Godrej Properties, the Mumbai-based real estate developer announced launch of their BKC (Bandra-Kurla Complex) project in partnership with country's largest private air carrier Jet Airways.
Commenting on the project, Pirojsha Godrej, MD and CEO of Godrej Properties said the launch of the project comes at an attractive time. Especially, with positive news on reforms front and along with interest rate reductions that have started could lead to buoyant demand for both commercial and residential spaces.
The saleable area of the BKC project is 1.3 million square feet (sq.ft) out of which 250,000 sq ft will be used by Jet for their corporate headquarters. Commenting on revenues from the project he said, "We expect revenues from this project to be about Rs 3,500 crore-4,000 crore over the life of the project. We are looking launch the project at price of Rs 27,000-28,000 sq ft, which could substantially appreciates as the project unfolds," he added.
Below is the verbatim transcript of his interview on CNBC-TV18
Q: Can you take us through some of the details that we not get, what is the total amount of money you are expecting to make by when and what will be the margins on this project?
A: We are launching our project Godrej BKC. This is a project we are doing in partnership with Jet Airways. This is a piece of land that they had originally bought and we are now doing this in joint venture with Jet Airways.
The project in total is about 1.3 million square feet of saleable area in terms of the size of the project about 250,000 square feet of that will be used by Jet Airways for their own corporate headquarters and the remainder of which will be sold externally. We expect revenues from this project to be about Rs 3,500 crore-4,000 crore over the life of the project. We expect to complete construction by the end of 2015 and hopeful complete sales on the project soon thereafter.
I do not think at this time I can comment on the margins of the project because it depends on a large factor of things that will play out over the next three-four years. However, we are quite optimistic that we are launching this project at a very attractive time. The Indian economy, we think is now troughed out. We think the reform measures the government is taking combined with interest rate reductions that have started and will continue to unfold, we believe will lead to a very buoyant demand for real estate both on the residential and the commercial side.
From a supply perspective we also think the timing is very good because of the slight weakness the commercial market has seen over the last couple of years, there isn’t much by way of new supply that developers have committed. Once demand picks up, we think this project can do well and there will be substantial room for price improvement over the course of the project.
Q: If you could give us a picture of where the balance sheet stands after the launch of the project? Could you give us the net debt levels and how this project will make a change?
A: The net debt of the company at the end of last quarter, which is our last published number that I can talk about, is about Rs 1,500 crore. We think it is a very manageable number. From debt equity perspective, from the end of calendar year 2011 to the end of calendar year 2012, our gearing ratio reduced from 2:1 to 1:1. Our net debt has also reduced by Rs 500 crore. In the last two quarters we have had more than Rs 200 crore of operating cash flow surplus. So, we think our balance sheet is in very strong shape.
We do not anticipate any major impact in either direction in the short-term from the launch of this project. Certainly it will allow us to create funding through sales. It will be used to invest in the construction and development of the project but there will be investments required for the development as well. So, I would say from a balance sheet perspective in the very short-term it is probably neutral.
Q: What will it cost you to develop this property. How much of it will be your problem, how much of it will be Jet’s. Therefore if we can have an idea whether it won’t make any difference to the amount of loans that you may have to raise?
A: We already have a substantial amount of loan. Out of Rs 1,500 crore debt, we have about Rs 750 crore of debt on the project already, so we do not anticipate any incremental debt requirement for the project. We think the cash flows from the sales we generate will be more than sufficient to cover additional investment.
In terms of the project structure with Jet, it is a 50-50 profit sharing arrangement. Their profit and any fund to them will be received at the end of the project and will be based on at that time the surplus in the project after taking out all cost of debt.
Q: In the near-term do you think cash flows maybe a bit subdued because the investment you have made in the project and only once the project is launched could you see cash flows coming in and so the near term outlook maybe a bit challenged?
A: We are announcing today that we are launching the project. So the project is now open for sale. We are quite excited at this stage. We anticipate that we will see high amount of interest in the project and we will be able to generate cash flows.
There could be opportunities to generate cash flows far in excess of the funding requirement of the project in the short-term but I think it is premature to comment on that at this stage. However, for now we expect that we will be able to meet the funding requirements of the project in the short-term entirely through the cash flow it generates.
Q: Have you done some pre-sales? You sound confident that the money you will make will be more than the money you will spend in the first year itself.
A: We haven’t done any presales on the project, we are launching it today but we are confident that there will be demand for this kind of project. In any case, the incremental investment in the project is due over a large period of time. So, the payments for the floor space index (FSI) that we have purchased are due on an annual basis once a year over five years. The repayment of the debt we have on the project doesn’t start until four years from now. So there is ample time and the project has been structured in a manner that it will not require any further capital outflows from us at this stage.
Q: At the moment what is the per square feet realisation?
A: We are just about launching the project, we expect to launch the project in the range of Rs 27000 per sq ft. We think that could see substantial appreciation as the project unfolds, as the project gets near completion.
We think there will be general appreciation in the commercial market. Also particularly for commercial real estate prices do tend to move up quite substantially by the time a project is complete.
Q: There is some concern with analysts that over an above what Jet takes, you will be going for external leasing and in that there are other properties available at a slightly cheaper price. Do you think you will find adequate demand for external leasing for the project?
A: Certainly, we do think we will have more than adequate demand. We are offering a quality of product here that really hasn’t been seen in BKC yet. We are using Skidmore, Owings & Merrill LLP (SOM) as our architectural partner for the project. They have designed buildings like the Burj Khalifa in Dubai which is the tallest building in the world.
We have an outstanding corner plot in BKC which will afford our clients better views than most other projects there.From a sustainability perspective we are delivering a project that is very high end.
So we anticipate that this will be a preferred choice for high end corporate clients interested in world class development in what we now think is India's most prestigious commercial office address. We actually think that now the rental values that are currently available and the sale values that are currently available offer a very attractive opportunity for corporate clients because rates have been quite subdued.
If you look at it even compared to peak rates in say 2007-08, BKC values are today about at 25-30 percent discount to those values, whereas the residential market is at a huge premium. Of course there has been quite a lot of inflation since then.
We do think that once the short-term oversupply situation which has largely corrected and will fully correct itself which we anticipate will happen over the course of this project because of the short supply of new projects being launched that there will be quite substantial price appreciation in a location like BKC.
Q: How many floors is it, is it just one building?
A: It is nowhere close to the Burj Khalifa. It is just ground plus 19 floor structure with a couple of basements. My reference to Burj Khalifa was more a reference to what we hope will be an outstanding building from a perspective of design, sustainability and other things that we think our corporate clients care about.