place where we still see a lot of buoyancy and the demand is very good.

Q: What about residential - in markets like National Capital Region (NCR), Hyderabad and wherever you have lot of presence, are you seeing sluggishness in sales and have prices started softening a bit?

A: If you compare the sluggishness in bookings to 1.5 - 2 years ago, it's not the same because at that time there were speculators led investor demand, now it's end-user led demand. Although prices have not come down, the secondary sale market has gone up a lot as the projects are close in completion. So the prices seen just in Gurgaon are up about 20%. But the pace of sale for fresh booking where the product delivery is about 2.5 years is not what it used to be two years ago.

Q: Which pocket in specific are you seeing sluggishness in and in the last quarter your key competitor DLF had indicated that they wanted to shift now from premium to middle income housing? Do you think that might be the right strategy to go with? Is it premium that is seeing the most slowdown in sales?

A: Premium also depends on the neighbourhood, for instance, we do not operate in the market of Central Delhi or South Mumbai. There the premium property prices are still going up, so it will be tough to say that premium is coming down in prices. But what is happening is we always were working more on the upper middle class category that's still doing well and that's a category, which not too many of the other developers were working on. So maybe they classify their premium as shifting towards this. But we have seen this being pretty healthy; the affordable, the Rs 50-70 lakh range is doing well and absorbing very fast.

Q: There has been some dilemma among market analysts who track your stock on what kind of an NAV should be now ascribed given the state of the market. There is a raging debate on whether the NAV calculation should be scaled down for your company depending on which report you pick up - it's between Rs 200 and Rs 280. Have you done any assessment on what your NAV could be per share and whether you think it needs to be revised southward?

A : For NAVs, what we are finding is a lot of the people don't exactly know how to take out NAVs of real estate development assets and what is very evident from the fact that we can get a much higher value for the same projects from the private equity market, there is some disconnect. For instance, the implied NAV for the project is about Rs 13,000 crore, that would be about a third of the market cap.

I am not sure what analysts have taken what as the NAV for that project, but the real NAV calculations is a challenge for most of the people on the street because you need a lot of real estate expertise and a lot of insight as well as information which is not available totally on the public domain including by laws and regulations, business plans.