Last week the Rs 1,600 crore (Rs 16 billion) Unitech group, in an audacious deal, piqued DLF to the post by grabbing 345 acres of prime land in Noida for a staggering Rs 1,582 crore (Rs 15.82 billion) - till then the largest land deal in the country (the record was broken this week by the Adanis and HDIL combined in Mumbai).
It was probably the first public challenge that it had thrown to the might of DLF in the national capital region. For decades, no one had questioned the domination that DLF had - at least in Delhi and Gurgaon. Unitech, a quieter player in Gurgaon, seemed at last to be
flexing its muscles.
A jubilant Sanjay Chandra, joint managing director of the group, says the land in Noida will be used to make 4,000 top-of- the-line apartments priced at Rs 2 crore (Rs 20 million) each. The investment required to build this dream residential project: Rs 3,000 crore (Rs 30 billion).
Says Sanjay Dutta, executive director of realty consultants Cushman & Wakefield, "At around Rs 5 crore (Rs 50 million) an acre it is a great deal, especially as it is just 15 minutes' drive from the posh Maharani Bagh in south Delhi. It's virtually impossible to get a large chunk of land just minutes away from south Delhi. And with Unitech's brand equity, they should be able to make a huge profit."
But the deal has come under fire with one of the bidders alleging foul play and threatening to go to court, claiming Unitech's price was lower than prevailing land rates.
The low-profile company which rarely meets even equity analysts has quietly built up a real estate empire, buying up land furiously in the last few months across the country - from Gurgaon to Kolkata, Kochi, Hyderabad and Chennai - to create a land bank of over 8,000 acres (of which 1,000 acres is in Gurgaon where DLF has 3,000 acres and is adding
more).
That is twice the size of what DLF has declared in its prospectus for its upcoming IPO and second only to the Sahara group. But with 50-60 per cent of that land brought in the last year alone at high prices, does it make sense?
Says Sanjay Verma, joint managing director of Cushman & Wakefield, "For any serious builder, land is the main inventory you need to build stock. Obviously, as in any other industry, in case of recession your unutilised capacity could get affected. But developers can't wait when demand is moving up to create land banks on a downswing - that way they won't have any land to build on."
And in the long term, because land is finite, land prices are guaranteed to rise anyway. "Unitech's strategy," says Verma, "like all serious builders, is to become a pan-Indian player and build land banks across the country."
Going by valuation of the land bank, Chandra believes Unitech should be able to match DLF: "Our preliminary estimates show that it is valued between 75-125 per cent of that of DLF." {DLF has valued its land bank at around Rs 80,000 crore (Rs 800 billion)}.
But it has also taken some major risks with at least 75 per cent of the land bought from farmers before the land use has been changed for housing and commercial purposes.
Yet Unitech is already claiming to have made a killing - buying on average at Rs 1 crore (Rs 10 million) per acre, but with valuation at current prices already in excess of 5-8 times that amount. Even in terms of turnover, DLF is only marginally bigger than Unitech.
It is this that has prompted the group to push the Unitech juggernaut more aggressively. Ask chairman Ramesh Chandra, an engineer from Indian Institute of Technology- Kharagpur, his group strategy, and he says, "Our aim is to dominate every new market that we are getting into. We have become number one in Noida and Kolkata, and while we started much later in Gurgaon, if you take new acquisition of land and space being constructed there, we are closing in on the competition. That is why we have avoided Mumbai, where there are entrenched players."
Over the next two years Unitech will build 150 million square feet of space across the country, five times more than the total stock of space that major builders will make available in the country's major metros this year.
The aggression is also reflected in Kolkata's uncharted market, which the group entered just a year ago but where it has already sold 1,100 apartments, equivalent to what the city's three top developers sold together in one year. Unitech has also bought 47 acres in Chennai.
As part of its realty business, the group has already catapulted into the country's number one amusement park developer. It is developing two amusement parks in Rohini in Delhi, and Noida, spread over 200 acres. It has tied up with Cartoon Network to franchise its cartoon characters for one of the sites, and with Pogo for the second theme park.
And it is making a foray into the hospitality sector with a tie-up with hotel major Marriott to launch its Courtyard brand of business hotels in Gurgaon, Noida and Kolkata. The gameplan calls for an investment of Rs 700 crore (Rs 7 billion) in the first phase to build 1,400 rooms and service apartments.
Like other players, it has also jumped onto the SEZ bandwagon. The government has already cleared one of its projects in Haryana, to be spread over 20,000 acres in Kundli, near north Delhi, focussing on food processing, auto-components and - in an effort to woo the textile processing units of Panipat and Kurukshetra - textiles. Once this project gets going, as much as 50 per cent of the group's turnover could come from it.
With realty prices hitting the roof, so are the company's stocks, which have increased 20 times in the last six months. Yet, warns a Mumbai-based equity analyst who tracks realty stocks, "The problem is that there is no floating stock of these companies and no FII interest, so the rise does not make any real sense at all. I could agree that valuation of Unitech is 75 per cent of DLF, but 125 per cent looks very far fetched. They are playing the market cap game essentially to raise resources."
That's reflected in the fact that FII exposure to the company is a meagre 4 per cent, though there is a floating stock of over 25 per cent. Also, market analysts say that while it is certainly the second largest real estate developer in north India, and among the top four or five in the country, the gap between DLF's might and that of Unitech is huge.
"The expected market cap for DLF is expected to be to the tune of $15-$20 billion, Unitech's market cap is a fifth of that," says a market watcher of realty stocks.
