Seven Lessons Realty Players Picked Up from the Slowdown

THE LEARNING CURVE As reality bites, companies make significant changes to their business models to tackle high debt burden & demand slump  Therecent economic slowdown has hurt the real estate sector, with the five largest firms seeing a 75% erosion in their combined market capitalisation. Burdened with debt and struggling with poor growth, companies have made significant changes in their business models and strategy. Here are seven lessons they have learnt.  FORGET NATIONAL, STAY LOCAL  Pan-India expansion plans of developers like DLF, Unitech and Indiabull Real Estate have been undermined by highlyleveraged balance sheets, high borrowing costs and slower execution. DLF still earns almost 30% of its revenues from Gurgaon despite its presence in over 20 cities. It recently sold prime land in Mumbai to cut down debt. Godrej Properties, despite the pedigree of a large business group, earns 60-70% of its revenues from Mumbai and Ahmedabad, even though it has projects in 12 cities.  THE SMALLER, THE BETTER  Small regional players like Thakker Developers, Kolte Patil Developers, Puravankara Projects, Sobha Developers and Oberoi Realty have better balance sheets than larger peers. Their stocks have also fared better.  FROM RAISING FUNDS FOR GROWTH TO  SURVIVAL  Before the slowdown, realty firms had plenty of easy money. And they used it to grow. Not any more. In the peak of real estate boom in 2008, PE funds invested $6.8 billion in real estate which dried up to $0.85 billion in 2011, as per a report by Jones Lang Lasalle on decoding private equity real estate exits in India. Attempts by Raheja Universal and Lodha Developers to go public were upset by poor stock market response, making PE funds unsure of exit opportunities.  DLF is raising funds by selling noncore assets, Godrej Properties raised funds through a QIP and HDIL is generating funds by selling transfer of development rights (TDR) and floor space index (FSI) — all to lighten the debt burden. Earlier, companies were building land banks and were rewarded for it in the stock market. Now, they are conserving cash to payback creditors.  SOUTHERN MARKETS FARE BETTER  Led by Bangalore and Chennai, realty prices in south Indian cities have remained relatively stable compared to Delhi and Mumbai. The prices in these markets had not soared as much as markets like Delhi and Mumbai. Consequently, south India-based developers like Sobha Developers, Prestige Estates, Puravankara Projects performed better in the last 2-3 quarters compared to other companies such as DLF, HDIL and Godrej Properties. While the BSE Realty Index shed 14.5% in the past six months, the Bangalore-based Sobha Developers and Prestige Estates, the only gainers in the index, logged gains of 22% each.  RE-EMERGENCE OF PARTNERSHIP MODEL  Realty developers are going back to the partnership model — developing property jointly with the landowner. This, according to Anshuman Magazine, chairman and managing director (South Asia), CB Richard Ellis, was always around. However, during the boom period, ambitious developers started buying land and developing projects on their own.  Now, partnerships are back. Godrej Properties, for example, trades at a premium valuation compared to other large multi-city developers due to its asset-light partnership model.  COMMERCIAL PROJECTS TURNED INTO  RESIDENTIAL  Commercial property market has been hit more than residential property due to slowdown in industrial growth. Surplus commercial realty space has also put pressure on lease rentals.  In an earnings conference after its June quarter results, the management of Godrej Properties admitted that commercial projects in Tier-II cities have been negatively impacted by escalation in construction cost and weak demand for commercial real estate. The company is now keen to sell these projects at the earliest and has decided to avoid new commercial developments. Some developers like Sunil Mantri Realty have scrapped plans to develop commercial projects. The company is instead proposing to develop a residential project at its site at Parel. "Excess supply scenario in the commercial segment and possibility of better liquidity in a residential project has prompted us to change our decision," Sunil Mantri, CMD, Sunil Mantri Realty, had told ET in November last year.  FORGET RETAIL, STICK TO REALTY  Wadhawan Group, that owns HDIL, ventured into retailing through food & grocery store chain Spinach. But it has shut down its stores by 2010. Similarly, in 2009 Indiabulls Real Estate wrote off its entire investment in its retail arm, which it took over from the Piramals during the retail boom in December 2007. Some realty firms are building malls, but staying out running retail businesses.  kiran.somvanshi@timesgroup.com

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Housing body meet may clear air on VAT refund

Mumbai: With the sales tax department insisting that the payable value added tax (VAT) is much less than 3%, buyers who purchased flats between 2006 and 2010 and had paid money (in the form of guarantees and deposits) to builders are now a confused lot over the refund mechanism. 

    Vilas S, an executive with a leading corporate firm, said, "I do not know which authority to approach. I had given a bank guarantee of Rs 3.5 lakh, which is 5% of the agreement value, to my developer when I booked a flat in Vashi five years ago. After the recent fiasco, 14 flat buyers from my building and I asked a sales tax official to explain VAT to us. We were surprised by what he told us. According to rough estimates, the VAT works out to approximately Rs 25,000. I showed this to the developer, but he is refusing to accept our calculation. He is also not willing to show us how he had arrived at the figure of Rs 3.5 lakh," Vilas said. 
    Borivli resident Rajat Purohit, who paid Rs 1.5 lakh as VAT, echoed similar views. "I do not understand why there is no clarity on the amount payable as VAT. I purchased this flat from my hardearned savings. Which consumer has the time and the energy to fight a legal battle to verify whether or not the developer has taken the correct amount," he asked. 
    The Maharashtra Chamber of Housing Industry (MCHI) will meet on Tuesday and is likely to discuss the refund issue. 
    Pujit Aggarwal, managing director of Orbit Corporation and MCHI member, said buyers need not worry. "The balance VAT amount will definitely be refunded to the buyers. VAT is paid against each flat agreementand not as a lump sum. A receipt is made with details of the transaction. No developer will keep the amount with himself," said Aggarwal. "The sales tax department may interpret the VAT payable as 5%. Had we refunded the amount to buyers earlier, it would have been difficult for us to search for the. So the refund, if any, will take time as the sales tax department is yet to clarify to developers the exact amount payable as VAT,'' Aggarwal added. 
DO THE MATH 
The Bombay Chartered Accountants Society has given two examples to show how VAT is calculated 1 Tax payable where builder sub-contracts construction and finishing of a building of 20 flats to a contractor 
Sale price @ 25L each paid by 20 flat owners | 5cr 
Less value of land | 3cr 
Less amount paid to subcontractor | 1.5cr 
Less 30% on the balance Rs 50 lakh on account other services like labour, architects fee, profit | 15L 
Balance liable to tax | 35L 
Total tax payable on goods purchased @ 12.5 % | 3.88L 
For each flat, the tax payable | 19,444 2 In case the builder uses his own material 
Total Sale Value @ 25L each paid by 20 flat owners | 5cr 
Less Value of land | 3cr 
Less 30% on the balance 2cr on account of other services like labour, services, architects fee, profits | 60L 
Balance liable to tax | 
1.4cr 
Total tax payable after deducting set-off on goods purchased @12.5 % and 4 % | 3.12L 
For each flat, the tax payable works out to 
15,630

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