Realty demand slow; volumes are down greatly: Godrej Prop

Pirojsha Godrej - MD&CEO, Godrej Properties.

Godrej Properties the real estate development arm of the Godrej Group, has created a Rs 770 crore development fund with a clutch of global investors, including Dutch pension services provider APG and Sparinvest Property Fund II.

Targeting their focus markets of Mumbai, NCR, Bangalore Pune and Chennai, the realty firm aims to develop residential properties in these cities. Godrej Properties has set-up an investment horizon of two years.

"We will fully invest the capital over that period of time and we think the projects would take four to five years from that time to execute, " says Pirojsha Godrej, the managing director and CEO of Godrej Properties.

The total life of the fund will be around six to seven years. He says that while the economic environment in the country is lagging, he feels property is quite a sentiment driven industry and should be fine.

"Property prices are holding up reasonably well. What has happened, however, is that demand is a little bit sluggish and volumes in most markets have dipped considerably," he says.

Below is an edited transcript of his interview. Watch the accompanying videos for more.

Q: What is the mood in the market itself? It is somber when you look at economic development parameters and capex parameters and not quite showing in property prices, certainly not in Bombay. Give us an idea of the markets that you operate and how property prices are behaving?

A: You rightly pointed out that the economic environment generally in the country isn't its strongest currently. But I think property is quite a sentiment driven industry. But that has not really reflected in property prices and that's true of almost all the markets we are in today. Property prices are holding up reasonably well. What has happened, however, is that demand is a little bit sluggish and volumes in most markets have dipped considerably.

My sense is given the way input costs have moved over the last year and given that prices have actually remained quite flat, it's unlikely that there is a room for a huge price correction, because developers' margins are under quite a bit of pressure. But that will depend largely on how the next few months go and whether general economic sentiment improves, because I do think ultimately property is a very sentimentally driven sector.

Q: Today Godrej is higher in terms of trade because of this property fund which you are floating with a group of investors of around Rs 770 crore. Take us through the nuances of it? When exactly would it become active?

A: The agreement on what the initial size of the fund is about Rs 770 crore and what kind of target projects we will do which is largely residential projects in the key cities of Mumbai, NCR, Bangalore, Pune and Chennai has already been put in place. Now what will happen is we will identify the actual project that we will do through this partnership and go out and actually get the land needed for those and start executing those.

We have already started working on identifying suitable projects. The great thing about this platform is it allows us as a developer to scout opportunities for land parcels at reasonable prices and be able to buy those without having to buy them on our own balance sheet, because Godrej Properties has always followed capital efficient land sourcing strategy.

This will allow us to continue to do that, but particularly in market conditions where we think there are some quite exciting opportunities to get land at good valuations this will allow us to add many new projects to our portfolio and we will also get a fee from our partners in this platform. The idea was to agree ahead of time on the types of projects we would like to do, create a platform to invest in those and then go out and do multiple projects with the same set of partners.

Q: Would they largely be Mumbai based projects?

A: We have talked about projects in five cities. The top three cities will be Mumbai, Delhi and Bangalore. The exact ratio of split between those three cities would probably depend on the types of opportunities we identify, but clearly Mumbai for us is one of our most important markets, both through projects under this platform and through our other joint venture development management fee and redevelopment models.

Q: Do you commit to an IRR or Investment Return Rate to your investors in this fund? Also share with us how your fee is structured?

A: There is no commitment or no sort of preferred or guaranteed returns at all in this structure. It's a pure equity partnership. Godrej Properties will put up 29% of the required capital. Our capital partners will put in the remaining 71%. We will get equity returns in proportion to our investments. Godrej Properties for handling the projects will also get a very substantial development management fee which will be calculated on a per square foot basis.


Q: You do have 29% equity. Give us a sense of who the other investors are and why exactly are you all focusing more on residential projects as opposed to commercial projects? What is the rationale for that in particular? How much are you estimating in terms of investment?

A: The total investment commitment for now is Rs 770 crore and Godrej Properties is liable for investing 29% of that total amount. We have setup an investment horizon of two years. We will fully invest the capital over that period of time and we think the projects would take four to five years from that time to execute. So the total life of the fund will be sort of six to seven years. Of course we have the opportunity to increase the size of committed capital in this platform if all our partners are happy with the outcome. We think there is a good chance that over time this could be increased further in terms of size.

As to why we are focusing largely on the residential space, there are few key answers for that. One, given our capital efficient land sourcing strategy, we think residential is the more appropriate strategy for us, because typically you can sell-off plans in the residential space and your customers can basically fund the construction of the project, which is a little bit more difficult to replicate in the commercial space.

Also depending on the particular year - 70-80% of all demand for real estate in India is in the residential space. So it's fundamentally a bigger market. Lastly we think the Godrej brand while a big source of strength across asset classes is particularly advantageous to us in the residential space. So, that's why you are seeing us focused primarily in the residential real estate.

Q: Give us an idea of how many million square feet or other measures of land will come in for sale in FY13 and FY14?

A: We don't give specific guidance on the numbers in terms of square foot of new projects coming online, but we think this year will be a very robust one for us in terms of new launches. In the last couple of weeks we have launched two projects, one in Mumbai and the other in Pune. We have a launch slated in NCR this month and several launches and new phases of existing projects to be launched during the remainder of the year.

Over the course of FY13, we expect to launch either in terms of new projects or phases in existing projects about 15 as compared to five to six last year. So we do have a fairly robust launch calendar. What is exciting for us about the current environment is that while there are certain challenges with demand being weak due to economic sentiment there are also a lot of opportunities on the business development front.

I think we have been very successful in capturing those and things like the announcement of this investment platform will further our ability to add new projects which in turn will increase the amount of launches we will have over the next couple of years. So I am quite bullish in terms of the number of launches we have got slated in the next two years.

Q: There are some brokerage reports which have pointed that out there is a possibility that the gearing of the company could increase in FY13-FY14 simply because there might be increased outflow of payments going forward. Do you foresee any stress on the balance sheet of the company going forward?

A: In March of this year, in quite difficult market conditions we were able to do India's first ever IPP and through that we raised about Rs 470 crore. At the end of last quarter we actually reduced our gearing level from almost 2:1 at the end of the third quarter to just over 1:1.1 to be precise at the end of quarter four. There may in the short-term be a slight increase in debt as we get into these new projects but certainly we have a very strong focus on ensuring a healthy balance sheet.

Our borrowing costs are amongst the lowest in the industry and we will continue if there ever is a situation where our gearing gets beyond that targeted levels, we will be sure to find way to raise equities to bring that under control as we have recently done in March. For now we think we are quite comfortable in terms of the strength of our balance sheet.

Q: Your revenues in FY12 for instance were about 10-12% higher than the previous year. What could be the run-rate in the current year either in terms of volume of flats you sell or square feet you sell or in terms of the money you expect to make? Your margins were around 23%. Does it go higher? Does it stay there? Give us a broad guidance, I am not asking for specifics?

A: Last year we actually grew revenue bookings and profits from operations all by about 46-50%. Our actual net profit last year declined because of higher input costs affecting margins and because we did lower number of private equity deals for the year, but I think we saw fairly robust growth on most operational parameters last year and certainly we would like to sustain that kind of growth. It will depend a lot on frankly how the overall economic conditions tend to be later this year. We expect things to improve. We do expect further interest rate cuts and if those things happen, we think the kind of growth number I mentioned are quite repeatable this year as well.