And Unitech is hungry for cash. The grand expansion requires an infusion of Rs 12,000-16,000 crore (RS 120-160 billion) to fructify. Where will that money come from? Is Unitech planning to piggyback on the euphoria generated with the Rs 10,000 crore (Rs 100 billion) DLF maiden public issue and go public again?
Chandra says that at least in the next 9-12 months he will not get into the market. But he is looking at more innovative financing options, which include raising $750 million overseas for a new realty fund in which 50 per cent of the money would be used for investing in new projects, each of which will be spun off as separate companies.
It has also closed a Rs 350 crore (Rs 3.5 billion) realty fund, part of which will be used again for investing in group companies.
He argues, "Using realty funds to raise money is standard practice in the US. The advantage is that you can draw the money only when you require it, and the payback time is after seven years. In case of public equity, you need to service the entire money you have raised from day one."
Analysts agree. An equity analyst based in Mumbai comments, "Raising money through funds is smart because in case of a slump in the market the losses are borne by the fund while the company's balance sheet remains insulated. Nor do you lose control over the company."
But what is the company's hedge against a realty bust in what many say is already an overheated market? What happens to the land bank should prices take a tumble? And is the stock market run sustainable?
Argues an equity analyst: "There are some serious dangers Unitech faces. A large part of its land is in Gurgaon where, unlike DLF, which bought it many decades ago at throwaway prices, Unitech did not have the same advantage and bought at high rates. With only 20-25 per cent of Gurgaon dwellings occupied, it is clearly a speculative market. If it bombs, Unitech, with its higher cost of land and dependence on residential
developments, will be in trouble."
Even Cushman & Wakefield's Verma agrees that 25-30 per cent of buying in Gurgaon and Bangalore could be speculative.
Unitech is aware of the risks involved, but it says the risk in buying land there is already paying off as prices continue to soar. But it is still hedging its risks. For instance, it has eschewed bidding in open auctions where land costs are too high.
Secondly, it is reducing its dependence on the national capital region by getting into newer markets, many of which are still not as heated or speculative as the NCR. So, if 80 per cent of its current turnover comes from the NCR region, the aim is to reduce it to 50 per cent by increasing its holdings elsewhere.
It is planning to increase its land bank in Kolkata from 10 per cent to 20 per cent in the next two years. And its purchase of cheap agricultural land is in the hope that it will be converted to commercial use adding immense value to the slight risk that this may not happen.
Unlike DLF, Unitech has focussed almost exclusively (up to 75-80 per cent of its space) on residential markets. The reason, Chandra says, is that you can finance 50 per cent of the project cost of a residential property through advances from those who book the flats, rather than investing the entire money in a commercial property.
As a result, the internal rate of return on residential projects is virtually twice that in a commercial property. And any commercial property it develops is for sale (and not on lease) to enable it to encash its profit upfront and use it to buy more land.
"If we worked on a lease model, our cash flows would have got stuck and we would not have been able to build a large land bank," says Chandra.
But there is a downside too. A senior executive in a leading equity fund says while Unitech's strategy is meant to reduce risks, it only ends up putting pressure on always needing more, as this raw material gets used up faster than if the company were to concentrate on building and leasing out the property.
And so, for now, the message in the real estate world is quite clear. DLF remains synonymous with Gurgaon's unprecedented development, but when it comes to the final stakes, watch Unitech's every move carefully. For the snail could just be catching up with the hare.
Adding value to land
Developers buy land from individual farmers and then consolidate it under one title. It is a cumbersome process, knowing the land ownership laws of the country. But if you can, you get a premium on the consolidated land.
Developers then apply for conversion into commercial or residential purposes. Once you get permission, the land value rises further.
Developers make their plans for building flats or commercial complexes and get them cleared by the authorities. Once the designs are sanctioned, there is further escalation in the land's value - which could be as high as 5-6 times in Gurgaon
Of course, the highest value is achieved when you build and then sell the property among buyers. In the case of auctions, or tendering, these margins are usually lower than land bought directly from farmers.
Who's got what
The Sahara group owns 19,000 acres across the country. Of this, a sizeable amount is held by the highly touted Amby Valley project on Mumbai's outskirts, where it has over 8,000 acres of land. The company is selling luxury apartments and chalets in this space.
DLF has a land bank, which is in various stages of acquisitions of over 4,270 acres of land. And it is valued at over Rs 80,000 crore (Rs 800 billion).
Unitech has built a land bank of over 8,000 acres across the country, which is valued between 75-125 per cent of DLF's valuation.
Delhi-based Ansal has built a land bank of over 4,000 acres, which includes Gurgaon, Ghaziabad, Lucknow, Karnal, Meerut and Agra. It expects the land bank at current prices to have a value of Rs 10,000 crore.
The Vatika group has been the new kid on the block in Gurgaon, and has a land bank of 3,000 acres, of which a third is in Gurgaon and the rest in Jaipur and Sohna.
Industry estimates suggest the Hiranandani group has 4,000-5,000 acres across the country. In terms of value that could be pretty high.
Mumbai-based Housing Development and Infrastructure, which struck a deal with the Adanis for developing 48 acres in Mumbai's Bandra-Kurla complex for Rs 2,250 crore (Rs 22.5 billion), has enough land to create 40 million square feet of space.
The big boys in the south include Brigade, RMZ, Mantri and Sobha Builders. According to industry experts, the prominent developers in Bangalore together control 2,000-3,000 acres.
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