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Real Estate Sector In India

Group No. - 2

Real Estate Value Chain

Business Model

4th highest in terms of FDI inflow

Constitutes 8% to the GDP

Market Size$126 Billion dollar

High Input Cost:Increasing Labour CostLand Cost comprises of 40% of the total project now as compared to 20% in 2005Government intervention of building minimum 20% affordable housing putting extra burden on developers and ultimately on the rest 80%

The construction sector generates the highest level of direct and indirect employment for about 40 million people

Approvals and Procedural DifficultiesThere are almost 50 approvals or more need to be taken for starting a real estate project

Properties with Banks under NPARs 27,500 crores

Indian Real

EstateCurrent Position

High Cost of Financing

Debt Details

in Rs Cr.

Company Name Debt Annual Sales

DLF 7390 2360.9

HDIL 184 1152

Unitech 1568 874

Ansal Properties 401 652

Vascon Engineers 108.58 303.16

Prestige Assets 1134.83 2319.13

Parsvnath 1162.61 305.8

Godrej Properties 8.26 239.48

Oberoi Realty 52.46 1173.6

DB Realty 118.97 172.09

Sobha Developers 759.82 1799.34

Puravankara 957.71 972.34

Nitesh Estates 1.34 87.12

Orbit Corporation 262.46 1.81

Market Division and Growth Factors

Project Timeline

Oberoi Realty

• The group has its presence in Mumbai since past 27 years and till date; it has developed 33 projects with saleable area of 5 msf

• In Mumbai, Oberoi Realty has focused on 4 micro markets (Goregaon east, Andheri east, Mulund and Worli)• It has 13 ongoing projects with saleable area of 10 msf and 11 planned projects with an 10 msf.

What makes Oberoi Realty stand out

• Strong brand name in premium housing segment

• Low debt company Unlike other real estate companies in the listed market space, Oberoi Realty has a very strong balance sheet with cash balance of INR 3.7 bn and D/E of 0.1

• Revenue recognition happens early as they are not in the business of taking 20% now and 80% later

Residential

Office Space, Retail projects

Hospitality

Sale Model, JV with

Landowners

Lease Model

JV, Operating Agreement

Model

Oberoi Realty

Key Ratios and Financials

Particulars FY 17 FY 16

EBITDA Margin (Including Non Operating Income/ Total Revenue) 53.17% 49.29%

EBITDA Margin (Excluding Non Operating Income/ Total Operating Income) 51.18% 47.76%

PAT Margin 32.34% 29.75%

RONW 6.84% 8.64%

ROCE 6.22% 8.60%

Debt/Equity 0.15 0.09

• EBIDTA Margin for Malls and Commerzstood at 93% and 95% respectively

• EBIDTA for only residential business stood at 46%

• Debtor days 31 days Creditor days 471 days Inventory days 1,025 days

Key concerns

• Low footfalls post demonetization and increasing inventory would create short term issues• With RERA act coming into play, every company will be forced to deliver on time. On time delivery is one of the

distinguishing factor for Oberoi Realty which would be lost• Delays in projects due to formalities of getting RERA approvals

Unitech

Unitech started as a consultancy firm for soil and foundation engineering and has grown to have the most diversified product mix in real estate comprising of world-class commercial complexes, IT/ITes parks, SEZs, integrated residential developments, schools, hotels, malls, golf courses and amusement parks

Particulars FY 13 FY 14 FY 15 FY 16 FY 17

Operating Profit Margin Ratio 13.40 5.67 22.55 (33.42) (14.85)

Net Profit Margin Ratio 8.36 1.57 (4.74) (45.03) (25.38)

Particulars FY 12 FY 13 FY 14 FY 15 FY 16

ROCE 2.73 2.28 1.17 5.9 (6.63)

ROE / RONW 2.05 1.84 0.6 (1.17) (8.98)

Financials and Problems with Unitech

• Unitech has delayed completion of 74 projects which are either held-up or stopped across the country.

• Due to non-completion and non-delivery of flats within the stipulated time, the company has faced 958 litigation from home buyers with National Consumer Disputes Redressal Commission (NCDRC) alone.

