The Mighty Real Estate up on its feet!

The real estate market in India has grown at a CAGR of approximately 10% from USD 50 billion in 2008 to USD 120 billion in 2017, and is expected to further grow at a CAGR of 17.7% to reach USD 1 trillion by 2030. The real estate market contributed approximately 6% to India’s GDP in 2017 and is likely to contribute approximately 13% to India’s GDP by 2025. Residential, commercial and retail are the three key asset classes that have primarily contributed to the growth of the real estate market in India. (Anarock Report)

Key growth drivers include – FDI, Rapid urbanization, Nuclearisation of families, Favourable Demographic dividend, Increasing per capita income,

As per the United Nations Development Programme, eight cities in India are projected to have a population base of over 10 million by 2035, and approximately 50% of India’s population is projected to be urban by 2046.

Real estate sector has come a long way after facing a lot of disruptions like RERA, Demonetization and GST. Drifting of the market from unorganized to organized sector and tailwinds in the industry after COVID 19 lead to multiyear demand highs. 

Key Reforms in the Indian Real Estate Sector :

GST :

GST came into force with effect from July 1, 2017, to remove multiple taxations and seeks to transform India with its one nation, one market and one tax principle. In the real estate sector, ready-to-move-in properties and land are exempt from GST.

Initially, for under-construction properties, GST was charged at 8% for affordable housing projects (under 60 square meters in non-metro cities and 30 square meters in metro cities) and 12% for other under-construction housing projects with a provision to receive an input tax credit (“ITC”). Post April 1, 2019, buyers of under-construction affordable housing projects (priced up to ₹ 4.5 million both in metro as well as non-metro cities) are charged GST at 1% and 5% for other under-construction housing projects, without the ITC benefit. Alternatively, for under-construction housing projects, where both construction and actual booking have started before April 1, 2019 and which have not been completed by March 31, 2019, GST may be charged at the old rates with the provision to receive the ITC benefit. The reduction in GST rates is likely to boost absorption in the affordable housing category.

Real Estate (Regulation and Development) Act, 2016 :

Real Estate (Regulation and Development) Act, 2016 (“RERA”) came into force with effect from May 2016. RERA was aimed to improve transparency, financial discipline and accountability in the real estate sector in order to increase buyers’ confidence and prevent developers from wilful misuse of funds that led to delay in project execution.

Some of the key features of RERA include: (i) registration of projects post receipt of all requisite clearances; (ii) advertisement of projects by developers post RERA registration; (iii) opening of an escrow account for a project to avoid diversion of funds; (iv) providing timeline for project completion; and (v) consent requirement of 2/3rd of the allottees to modify the layout.

Benami Transactions (Prohibition) Amended Act 2016 :

The objective of the Benami Transactions (Prohibition) Amended Act 2016 (“Benami Act”) was to curb the use of unaccounted cash transactions associated with properties and bring transparency in the real estate sector. While the Benami Act is still in nascent stage of implementation to estimate the impact on the overall real estate sector, it is likely to improve transparency and increase institutional investments in future.

Demonetization :

The Government of India banned all ₹ 500 and ₹ 1000 currency notes in November 2016, to curb black money and check the circulation of fake currency. In the long term, this reform along with RERA has helped in organizing the real estate sector, resulting in more institutional inflows in the sector.

No access to capital for tier-2 unbranded developers :

Due to lack of experience in executing and completing the projects, tier-2 unbranded developers delayed their projects significantly, which resulted in loss of customer confidence. Further, in order to compete with tier-1 branded developers, tier- 2 unbranded developers often resorted to price-cuts, which further eroded their profitability. However, they were able to continue with this business model due to ample liquidity present in the system prior to 2018. While project delays jeopardized cash flows for these projects, NBFCs continued to refinance and provide incremental capital for project completions. In September 2018, the Infrastructure Leasing and Financial Services (“IL&FS”) crisis caused a severe liquidity crunch.

Thereafter, NBFCs significantly reduced real estate funding during the under-construction phase, which led to low sales and poor cash flow management for the developers, especially smaller developers with limited access to bank loans. Since tier-1 branded developers were able to sell substantially at the time of launch and throughout the under-construction phase, limited financing was required for the completion of under-construction projects. Most of the tier-1 branded developers also had access to bank loans, and were able to complete under-construction projects on time.

Top Seven Indian Markets - The Mumbai Metropolitan Region (“MMR”), Pune, Bengaluru, Hyderabad, the National Capital Region (“NCR”), Chennai and Kolkata

With a share of 24% of total supply (by units), 32% of total absorption (by units) and 46% of total absorption (by value) in the Top Seven Indian Markets, the MMR was the top performer in overall residential activity in 2020.

