Pain in India Property Market Spells Opportunity for Godrej

Pirojsha Godrej

Pirojsha Godrej.

Photographer: Abhijit Bhatlekar/Mint via Getty Images
  • Distressed India property to boost deals for developer
  • New property bill may speed up consolidation in industry

For Pirojsha Godrej, who leads India’s third-largest developer, the pain in the real estate market is spelling opportunities.

The son of billionaire Adi Godrej and chief executive officer of Godrej Properties Ltd. expects the firm’s best year ever for new project acquisitions as sluggish sales and a newly passed regulatory bill forces smaller developers out of business. The real estate arm of the Godrej conglomerate joins a select group of large developers weathering the downturn, as smaller players are struggling with unsold inventory and a funding squeeze and buyers flock to brand-name firms that can successfully finish projects.

“Conditions aren’t going to get any better than this; there is some amount of distress with many banks taking over projects, some of the promoters have lost control of their companies,” Godrej, 35, said in an interview in his Mumbai office. “We have a strong ability to invest capital at this point and we are very happy with our sales in a weak market.”

Developers without scale may struggle to stay afloat as new regulations passed last month place costly restrictions on them, said Godrej, who estimated that only a few hundred of the few thousand developers will survive the tough conditions. Godrej, by contrast, is seeing brisk business, with residential sales more than doubling in the quarter ended Dec. 31 from a year earlier.

“Weaker developers are facing a harder and harder time both in terms of accessing customers and capital at reasonable costs,” said Godrej. “With the real estate bill coming in, it will only increase pain for them."

Regulatory Bill

The introduction of the new bill requires more disclosure from developers and penalizes them for failing to do so or attempting to change the terms of contracts that have been agreed upon. Developers currently pre-sell homes to buyers at lower prices before obtaining approvals, to fund land acquisitions and generate money to complete other projects. With the new law, they will be allowed to sell only after getting all approvals, and have to use 70 percent of the proceeds to finish the project. That will restrict their ability to divert funds to other unfinished development and crimp cash flows.

India’s real estate market has been sluggish as the inventory of unsold homes rose across all major Indian cities, according to data from Liases Foras Real Estate Rating & Research Pvt. The number of months it would take to sell all the stock rose 16 percent to 43 months as of Dec. 31 from a year earlier, the data showed. A healthy market normally should have about 12 months of inventory, the research firm said.

Developers’ cash flow from operations has not been sufficient to cover their finance costs since the fiscal year ended 2012, according to a Moody’s Investors Service report. The aggregate cash flow from operations for six developers tracked by Moody’s was at 3 billion rupees ($45 million) in the fiscal year ended March 2015, dropping from 30 billion rupees in 2011, while total interest costs rose to 36 billion rupees from 29 billion rupees in 2011, the data showed.

Anand Piramal of Piramal Realty Ltd. and Sunteck Realty Ltd.’s Kamal Khetan are among those who have said they would seek to purchase distressed assets or tie-up with developers that are struggling to sell homes.

Godrej, among the largest land-owners in Mumbai, sold 93 percent of the units it marketed in the first phase of its 35-acre ‘Trees’ project in the northern part of the city, an area in which the developer owns 3,500 acres including a privately controlled mangrove reserve that is five times the size of London’s Hyde park.

Top Markets

The firm will focus on its top four markets of Mumbai, National Capital Region which includes Delhi and its surrounding areas, Bengaluru and Pune, Godrej said. The developer joined with smaller developers for projects in Noida, near Delhi, and Mumbai in the last quarter and expects to sign many more such joint-venture deals this year.

The developer’s shares rose 1.3 percent to 318.95 at 11:14 a.m. in Mumbai trading, heading for the highest close in almost three months.

Godrej Properties posted a 53 percent increase in profit to 2.13 billion rupee in the nine months ended Dec. 31. Net debt rose 14 percent to 25.32 billion rupees in the December quarter from the previous three months even as average borrowing costs declined to 10.34 percent from 10.55 percent. The level of debt is not a concern for the firm because of its strategy of using low-cost financing, Godrej said.

“We expect next year to be better if rates come down and GDP picks up," Godrej said. "Its an exciting time to take advantage of the current weakness to gear up for the upturn."

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