• 13,337 units of home are yet to be offered for possession to the home buyers under these 41 projects

• Bank of America Merrill Lynch downgrades Unitech to underperform

• RERA act will further deepen the problems

Unitech

What is Unitech doing to resolve its problems

• Unitech is increasing its focus on project delivery against launch and sale of new projects

• Adoption of new models such as JDA (Joint Development Agreement) and partnering with other real estate players

• Unitech also partnered with Godrej Properties for completion of a project in NCR

• Even though there was focus on the execution front, progress remained stymied due to liquidity crunch

What Next??

• Falling margins need to be aligned Increasing operational efficiency• Outsourcing some of the operations to speed up the completion of projects

Lodha

353,100

283,100

1,400162,400

3.37

0.03

3.43

3.06

• Sales crossed ₹ 8000 cr. in March 2016, beating DLF Ltd and Prestige Estates Projects Ltd.

• The company’s four largest projects are Palava City in Dombivali, the Park in Worli (including Trump Tower), New Cuffe Parade in Wadala and World Towers in Upper Worli.

• Lodha group has projects in all 4 segments of Mumbai’s real estate and they have a good mix of high end as well as high momentum projects.

Fitch maintains “B” rating with negative outlook

Though the sales booking bounced back in February and

March this year with bookings of ₹ 6,920 cr. in FY17 from

₹ 6,430 cr. in FY16, the negative outlook reflect the near-

term risks to the company's credit profile, in particular

refinancing risk associated with sizeable maturities, including

financing for its London project, over the next 12 months.

Moody’s downgrades Lodha Developers to B2Moody anticipates that any reductions in home loans from the union budget on Feb 1st will not lead to any near-term material improvement at the high-end of the real estate market and LDLP is mostly represented across the luxury and mid-tier segments. Upgrading of rating will require credit metric like revenue/debt to be above 55% and homebuilding EBIT/Interest exceeds 2.0x on a sustained basis.

The Way AheadTaking advantage of GST

• As GST gets implemented, warehousing will be

determined by the efficiency of the operations as

compared to the location.

• According to Abhishek Lodha, the group is building a

new portfolio, under which a 150-acre warehousing and

logistics park is being developed near Mumbai.

• CBRE claims that demand of warehouses remained

strong in 2016.

Opting for HDFC Property $500 mn. Fund

• HDFC is set to launch a $500 million offshorefund that it has been planning since early2016, a company executive said.

• The fund will invest up to 40% in officespaces and the rest in residential projectswith a focus on affordable housing.

• Lodha group is planning to build 9 million sq.ft of office space and should consider thisfund.

Go for IPO• Lodha group can restructure it’s capital by

going for IPO and reduce leverage.• Lodha Group can look for investments from

marquee American investor KKR & Co.• KKR & Co. wishes to spend around $150

million in the IPO.• The stock market listing will also aid the

company’s plan of starting a real estateinvestment trust (REIT) as it seeks toexpand its commercial property portfolio.

Learnings from UK business

• Lodha Developers is expecting sales

revenue of 1.5 billion pounds (over

Rs 12,000 crore) in the next three

years from two ongoing housing

projects in the central parts of this

city.

• The company should take forward

its learnings about quality and

design from the London market to

India business.

DLF

• DLF has an asset heavy model as its portfolio is heavy on high end commercial spaces that are leased out.

• The company has Rs 14,000 crore of inventory in its ongoing projects which includes Rs 3,000 crore of inventory in ready projects (mostly commercial projects) .

• The company remains focused on its strategy of executing its ongoing projects to create finished un-launched inventory.

• On weak collections and continued spend towards construction and overheads (including interest), the company faced cash flow deficit in Q4 (on the expected lines), increasing the debt by Rs 700 crore to Rs 25,100 crore (includes net debt of Rs 7,000 crore in DCCDL).

• Strategies that are being executed currently are

• Create a high quality long term portfolio

• Reduce debt and improve the quality of debt

• Focus on Core market

• The company has improved its profitability by focussing on completing existing projects

• It has obtained the approvals for developing 2.5 mn sqft for Chennai IT SEZ

• But the strategy to not start new projects has impacted its estimated revenues for the next 2 fiscal years

• They also do not have presence in tier 2 and tier 3 cities and may miss out on the high growth that is expected

DLF

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Management Efficiency

Inventory Turnover Ratio Investments Turnover Ratio

Fixed Assets Turnover Ratio Total Assets Turnover Ratio

Asset Turnover Ratio Debtors Turnover Ratio

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2012 2013 2014 2015 2016 2017

DLF Revenues and Profit

Revenue Profit

Omaxe

• The projects developed by the Group span across 9 states including 30 cities. Group is presently at the helm of 46 projects which add up to a total of 31.8 million sq ft of space which is under development.

