Fund-raising by DLF, Unitech doesn’t betray ground realty
The Economic Times, May 18, 2009, Page 19
The battered real estate sector may be seeing some glimmer of hope for the first time in about a year after two of its biggest names managed to raise cash by way of equity sales in recent weeks, but analysts warn it’s still not time to call an end to the sector’s travails and the real change will be felt only when private equity feels confident to return to the sector.
Promoters of India’s largest real estate company DLF sold a 9.9% stake to raise Rs 3,890 crore last week, while Unitech closed a qualified institutional placement (QIP) to investors raising Rs 1,600 crore in April.
“The fund-raising by DLF promoters and Unitech shows the improvement in general sentiment towards real estate,” says Anshuman Magazine, MD of CB Richard Ellis South Asia, a international property consultancy. But he and others are quick to add that these corporate deals can hardly be classified as a broad sectoral revival.
Unitech MD Ajay Chandra says that even now no company in the sector could possibly come out with an initial public offer for at least another year, although a couple more QIPs may get done. “There is a decent appetite among investors for QIPs,” he said. Investors are also cautioning against assuming a recovery for the sector, which was tipped into a downward spiral in February last year after one of its leading names — Emaar-MGF — was forced to abandon plans for in initial public offering of shares. Sourav Goswami, India head of USbased realty private equity firm Walton Street Capital, cautions that people are getting excited a little bit too quickly. “If some sales in the housing sector have happened, it’s not known if it’s sustainable,” he says. Goswami’s fund did its last transaction in India almost a year ago.
The past 12 months have been painful for the sector, with sales plunging, prices falling and access to funds drying up. A combination of high interest rates and skyhigh property prices sent home buyers into a wait-and-watch mode, while a weak economic outlook forced corporates and retailers to freeze expansion plans, pushing down demand for commercial real estate.
The worsening of the global credit crunch last year as large swathes of the Western banking system crumbled under the weight of toxic mortgage-backed assets worsened perceptions for the sector, left vulnerable by a sharp rise in prices and valuations in the preceding years. Borrowing costs zoomed and private equity dried up, leaving many realty firms that had piled up large amounts of debt to fund their land buying spree in boom years with little cash to service that. It was the Reserve Bank of India’s (RBI) decision to allow restructuring of commercial real estate debt that saved many companies from defaults and bankruptcy.
Recent successful transactions by DLF and Unitech are aimed at cleaning up the mess left by their past excesses, and do not necessarily signal that a broad revival of the sector is imminent. “It was a compulsive sale of shares (by Unitech and DLF),” said a senior executive at a Mumbai-based realty firm, adding that there was no overwhelming interest among investors for Indian real estate and the two recent deals were more a case of smart money shifting from low-yield bonds to high-yield equities with the risk of bankruptcy having receded.
Not all companies will be as fortunate as DLF or Unitech, say expects. “Small realty companies will still struggle for funds,” says Anshul Jain, head of property consultancy DTZ India. For these companies, the solution could come in the form of private equity, but only in 3-6 months as the situation stabilises further.
If stock markets are to be believed, there’s some evidence of the situation stabilising. Realty stocks, some of which fell as much as 95% from their January 2008 peak., have seen some recovery in the past three months in line with broader market. DFL, for instance, has doubled since February, while other stocks registered gains in line with the broader market.
Meanwhile, a host of realty companies are now looking towards private equity funds to breathe life into the sector. But, for that to happen, several things have to fall in place. Mr Magazine at CBRE says global sentiment has to improve, borrowing costs fall and demand picks up amid a revival in the broader economy.
While valuations have seen some rationalisation, they need to come down further, says Mr Goswami of Walton Street Capital. Until then, he says: “Private equity players will focus on the execution of projects where they have invested earlier.”
The Economic Times, May 18, 2009, Page 19
The battered real estate sector may be seeing some glimmer of hope for the first time in about a year after two of its biggest names managed to raise cash by way of equity sales in recent weeks, but analysts warn it’s still not time to call an end to the sector’s travails and the real change will be felt only when private equity feels confident to return to the sector.
Promoters of India’s largest real estate company DLF sold a 9.9% stake to raise Rs 3,890 crore last week, while Unitech closed a qualified institutional placement (QIP) to investors raising Rs 1,600 crore in April.
“The fund-raising by DLF promoters and Unitech shows the improvement in general sentiment towards real estate,” says Anshuman Magazine, MD of CB Richard Ellis South Asia, a international property consultancy. But he and others are quick to add that these corporate deals can hardly be classified as a broad sectoral revival.
Unitech MD Ajay Chandra says that even now no company in the sector could possibly come out with an initial public offer for at least another year, although a couple more QIPs may get done. “There is a decent appetite among investors for QIPs,” he said. Investors are also cautioning against assuming a recovery for the sector, which was tipped into a downward spiral in February last year after one of its leading names — Emaar-MGF — was forced to abandon plans for in initial public offering of shares. Sourav Goswami, India head of USbased realty private equity firm Walton Street Capital, cautions that people are getting excited a little bit too quickly. “If some sales in the housing sector have happened, it’s not known if it’s sustainable,” he says. Goswami’s fund did its last transaction in India almost a year ago.
The past 12 months have been painful for the sector, with sales plunging, prices falling and access to funds drying up. A combination of high interest rates and skyhigh property prices sent home buyers into a wait-and-watch mode, while a weak economic outlook forced corporates and retailers to freeze expansion plans, pushing down demand for commercial real estate.
The worsening of the global credit crunch last year as large swathes of the Western banking system crumbled under the weight of toxic mortgage-backed assets worsened perceptions for the sector, left vulnerable by a sharp rise in prices and valuations in the preceding years. Borrowing costs zoomed and private equity dried up, leaving many realty firms that had piled up large amounts of debt to fund their land buying spree in boom years with little cash to service that. It was the Reserve Bank of India’s (RBI) decision to allow restructuring of commercial real estate debt that saved many companies from defaults and bankruptcy.
Recent successful transactions by DLF and Unitech are aimed at cleaning up the mess left by their past excesses, and do not necessarily signal that a broad revival of the sector is imminent. “It was a compulsive sale of shares (by Unitech and DLF),” said a senior executive at a Mumbai-based realty firm, adding that there was no overwhelming interest among investors for Indian real estate and the two recent deals were more a case of smart money shifting from low-yield bonds to high-yield equities with the risk of bankruptcy having receded.
Not all companies will be as fortunate as DLF or Unitech, say expects. “Small realty companies will still struggle for funds,” says Anshul Jain, head of property consultancy DTZ India. For these companies, the solution could come in the form of private equity, but only in 3-6 months as the situation stabilises further.
If stock markets are to be believed, there’s some evidence of the situation stabilising. Realty stocks, some of which fell as much as 95% from their January 2008 peak., have seen some recovery in the past three months in line with broader market. DFL, for instance, has doubled since February, while other stocks registered gains in line with the broader market.
Meanwhile, a host of realty companies are now looking towards private equity funds to breathe life into the sector. But, for that to happen, several things have to fall in place. Mr Magazine at CBRE says global sentiment has to improve, borrowing costs fall and demand picks up amid a revival in the broader economy.
While valuations have seen some rationalisation, they need to come down further, says Mr Goswami of Walton Street Capital. Until then, he says: “Private equity players will focus on the execution of projects where they have invested earlier.”
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