Cash-Strapped Realty Companies Eye Rs 15K-crore mop-up

November 13, 2009    


Cash-strapped real estate companies looking for succour from the
capital market are likely to run into headwinds on the pricing front.
 Market watchers say unless the promoters price their issues a bit more
 realistically, they are likely to see a tepid response from investors.
Some of the high-profile new issues over the past few months were
felt to have been priced expensively, resulting in the stocks faring
 poorly on listing.

Nearly a dozen real estate companies are looking to mop up over
Rs 15,000 crore through public offerings in the coming months.

Godrej Properties, DB Realty, Emaar MGF, Lodha Developers,
Sahara Prime City, Kumar Builders, Ambience, Ashoka Buildcon
are among the companies which have filed their draft red
herring prospectuses (DRHP) with Sebi.

Those in the pipeline, but which have not
yet filed their DRHPs, include Nitesh Estates,
 Prestige Constructions, BPTP and Oberoi Constructions .

The IPO-filings mark the second round of fund-raising in the real estate
industry, which had been wracked by the global financial crisis and the
 resultant drop in demand. Signs of a revival in the residential segment
 in April-May this year, prompted many to hit the capital market to raise
funds. Merchant bankers are, however, sceptical about investor appetite
 given the huge overhang of paper. “There are serious challenges on
the pricing front,” says Nimesh Shah, MD, Fortune Financial.
 Mr Shah is of the view that there is too much paper on offer
at the moment, which is dampening investor appetite.

“And with almost all of the recent quality companies quoting at
a discount to the offer price, the prospects look bleak,” he added.
 Industry experts point out that investors should look at the earnings
 model of the real estate companies rather than the landbank model
 because in the latter, prices tend to be volatile. Also, there are
concerns that builders are putting value to the whole piece of land
 where they have partial ownership.

“Investors need to do due diligence as to whether the land bank
 is agricultural land or non-agricultural land. Currently, valuation
of land is being done arbitrarily. If it is agricultural land, one needs
 to factor in the cost of conversion (property tax & cost to be paid to
 the government etc),” said a real estate developer on condition of
 anonymity. Investment bankers believe that this phenomenon is not
 true of India alone but is also seen in other countries like China.
“Real estate companies are quoting at an almost 60% discount to
their NAVs,” said a banker with interests in the region.

“Given the overall weakness in the IPO market in the recent months,
 pricing and quality of promoters will be paramount,” says
 Munesh Khanna, CEO & MD-investment banking, Centrum Capital.
 However, JC Sharma, MD, Shobha Developers, believes one should
 look at the macro picture. “The real estate industry is still not getting
 proper representation in India. In a developed/developing economy,
it constitutes 10% of the market cap of the country. We still have a
 long way to go,” he told .