• The notable residential projects helmed by Group which are presently under construction include Forest Spa and Palm Greens in Noida and Spa Village in Faridabad.

• The group has a diverse portfolio in both commercial and residential project areas.

• Omaxe has reduced its debt equity ratio over the past 2 years

• It has improved its profitability as it has concentrated on tier 2 and tier 3 cities projects completion which showed high growth

• Omaxe has to improve on its ability to deliver its projects on time with the advent of RERA

Omaxe

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2012 2013 2014 2015 2016

Management efficiency

Debtors Turnover Ratio Investments Turnover RatioTotal Assets Turnover Ratio

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2012 2013 2014 2015 2016 2017

PA

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Revenue and Profit

Revenue PAT

Asset Light is Right• Asset-heavy and vertically integrated models offer superior control, but they tie up significant capital and

prove less flexible in a fast-changing environment.

• Asset light model offers the following advantages:• Better ROA : Assets are removed from the balance sheet

• Lower profit volatility : Costs are more variable in nature. Net income not dependent on utilization

• Greater flexibility : Low dependence on legacy assets improves flexibility Respond faster to changes in demand

• Higher scale driven cost saving : Benefits of assets ownership without intensive capital investment

Godrej Properties• Created in 1990, GPL pioneered the concept of Asset Light development model in the real estate sector

• JV model, Development manager fee model & Redevelopment model Share of revenue / profits from sale

• Outsourcing of architecture and construction to good vendors ensures a lean structure / operations

• GPL is the first real estate company in India to have ISO certification Enhances the strong “ Godrej” brand

• Early monetization of projects. A unique Co-investment platform offers better deals to PE investors

• CII – Sohrabji Godrej Green Business Centre (a group company) offers advisory services to the industry in the areas of green buildings, energy efficiency, water management

• ~15% revenue without any capital investments Design, marketing and sales of projects on a fee basis

Land Identification

Project Planning

Branding, Sales & Marketing

Approvals

Land Acquisition JDA with local

partners

Construction

Design & Structural

Pan India contract with Pelli Clarle Pelli &

PG Patki Architects

Pan India contract with L&T

Value Addition by GPL

Activities Outsourced

Mitigation of Investment Risk Mitigation of Execution Risk

TATA HOUSING

• In 2006, while RE sector was booming in India, Tata Housing had negative net worth of 10 crore

• Brotin Banerjee assigned with turning around the firm ( without using the TATA brand!! )

• No quality land bank, no borrowing capability and no employee willing to join the firm

• Initially company targeted the low margin affordable housing segment (Value Homes @ 5 – 15L / unit)

• When the RE sector crashed in 2008, the best on affordable housing paid off as demand remained strong

• Existing developers sold property in tranches, but THDC adopted “Construct quickly & move on” approach

• “Tata Value Homes” formed in 2009 to focus on affordable housing Contributed ~500Cr. To top line by 2012

• Company adopted a “ Joint development model” to develop projects on prime land without initial debt

• JDA’s were signed with land owners for a fixed amount with a ceiling (floor and cap model)

• Alternately, a JV was formed (majority partner) and with owner getting a fixed percentage of topline

• Company diversified into various segments ( premium & luxury ) to de-risk the business

• Created affordable housing brands like Shubh Griha & New Haven

• From a turnover of 36 Cr in 2007 company achieved turnover of 1100 Cr in 2016 CAGR 46%

Private Equity Investments in Real Estate

Three broad investment phases within Indian real

estate

Opportunistic investments

Structured Equity Investors

Long-Term Partnership

PE investment peaked in 2007–08 and then fell in 2009–10. Since then, a gradual and a steady growth in PE activity has been visible

1. Opportunistic investments

Sequence of events

• Through PN 3, DIPP allowed FDI into real estate in 2003

• Huge scope and underlying demand, India attracted PE both India and foreign

• Investment scene started upward trajectory with issue of PN 2, sped till GFC

Fund characteristics

• Majority of the funds denominated in US dollars and Singapore dollars indicating keen interest of foreign investors