The average base selling price in the MMR was approximately ₹ 10,610 per square feet. Hyderabad reflected the lowest average base selling price of ₹ 4,195 per square feet among the Top Seven Indian Markets.

Type of products - 

Businesses can be classified into the following:

• Residential portfolio, consisting of - Affordable and mid-income housing projects; and Premium and luxury housing projects.

• Logistics and industrial park portfolio.

• Commercial portfolio, consisting of: Office projects; and Retail projects.

MMR – Overview

From a residential real estate perspective, the MMR can be broadly divided into seven different micro-markets based on geography, profile of population and type of real estate development namely South Central Mumbai, Western Suburbs (Bandra, Khar, Andheri, Jogeshwari, Vile Parle, Goregaon, Malad, Kandivali and Borivali), Eastern Suburbs (Kurla, Powai, LBS Marg, Ghatkopar, Vikhroli, Mulund, Sion and Bhandup) Thane (Thane, Ghodbunder Road and Wagle Estate), Navi Mumbai (Vashi, Airoli, Panvel, Belapur, Rabale, Mahape, Turbhe, Ghansoli, Sanpada and Kharghar), Extended Eastern Suburbs (Shil Phata, Palava City, Dombivali, Kalyan, Asangaon, Badlapur, Titwala and Karjat), Extended Western Suburbs (Vasai, Virar, Mira Road, Bhayander and Naigaon)

Prominent real estate developers: Lodha group, Piramal Realty Limited, Oberoi Realty Limited, Indiabulls Real Estate Limited, Hiranandani Constructions Private Limited, Runwal Group, Godrej Properties Limited, L&T Realty Limited and K Raheja Corp Private Limited.

Warehouse and Logistics Market in the Top Seven Indian Markets

Logistics has a huge impact on the economy of any country. Historically, logistics sector was primarily restricted to transportation and warehousing. However, in the present scenario, logistics management covers all aspects of the value chain including transportation, distribution, warehousing, reverse logistics as well as value-added services such as payment collection, packaging, documentation, customer brokerage facilities, kitting, repair management and reconfiguration. The development of state-of-the-art IT facilities and data centres in recent years have had further positive impact on the logistics industry.

As of 2019, the total Grade-A warehouse stock in India was approximately 110 million square feet, of which 77 million square feet was attributed to the Top Seven Indian Markets. Grade-A warehouse stock is approximately 40% to 45% of the overall

(Grade A and B) warehouse stock in India. Third-party and fourth-party logistics, e-commerce and manufacturing, automobile and retail sectors are among the largest occupiers of warehousing space in India, accounting for approximately 75% share.

Absorption of Grade A and B warehouses in the Top Seven Indian Markets in India has increased at a CAGR of approximately 28% from approximately 20 million square feet in 2017 to approximately 33 million square feet in 2019.

Growth Trend of the Key Drivers for the Warehousing Sector: Among the key drivers, Third-party and fourth-party logistics sector has been forecasted to grow at a CAGR of 11.5% from 2020 to 2025, whereas the e-commerce sector is expected to grow at a CAGR of 25% reaching USD 200 billion by 2027. (Source - Anarock)

Growth Trend of the Absorption of Built Infrastructure for Manufacturing and Warehousing Sectors: Absorption of built infrastructure for manufacturing and warehousing sectors in the Top Seven Indian Markets grew at a CAGR of 28% during the last three years. Absorption in the NCR and the MMR grew at a CAGR of 15% to 20% during the same period. (Source - Anarock)

Here, I present a brief about real estate sector from understanding the business model of Brigade enterprises and Sunteck Reality. From different cities and a few differences in the working, I have tried to use numbers and snippets from conference call to fetch the differences.

Brigade Enterprises Ltd

Brigade Enterprises Ltd was established in 1986. It is a real estate developer in South India, based in Bengaluru, and expanding its area of operations in other parts of India. It has completed over 250 buildings aggregating to over 70 mn. sqft of developed space in residential, offices, retail, and hospitality sectors across Bengaluru and Mysuru, Chennai, Ahmedabad, Hyderabad, Kochi.

