Affordable housing key to real estate recovery

People in India swear by the success of the real estate sector, and understandably so, for it is the country’s second largest employer and contributes to approximately 5% to its GDP. The sector received foreign direct investment (FDI) of about Rs213.7 billion (US$4.5 billion) between April 2007 and March this year, second only to the services sector.

However, with the collapse of Lehman Brothers in September 2008, cracks in what was until then a rosy lens appeared to show, and what followed crippled the liquidity centric real estate market in India completely. With demands dipping to record lows and FDI drying up, real estate players were forced to think out of the box and devise innovative strategies indicating a sea change of guard.

Raising funds

The year 2007 witnessed real estate companies raise substantial capital from the primary market with DLF hitting the market first and many following suit until mid-2008, when we saw the equity market meltdown closing the primary market almost instantly, even forcing already floated IPOs to withdraw.

Reeling under the liquidity crunch and given the weak market conditions and sentiment, many listed real estate players took to the qualified institutional placement (QIP) route, i.e. public companies raising capital through, equity participation from a few large qualified institutional buyers (QIBs), either by way of issue of equity shares, fully and partly convertible debentures, or any securities other than warrants which are convertible into equity shares. The QIP route has gained popularity because it enables an issuer company to raise capital in as little a week and requires far less approvals from the Stock Exchange Board of India. This has not only helped companies meet their immediate debt liabilities but also to keep the working capital rolling, in times where investors and customers were shying away from making investments into real estate.

Not only do the companies benefit, but also the QIBs. The August 2008 amendment to the Disclosure and Investor Protection guidelines, enabled the issuer and QIB to mutually arrive at a valuation, close to the real market price, which can be as recent as the two-week average share price, as opposed to the six-month average prescribed prior to the amendment.

For the 24 companies which raised capital of a staggering Rs170 billion through the QIP route from March until the first week of September, the current mark-to-market value put together works out to Rs232 billion for the same period, which means returns of more than 35%. Only five QIPs are trading below their issue price, according to SMC Capital’s report on QIPs.

The most popular QIPs were those placed by Unitech, Ansal Propeties, Indiabulls Real Estate, PTC, HDIL, and Sobha Developers. It seems the road for QIPs has only been cleared as there are approximately 50 companies waiting to go the QIP way.

Creating demand

Hit by the global economic downturn, which led to the resultant drop in purchasing power, instability in jobs and growing interest rates, real estate players were quick to realize that affordable housing was their best hedge against unpredictable markets conditions. Many real estate companies have changed strategies and embedded this mantra in their core ideology for any future expansions. 80% of the real estate developed in India is residential space and the rest comprises offices, shopping malls, hotels and hospitals. Although most of the big players made attempts to diversify into ancillary sectors like hospitality, special economic zones, hospitals and retail, recently many such projects have been up on the blocks for sale with the majority of such players sticking to hardcore real estate activities and either shelving or putting on hold their plans for diversification in the near future.

Reports from Goldman Sachs and McKinsey in 2008 have speculated a shortfall of approximately 30 million and 25 million units, respectively, of affordable housing in India. Further, according to a Knight Frank report the market size is set to reach Rs300 billion by 2011. A common theme emanating from these reports is that there is a clear dearth of affordable housing besides painting an ambitious picture for this segment in the long term. The annual report 2008-2009 circulated by the Ministry of Housing and Urban Poverty Alleviation states that as part of an economic stimulus measure, Rs50 billion has been sanctioned by the ministry for building 10 million affordable houses in partnership with the government, and private, co-operative and financial services sectors.

With the economy regaining a positive mood on account of synchronized measures taken by governments across the world, real estate companies are betting big on affordable housing for reasons ranging from the re-election of the previous government, rising employment rate, increases in FDI and attractive interest rates for home loans.

Mrinal Sharma is a principal associate and Avnish Sharma is an associate at Amarchand & Mangaldas & Suresh A Shroff & Co.