Unitech Forced to Sell New Delhi Head Office

The morass that Indian real estate companies have sunk in to is now becoming glaringly evident. The nation's second-largest property company, Unitech, is now forced to sell its New Delhi office of over 2 lakh sq ft, to raise cash and meet demands from lenders.

Unitech had borrowed an undisclosed sum from HDFC, using the Saket head office as collateral, while HDFC sources claim this number to be Rs 30 crore.

Unitech sources said that HDFC has agreed to purchase this property for Rs 450-500 crore, and that formal agreement is expected to be signed end of this month. Unitech had itself purchased this land for over Rs 127 crore.

HDFC clearly refused to comment on this.

Read the story here

Realty Cos Likely to Default on Payments

Citigroup, in a note to clients, has warned that Indian real estate companies face a higher risk of payment default as access to cash becomes restricted.

The same note states that DLF, the nation's biggest property developer, Parsvnath Developers and Omaxe have shown a decline in Q2 income, as a slowing economy and tighter lending norms by banks cut out the oxygen supply.

Citigroup analysts categorically stated that they do not expect a recovery in the near term.

In another development, Goldman Sachs too said, in a separate note, that the earnings of realty companies reflect a slowdown.

New Delhi-based DLF Q2 profit fell 4 percent, while Unitech's Q2 declined 12 percent respectively.

Read the story here

Unitech's Santacruz Project Scaled Down

If there is ample money and good valuation in the private sector, as opposed to the public markets, why has Unitech's Santacruz Koliwada project scaled down half to 1 million sq ft?

Sanjay Chandra, Unitech's managing director said in a CNBC interview, that there was better valuations for real estate in the private equity segment than public markets. This comes at a time when after much dithering, Lehman has agreed to invest Rs 750 crore in to Unitech's Santacruz Koliwada project in Mumbai.

What has gone unnoticed is that Unitech has cut back the size of the project by 50 percent. The original deal between Unitech, Lehman and then Deutsche Bank, was valued at Rs 2,000 crore for 2 million sq ft, for which Unitech had already invested Rs 500 crore. This works out to be Rs 10,000 per sq ft for land and construction. Lehman and Deutsche Bank were expected to get a minority stakes each in the project for bringing in together Rs 1500 crore.

Due to the conditions in the marketplace, as well as Lehman's own problems in the US, the project appears to have been scaled down to 1 million sq ft. In this Lehman has infused Rs 750 crore, the same amount of money it had committed for the original plan, but has taken in a 50% stake in the SPV. Deutsche Bank had earlier backed out of the deal.

So, why is Unitech not getting another private equity fund to finance the balance 1 million sq ft. Several stories are being fed in to the media that Lehman may invest $700 million in other projects by Unitech. This seems a bit contradictory.

Read the CNBC interview here

Video here

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Unitech Project Hinges on Lehman's Rs 1500 Crore

Unitech's 97-acre project in Santacruz, Mumbai, from which Deutsche Bank had exited , may have just one investor - Lehman Brothers, itself a beleagured financial entity, if US reports are to be believed. The success of this project now hangs balance on Rs 1,500 crore, which Lehman is expected to confirm by June 15.

Unitech's plans to convert the Santacruz Koliwada area in to a residential-cum-commercial hub may take a beating if Lehman Brothers refuses to put down this cash. Earlier, Deutsche Bank which was a co-investor, became disconcerted about the valuations and refused to be part of this deal Now, however, it is reported that Lehman will put in the Rs 1,500 crore by itself.

Sources in the Mumbai real estate market say that Unitech had purchased this land when the prices were at its peak, and when property prices were expected to scale right up to Mount Everest from the shores of the Arabian Sea. Unitech had paid up Rs 500 crore for bagging the project, but could not muster the balance Rs 1,500 crore. Thus, it had approached the two banks for an SPV arrangement, wherein it offered stake for cash. Deutsche Bank however backed out. [Read the story here]. Lehman may now negotiate a higher stake on revaluation of the project profitability. Besides, it may not fund Unitech's Worli project.