Mcap 10000 Cr

BV – 121

Mcap/ CFO – 10.2

Sales – 2999 Cr

PAT – (-98.5) Cr

D/E – 1.8

P/E – 100+

Business Segments
Residential (74% in Q3 FY21): Launched 1.2 Mn sft during Q3 FY21
Lease Rentals (21% in Q3 FY21): Active leasing pipeline of ~ 1 Mn sq ft
Hospitality( 5% in Q3 FY21): Holiday Inn Express & Suites

The Co. has a total land area of 365 acres, with 72% of it in Bengaluru. The total developable area is 38.9 Mn sqft with 78% in Bengaluru and 10% in Chennai.

The company made a Capex of 668 Crs and 1013 Crs in FY21 and FY20 respectively. In FY21, the company spent 577 Crs for its leasing division,80 Crs on the Hospitality division, and 9 Crs on the Real Estate division.

The company proposes to launch 4.5 mn. sq. ft. in FY21. It will comprise 2.6 mn. sq. ft. of residential space, 1.8 mn. sq. ft. of commercial space.

Sales distribution -Total sales, for the year, about 40% came from outside of Bangalore and 60% came from Bangalore by value.

About management :

Mr M R Jaishankar hails from Chikmangloor, started from coffee plantations and turned to real estate developer in 1987. He is first generation developer with main focus in Karnataka (Bangalore specifically). He made first 14 floor project in Bangalore in 1987 and since then continues to be in real estate development. Having seen several recession and recovery cycle in 1991, 1998, 2008 and 2016, Mr Jaishankar has ample amount of experience to be in the business.

The board has gone through churn with 3 youngsters coming in and qualified niche appointments in lease and Hospitality sector. ESOP policy introduced in real estate market by Brigade.

Mix of residential and commercial projects provides diversified portfolio. In terms of technology adoption , it is the first company to use SAP accounting software and digital transformation going on in customer management and construction. Indian real estate just values 1/10^th of Chinese real estate market.

FY22 has surpassed all yearly performances till date with the highest ever sales value as well as collections. Company recorded 4.7 million square feet of net new bookings after cancellations with a value of Rs. 3,022 crores. The residential business also registered best performance in collection upwards of Rs. 1,000 (Q4) and for the year in whole, the collections were Rs. 3,152 crores.

In financial year 23, expect to launch about 8 million square feet of residential business of which 2 million square feet will be in plotted development across 3 projects in Bangalore and Mysore.

Growth trajectory

“We registered net bookings of 3.13 million square feet with a value of 1957 crores in residential segment for the nine-month period ending December in financial year 21-22 and for the third quarter of FY22 net bookings of 1.08 million square feet having a value of Rs.680 crores is done. This is growth of 10% by area and 17% by value versus the nine-month period of FY21. We have a strong pipeline in excess of 800,000 square feet or 0.8 million square feet. The trend is consistent with robust hiring across IT and ITES and financial sectors and therefore the need for additional space.

Looking to grow 20% in FY23. Took 3 years to go from Rs. 1,500 to Rs. 3,000 crores. In 2018-19, in residential company clocked sales of about Rs. 1,454 adding everything together they have about Rs. 1,500 crores.

High Debt

The company's net debt outstanding as on 31 March 22 is Rs. 2,540 crores out of which BEL’s share is Rs. 1,619 crores. Real estate debt reduced by 45% during FY22 from previous year and stood at Rs. 272 crores as on March 22 driven by higher sales and collections. Almost 78% of debt pertains to commercial portion of which 74% is debt by rental income. A credit rating of A+ with stable outlook which has been assigned by both CRISIL and ICRA.

Inflation

All raw material cost like steel, aluminum, copper, finishing material and fuel and among others have seen huge increases due to the global supply chain issues, made worse by the geopolitical situation in Europe. As a result, the total construction cost has increased almost up to 15% and are expected to raise or at least remain at elevated level for the next 12 to 18 months.

Commercial contracts

In terms of the lease tenure, it's normally 5 years and in many cases it is 5+5 and so far, the renewals are concerned, this year they have already achieved 98.5% renewals. There were almost like 4.68 lakh square feet renewals that have come up.

East of Bangalore, (Rs.60+psf), if it is north of Bangalore, (Rs.75+ psf), Chennai (Rs.85+ psf). It depends upon like which property, which micro market. Like in east Bangalore, achieving almost like 3% to 4% premium over the weighted average rental of the micro-market.

The max pipeline is at a Brigade Tech Gardens, followed by Chennai and then Gujarat.

Land Bank

In Hyderabad they will be adding residential space of maybe (1+) million square feet, 1 to 1.5 million square feet and some in Chennai it will be a combination of residential and commercial, all together maybe in the range of 4 to 6 million square feet but they are in design stage and some of the projects are in design stage and bit of in due diligence.

