As per the prospectus, a pre-IPO placement of around 57.5 million shares for up to 11.75 billion rupees is being considered by Embassy Property. However, it is expected that they will provide a discount of 5% to the retail investors.

The IPO time line is not yet set.

According to the data collected by Thomson Reuters, in 2009, there was a raise of $16 billion from 87 offerings, while in mid June of this year; a total raise of about $11 billion from 56 issues took place.

March 18, 2010

Although most of the ample to mid-sized fresh offerings have received a cold response, the news is that quite a few real estate companies are bent on going ahead with their initial pubic offering (IPO) plans. Rumor in the market is that apartments at discounted rates in the projects of these companies in return for subscribing to the issues seem quite attractive to a few fund managers.

Due to the big margins in the business and the fact that these projects are not yet completed, this kind of plan will not be very expensive for the real estate firms. In comparison with the hundreds of crores that are on stake, these few crores seem like nothing to these Realtors. Market analysts claimed that at least two companies which came out with IPOs recently had such a plan with some fund managers.

As expected, despite expensive valuations, both the offerings witnessed a huge response from institutional investors. Since along with the stock market backing the property developers, the banks are also reducing their funds in the real estate sector, it has become an acute situation for many money-starved builders.

“The rate cuts will revive demand, which had cooled off in the past couple of months,” DLF CFO Ramesh Sanka says. He says some of DLF’s projects in New Gurgaon and Chennai, which offer homes for about Rs 28 lakh, will benefit. Prompted by a huge demand in the Rs 20-25 lakh category and incentives extended by banks, India’s largest listed developer plans to have ‘many’ launches in the coming quarters in this category.

Smaller developers, which have been building budget homes, expect more large developers to join them. “Developers are already reducing the size of apartments and offering fewer facilities to bring down the cost of dwelling units,” says Gaursons joint MD Manoj Gaur, who has sold several budget homes in Ghaziabad.

Many developers and analysts feel the impact of rate cut will be limited. “The rate cut is not going to help us. At present, we are not building houses priced close to Rs 20 lakh. And, who has the money to purchase cheaper land now to start a new project for cheaper homes?” pointed out Omaxe chairman Rohtas Goel.

Rupesh Sankhe, a real estate analyst with brokerage firm Centrum, says: “A home buying decision depends on prices, interest rate and the sentiment. Prices still need to come down by another 15-20% even in Tier II and Tier III cities to increase the affordability.” Home buyers in smaller cities also have a lower income level and, therefore, would buy only when prices come down further, he adds.

Anshuman Magazine, property consultancy firm CB Richard Ellis’ South Asia MD, feels the sentiment is the most important factor at present. “There is a crisis of confidence right now. If people are afraid of losing jobs, they are unlikely to buy homes.”

The average home loan size in India is estimated at Rs 7.5 lakh. So, the rate cuts for loans up to Rs 20 lakh can potentially have tremendous impact. However, developers and experts beg to differ. Property prices have risen by three fol d in most markets and an average home costs upwards of Rs 50 lakh in Delhi or Mumbai and Rs 25-30 lakh in tier II cities. Therefore, the government’s move is aimed at addressing the need of home buyers mainly in smaller cities besides some metropolitan suburbs.

The simple point being, when current loans are under distress, why will banks lend more to realtors in times of accelerating slowdown?

Also, all the measures announced are prospective, so any benefits that will percolate will only be through incremental lending — if it happens.

Nevertheless, here’s a quick check on the likely impact of RBI’s moves: Risk weights on bank exposure to the real estate sector and non-deposit taking NBFCs reduced from 150% to 100%.

The favorable demand supply equation shields against steep correction in Mumbai – Owing to its geography and high population density, Mumbai has limited land area and demand for quality properties tends to far outstrip supply, resulting in high prices. Slum rehabilitation, redevelopment unique business opportunity in Mumbai provides opportunity to real estate players participating in the highly lucrative slum rehabilitation and development business considering that half of Mumbai’s twelve million population lives in slums.

Strong cash flow visibility for Mumbai focused property developers – Stable cash flow of Mumbai focused developers will help these companies tide over the liquidity crunch. Mumbai suburbs to witness huge supply – The trend for suburbanization is likely to continue with suburban locations capturing demand for small to medium format spaces. Redevelopment of properties – Mumbai offers huge opportunities for developers in the redevelopment space. According to a survey done by the Maharashtra Housing Area Development Authority (MHADA) in 2006, Mumbai has 19642 dilapidated buildings that are more than 40-100 years old.

The move has also come as a blessing in disguise for these realty companies who have been finding it difficult to source funds after the RBI tightened lending norms to property developers following a global liquidity meltdown. Sources said that funds floated by majors such as HDFC, ICICI, Kotak and Anand Jain’s Urban Infrastructure Opportunities Fund as well as foreign funds are in talks with listed real estate developers to pick up minority stakes.

Although domestic real estate funds have raised over $2 billion during the past year, a major chunk of these funds is yet be invested. So, most real estate companies are keen to close such deals with the funds.

Mumbai-based Lok Housing chairman Lalit C Gandhi said, “There are 4-5 such proposals that we are working on. No deal has been finalized yet”. The company is in the process of raising around Rs 1,800 crore from the market. Interestingly, foreign institutional investment in various companies has also been on the rise since March.

Companies such as Orbit, IVR Prime, Kolte Patil and Peninsula Land have seen an increase in FII holdings, with IVR Prime and Orbit recording the highest such increase in institutional holding by over 1%.

Private equity interest in real estate companies has also revived as the slowdown in the economy has beaten down valuations, which were once quoting triple digit price earnings multiples when the market was at 21,000. Private equity players are now shifting focus from special purpose vehicle (SPV) investments in individual projects to entity-level investments. The fact that most of these real estate stocks have high promoter holding could leave scope for some equity participation by these private equity players.

Promoter holding in various companies has been going up sharply. Puravankara Projects and Akruti City have 89.96% promoter holding. If DLF was to go ahead with its entire buyback, it could have one of the highest promoters holding of 89.3%. DTZ director investment Amber Mahasweri said, “We are working on a few of such proposals. Though promoters are asking for a premium, many funds are keen to invest in the entity level”. DTZ is an international property consultant.

Many developers have also admitted that the investment bankers are also approaching them with proposals. “In the last two months, we have received as much as 12 proposals from PE players to pick equity stake. We are yet to come to any decision,” said Orbit Corporation head finance and strategy Ram Yadav. Realty stocks have fallen 65% from their 52-week high market capitalization. Companies like Parsvnath and Omaxe have already fallen by about 79% and 77%, respectively.