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Seeking Alpha in Indian Real Estate

By Mukul Pareek

As US housing prices come down to more sustainable levels after a prolonged boom, one can only wonder if we can expect the same story to be played out in other economies. Maybe there is some alpha waiting to be picked up. One place that stands out from a sustainability perspective is India where real estate, whether residential or commercial, seems to have completely disconnected from local economic fundamentals.

Imagine the dusty suburbs of Bangalore, Delhi and Mumbai. Imagine neighborhoods with high rises that have no reliable power or water supply, battered roads if at all, no public transport and a shadow of crime such that locked houses are not safe even for a day. Now imagine these houses commanding prices that match prices in expensive New Jersey suburbs. Go figure. Perhaps there are positive returns to be had in a bet on these. But as John Paulson was quoted in the WSJ , “you can’t short houses”. But maybe we can short some of the companies that build and sell these houses.

The Indian equity markets have enjoyed a tremendous bull run over the past few years. In 2007 the Indian markets were up 47%. Real estate was up even more on a frenzy that makes New York and London decidedly tame. Seeing the time to cash in, multiple ‘mega-issues’ or IPOs from real estate developers came out in 2007. Exorbitantly priced to begin with, they did not disappoint their investors. These IPO stocks outperformed the index (the one that was up by 47%!) by a handsome margin. We look at how some of the larger public offerings have done since they were listed. Terrific!

Which brings us to the point of this post. How sustainable are half a million dollar apartments in a country with an average wage of about $1000 (a year). Sure there are rich people in poor countries. Maybe enough to keep things going merrily forever. But maybe not.

Most people do believe that this is a bubble that is bound to burst. Perhaps it is only a question of when, and not if. But as said Keynes – the market can stay irrational for longer than you can stay solvent. There is no shortage of alpha seekers (and of academics & economists ridiculed on television) that were hurt calling a false top to the real estate market in the US. The same can happen anywhere, but given the fizz going out of the global markets, the Indian bubble may probably be short lived too.

One bet may be to short some or a diversified portfolio of these real estate companies. The Indian markets have already seen a correction in 2008, and that may or may not continue. These stocks do contain significant beta, so to guard against the risk of the general market going up, perhaps a market neutral short position in some of these companies may be desirable. As is the nature of the game, many of these companies have not been listed for too long, so betas that I calculated in the table below are probably unreliable but perhaps not a bad starting point for making an estimate for the future.

Here are some tickers (on nseindia.com, or add .ns after the ticker for Yahoo Finance) with some data. All information is approximate, US dollar conversions have been done using a single rate of USD 1 = INR 40. Notice the volatility in the stocks, they go up and down fast for sure. Also look at their fantastic profit margins. Who cares about EBITDA when net income to revenue ratios are straight out of wonderland!

There are a number of Indian stocks that are listed either on the NASDAQ or the NYSE as ADRs. Many of them are also included in the broader Indian S&P Nifty-50 market index (referred to above). These include the following:

List of Indian stocks listed in the US that are also a part of the S&P Nifty-50 market index:
Dr Reddy's Labs - RDY
HDFC Bank - HDB
ICICI Bank - IBN
Infosys - INFY
Satyam - SAY
Satyam Technologies - SIFY
Sterlite - SLT
Tata Communications - TCL
Tata Motors - TTM
Wipro Ltd - WIT

The list above covers industry, banking, communications and technology, but does not include any exposure to the real estate sector - except probably with the exception of HDB and IBN that have mortgage lending operations in India.

This opens up an interesting possibility - consider building a synthetic portfolio where one goes short on the entire market using IFN, IIF or INP; and simultaneously going long on a portfolio of individual stocks listed above in a way that the net exposure is only to real estate or related stocks. Unfortunately, real estate stocks currently comprise only about 4% of the Indian stock market capitalization, and as of the date of this post only Unitech is part of the Nifty-50. That makes this strategy a bit tricky to achieve but in the coming days as DLF and other Indian companies get included in the Nifty-50, it would be possible to create a portfolio that is strongly correlated (positively or negatively) to the Indian real estate sector.

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This article first appeared on Mukul Pareek's Blog