Bangalore also their major projects to be launched, the Cornerstone Utopia Phase 2 which is almost 7 million square feet. There is some road approach issues in what they call here as the CDP Road, the Development Plan Road issues near the entry. That is almost resolved but that may also take about the 9 to 10 months or so for lunch. And overall,” I feel we are in the process of tying up or tied up about 15 million square feet of new projects across these three cities.”

Total inventory which is available, which is unsold at around 5.8 million square feet that is kind of lowest in the last 5 to 6 years.

On debt

“It is the requirement is upwards of Rs. 500 crores, more than what is raised in the QIP and I did say we are able to meet the requirements from internal restheirces. Currently it is 0.14:1 is the residential debt. If you ask me even if it is the 0.5:1 or 0.6:1, it is considered a very acceptable. Many developers who are only in residential, they have a much higher debt-equity ratio of even probably 1:1 and more."

New prospects

Their Real Estate Accelerator Program, Brigade REAP set up India's first PropTech syndicates fund on the LetsVenture platform. Strawcture which is a REAP startup working in creating sustainable construction material using agri-waste raised 30% of its total fundraised via this platform and it was successfully closed in just 30 minute.

Brigade REAP has enabled 11 start-ups from their portfolio to raise capital and one exit one of them light store has opened India’s first flexi retail store at their flagship mall Orion at Brigade Gateway likes to offers disruption in the retail industry by giving premium retail spaces which can be rented out on an ultra short-term basis this shows their prime retail spaces can be democratized by brands would otherwise be present only online. The Indian music experience or IME founded and supported by Brigade to count two major community focused projects Yuva and culture supported by the British Council and projects Varitha, both projects brought the aim at making the museum at democratic inclusive base that enctheirages diverse voices.

Warehousing and Data Centres – A new vertical

There are developers in China who have got warehousing and logistics of 450 million square feet, just one developer whereas in India we are not able to scratch the surface. Everybody together we are under 100 million square feet, so if you consider in China it has exceeded 1000 million square feet of warehousing and all that, much more.

IRR “Data center has to be viewed in its own merit and sometimes, it may be more beneficial, IRR, sometimes it may be slightly less, but as long as we meet IRR requirement of the developer and the investor, there is nothing wrong, give or take 1% or 2%, it is another avenue of business.

Demand and Interest Rates

It all depends how much RBI increases the rate and see because retail market is a very competitive margin are today going to the wholesale retail market because retail market has become very competitive and for them to increase price is very difficult.

Property Tax

The property tax applicability depends on location. There are 6 zones in Bangalore, A, B, C, D, E, F, so the rates change from zone A to zone F. Zone A is always the central business district and zone F is the peripheral area. So, that is the variation the authorities had kept for residential and office building whereas when it comes to hospitality, erroneously they have kept one rate for all hotels, so that has been challenged.

Joint Venture model

“Basically frankly I must say recession no recession land owners expectations are always high, ultimately it is only what we can afford to give based on the feasibilities of project is how it is but I think if the market improves happening now the expectations can go bit high but if I am right lesser and lesser number of people are still in a position to buy a large tracks of lands, many developers are not fully out of woods the situation is not all that rosy for many it is organized developers who have given value to the customer over a period of time and those who have demonstrated the ability to complete projects even in tough times have been rewarded so many others are not in a position to buy lands so that way it is the only select group are in a position to acquire new lands so that way the number of buyers have reduced considered whereas the number of sellers maybe increasing.”

Real estate sector seems much more attractive after the pandemic as new normal is coming in and IT hubs like Bangalore and Hyderabad can get maximum benefit out of the churn. With mix of old and new gen on board, diversified land bank and leap into technology , Brigade can play positive lollapalooza over coming years.

Some antithesis pointer include high competition, uncertainty due to pandemic, high debt and valuation discomfort.

SUNTECK REALITY

Sunteck Realty Limited is a Mumbai-based real estate developer focused on developing premium residential and commercial properties across Mumbai Metropolitan Region (MMR).

The Co has developed various brands in order to differentiate its product offering and develop stronger brand recall. Its offering include:
Signature - Uber luxury residences that are aimed at HNIs.
Signia – Ultra luxury residences in select suburban micro markets.
Sunteck City - Large mixed-use developments offering premium luxury residences.
World - Aspirational luxury residences.
Sunteck - for commercial developments.