• Few funds focused on residential and retail, 66% had diverse options

Wrap-up

• This phase saw investment activity peak in India, various eye catching deals

• Many investors gained multiple returns, a few suffered losses due to GFC

• Profit losses caused by- entry price point, developer credibility and intensity of due deligence

2. Structured Equity Investors

Sequence of events

• Scenario turned upside down owing to GFC , was a dry spell for investments

• Only USD 3.9 billion raised in over 5 years

Fund characteristics

• Limited funds but showed more focus

• More participation from Indian investors

• Structure equity became the preferred route 2009 ownwards

Wrap-up

• This phase saw bottom of investment activity and its recovery to some extent

• Attractive entry point for investors helped achieve good investment returns

• The structured equity route, a better focus on asset classes and geographical locations, and a more intensive due diligence were a few other key factors behind the good returns

3. Long term partnershipsSequence of events

•Phase started with positivity surrounding the elections and in anticipation of a government led by Narendra Modi.

•Fundraising activity started to pick at a good pace even before the election results and continued to get better following its outcome

•Focus on longterm partnerships, largely platform-level deals, with developers that have an established track record

Fund characteristics

•Creation of public markets for commercial assets in the form of REITs

•Appetite for industrial and warehouses is increasing; passing of GST Bill also helped seed up investment.

•Shortages in quality retail space and increasing rental values have attracted PE players towards the retail segment in the last two years

Wrap-up

•Despite demonetisation and an overall poor scenario in the real estate industry, PE inflows saw 62% increase

•With change in regulatory framework, country looking way more attractive to investors – both foreign and domestic – than ever before

•Developers under pressure due to RERA and demonetisation, developers would be open to providing good entry points to the long-term equity investors

Why PE firms are investing in India?

• Relaxed FDI norms

• Govt regulations on banks to reduce credit given to real estate sector

• Government’s push for affordable housing

• Shortages in quality retail space and increasing renta

How PE have helped real estate in India?

• PE makes up 75% of funds propping up in property market

• Refinancing debt

PE investment deals in real estate

• Warburg Pincus invested US $ 268.4 million in Piramal Realty for a minority stake in the company

• Blackstone Advisors India invested US $70 million in a commercial project of Salarpuria SarrvaRealty LLP.

• Kotak Realty Fund, has raised US$ 250 million for projects across India's top six property markets

Real Estate (Regulation and Development) Act, 2016The act was passed by parliament last year and the Union Ministry of Housing and Urban Poverty Alleviation had given time till May 1, 2017, to formulate and notify rules for the functioning of the regulator.

01 Establishment of the regulatory authority: Each state and Union territory will have its own regulator and set of rules to govern the functioning of the regulator

Compulsory registration:• It is mandatory for all projects pertaining

to commercial and residential real estate to mandatorily register with the Real Estate Regulatory Authority India[RERA].

• Builders are required to submit the original approved plans for their ongoing projects and the alterations that they made later. The details of all registered projects will be put up on a website for public access.

• Developers can’t invite, advertise, sell, offer, market or book any plot, apartment, house, building, investment in projects, without first registering it with the regulatory authority.

02

03 Reserve account:The promoter of a real estate development firm has to maintain a separate escrow account for each of their projects. A minimum 70% of the money from investors and buyers will have to be deposited.

Continual disclosures by promoters:Home buyers will be able to monitor the progress of the project on the RERA website since promoters will be required to make periodic submissions to the regulator regarding the progress of the project.

04

05 Standardisation of sale agreement:The Act prescribes a standard model sale agreement to be entered into between promoters and homebuyers.Penalty:To ensure that violation of the Act is not taken lightly, stiff monetary penalty (up to 10% of the project cost) and imprisonment has been prescribed against violators.

06

1. Commercial and residential projects including plotted development.

2. Projects measuring more than 500 sq mts or 8 units.

3. Projects without Completion Certificate, before commencement of the Act.

4. The project only for the purpose of renovation / repair / re-development which does not involve re-allotment and marketing, advertising, selling or new allotment of any apartments, plot or building in the real estate project, will not come under RERA.

PROJECTS UNDER RERA ADVANTAGES OF RERA IMPACT ON PRICE

1. Governance and transparency

2. Project efficiency and robust project delivery

3. Standardization and quality

4. Enhance confidence of investors

5. Attract higher investments and PE funding

6. Regulated Environment

7. Consolidation of sector

8. Safety of money and transparency on utilization

9. Balanced agreements and treatment.

1. Due to stipulated compliances and regulations, the project launches may occur with lesser frequency than before.

2. The sale of projects on a carpet area basis is likely to result in the per square feet price of the project going up by about 40% to 50% of the price based on the super built area.

3. In accordance with RERA guidelines, a price readjustment may be in order.

4. Transfer of risk will lead to price rise -Initially the risk on account of delays, quality, changes, etc. was borne by the buyer. Customers were forced to bear the cost of the default. Now, since the risk will be borne by developers, there might be consequential premium that flat purchasers might have to pay.

IMPACT ON INSURANCE COST FOR CONSTRUCTION AND LAND TITLE

1. Shift from debt financing to equity financing as prelaunchconcept may end.

2. Funds for land and approval cost to be made through equity,leading to rise in cost od capital.

3. Increase in launch time as finer details such as completedrawing, utilities layout, etc. will need to be finalized beforelaunching the project.

IMPACT ON REAL ESTATE AGENTS

1. Broker segment- unorganized and unregulated. Approx a USD 4billion industry, with an estimated 5,00,000 to 9,00,000 brokers.

2. Real estate agents need to register themselves, to be able tofacilitate a transaction.

3. Agents responsible for disclosing all the appropriateinformation to the customer and for helping them chose aRERA-compliant developer.

4. Less profit earned due to increased cost of compliance.

5. RERA to filter out the inexperienced, unprofessional, fly-by-night operators, as brokers not following the guidelines will facehefty penalty or jail or both.

IMPACT ON SMALL DEVELOPERS

1. Strong financial and execution capability is required to launch a project. With frequent delay in obtaining approvals, debt fundingnot an ideal route for developers.

2. Smaller developers would find it difficult to meet their cash flow requirements due to prohibition on pre-sales until a project isregistered.

3. Implementation of RERA may entail initial hiccups across the states and hence the more established and bigger developers would beat an advantageous position compared to the small and marginal developers when it comes to adhering to regulations.

4. Small developers may merge or tie-up with large developers and then co-develop properties. Expected to witness large scaleconsolidation.

IMPACT ANALYSIS

Real Estate Investment Trust (REIT)What is REIT??Investment vehicle allowing investors to earn income produced in a income generating real estate asset.

Reason for Introduction - Liquiditya. Attract private Investmentb. Free Up Capital c. Monetize Assets d. Increase in entry and exit opportunities for

developers

Reason for Introduction - Businessa. Transformation of Business from asset heavy to asset light modelb. Focus on core competencyc. Segregation of operations and infrastructured. Easier avenue to raise capital for small developerse. Many banks have hit the sectoral caps

Reason for Introduction - Financinga. Replacement of Bank debt to long term equity

capital – Lower cost of capitalb. Reduced exposure for Banks

Reason for Introduction – Corporate Governancea. Improvement in transparency, disclosure standards and

professionalism within the sectorb. Informed decision-making enabled for investorsc. Sign of maturity of Indian RealEstate Sector

Market Potentiala. Approximately $121 billion or 1.73 billion sq ft of occupied commercial real estate across office, retail and warehouse

segments could potentially benefit from the REIT opportunityb. The ready commercial space eligible for REIT investments amounts to 277 million sq ft, accounting for 44 per cent of total

office stock in India. The REIT-eligible commercial office stock is estimated to have a total value of $44-53 billion. In retailassets, the estimated value of REIT-eligible stock (completed and under-construction malls) is around $20-24 billion.

Proposal

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Grant infrastructure status to real estate sector – Will reduce the risk weightage assigned by RBI

Allow developers to raise funds through ECB

Streamlining of approval mechanism

Expedite digitization of land records

Release surplus land – monetize

Create robust physical and support infrastructure

GROUP NO. - 2

Mayank Kumar A031Gautam Chhabra C016Sumit Jakhar C026Kena Kothari C034Akshay Kumar C035Snigdha Narayan C044Ketan Yagnick C065Vikas Garg C023

Thank You