Company’s portfolio :

Commercial & Rental projects: 28%
Residential Projects: 72%

The Co has 3 proven development clusters namely:
BKC cluster - 1.5 msf saleable area of which around 80% is already sold
Oshiwara District Centre (ODC) - 6 msf saleable area of which more than 40% is already launched and, from the launched inventory, more than 65% is already sold.
Naigaon cluster - 10 msf saleable area of which 30% is already launched of which over 85% is already sold.

Asset Light Model
The Co has entered into various joint development agreement (JDA) projects at Borivali, Vasai, Vasind and Kalyan. These projects do not involve any material upfront cash outgo as the Co gives the landowners a share of customer collections and no material upfront cash. This helps the Co in better cash flow management. 

Focused on maintaining an asset light business model by entering into JDAs with low-capex requirements. It will acquire land only if opportunity is extremely compelling.

In January 2021, the Maharashtra cabinet approved a 50% reduction in the premium fees paid by developers for ongoing and new projects between August 1 and December 31, 2021. As a result, Sunteck will be pre-paying premiums to the tune of 250 crores during FY22. The Co is confident of generating 35% ROE on these payments.

Mcap 6000 Cr

BV – 191

Revenue – 513Cr

PAT – 25.1Cr

P/E – 247

D/E – 0.18

EBITDA margin across all the projects are about 34%.

SUNTECK 3.0

Sunteck 3.0 is focused on three key priorities:

· One, maintain a strong balance sheet and cash flows.

· Two, continue to do marquee acquisitions in line with business development strategy.

· Third, building an exceptional team.

Mr. Kamal Khetan iterated “we have achieved strong sustained growth in both pre-sales and collections. In fact, on both the parameters this is our best ever performance till date.” explaining the kind of tailwinds real estate sector faces.

7 on going projects - Sunteck City 4th Avenue and Sunteck City Pinnacle at ODC, Sunteck Maxx World and Sunteck ONE World at Naigaon. Sunteck Icon and Sunteck BKC51 at BKC Junction and Sunteck Crest at Andheri.

Presales + Collection (FY22) = 1303Cr +1053Cr (best till date)

What lies ahead !

Rs. 1,800 crores sales of which at least 35% to 40% should come from the new launches. “Acquisition of close to 23 million square feet and aggressively looking at acquisitions and you will see this momentum continue for next at least 12-18 months going forward.”

Targeting around Rs. 1,800 crores of pre-sales and some Rs. 28,000 crores of sales from the projects which are undertaken for many years to come. ( specifically 8 to 9 years because these are all projects which are like 50 acres, 100 acres and 150 acres i.e. Naigaon, it is 150 acres. 50 acres in Vasai and more than 50 acres in Shahad Kalayan)

Management talks about aggressive approach, maintaining balance sheet and nominal debt i.e. funding new acquisitions or JDA through internal accurals.

Accounting Methods

In project completion method you recognize the revenue and everything at the completion whereas some of the administrative costs and advertisement and marketing costs are accounted in the current year itself irrespective of the project getting completed or not. That eats into the profits of maybe the other projects but going forward because it will get balanced once every year the projects will be getting completed.

Customer advances are now getting booked into the balance sheet because of that the other current liabilities have gone up because earlier what used to happen is that customer advances used to get amortized.

Cash Position and Capital requirement

“We don't need cash in spite of our acquisitions and that we are maintaining that we will continue to maintain our debt levels similar in spite of new acquisitions that is our strategy. We are hungry for the growth and we will continue to grow.”

No need to raise new capital i.e. to form a low debt high growth model. As the entire industry is going through tailwinds pre sales and collections will continue to pump the cash which will be used for further development and acquisitions. “The moment we do pre-sales, we are cash positive almost in every project what we launch.”

Approval and delivery cycle

It takes at least 6 to 9 months for approvals. “3 out of the 4 which is Andheri project which is Sunteck Crest and the BKC-2 junctions projects which are on the both the junctions of BKC, it is Sunteck Icon and Sunteck BKC51. All three these projects are almost 80%-90% complete. All the slabs are almost done. And I think we are very confident at least these three projects will be delivered in this current financial year itself and Pinnacle also maybe early next financial year.”

Sales and Interest rate cycle

“In spite of increasing the prices by 5%-10% across all our projects which gives more profit and it also absorbs the inflation of the increase in construction cost.”

The majority of companies reported best numbers in last 10-12 years. The main reason for it being the robust demand. It is very difficult to catch the top of demand cycle and I feel if we are not at peak but somewhere near the peak. As more players enter the field and inflation high interest cycle the cyclical trend may revert back. It is much better to observe for a few more quarters and see how demand supply cycle tend to go.

Disclaimer – Views are personal. This is just for educational purpose.