Today's Top Gainer
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Mr. Rajiv Singh, Vice Chairman, DLF, is a graduate of Massachusetts Institute of Technology (MIT), U.S.A and holds a degree in mechanical engineering. Mr. Singh has over 25 years of professional experience. Mr. Singh directs the strategy and oversees the operations of the Company’s residential, commercial, retail, infrastructure, hotels and SEZ business lines. In December 2005, Mr. Singh was awarded `The Udyog Ratna Award’ for ‘Valuable Contributions to Economic Development of Haryana’.
The DLF Group, is India's largest real estate company in terms of revenues, earnings, market capitalisation and developable area. It has a 62-year track record of sustained growth, customer satisfaction, and innovation. The group has over 231 msf of completed development and 423 msf of planned projects, and has pan India presence across 32 cities. DLF's primary business is development of residential, commercial and retail properties. The company has a unique business model with earnings arising from development and rentals. Its exposure across businesses, segments and geographies, mitigates any down-cycles in the market. DLF has also forayed into the infrastructure, SEZ and hotel businesses.
In a wide-ranging interaction, Rajiv Singh, Vice Chairman of DLF, shares his views on the risks and constraints that developers face, the importance of product positioning, pricing and land banking. He also shared his vision of DLF’s future.
Most industry observers agree real estate prices rose too much, too soon, sending them out of the common man’s reach. Why do you feel that happened?
Price resets and correction that had to happen have already happened. This was a very relevant question a year back, but last year has reset the equation. Everybody looks at absolute value, but the thing to look at is relative value. Three distinct segments have emerged in the market: 1) premium products at premium locations; 2) middle-income housing in established suburbs; and 3) low-income housing. Each segment will be positioned differently, and have its own pricing and its own product. So, every city will have these three categories. In the past, unfortunately, everybody tried to chase the highest price and positioned their product for something that it was not. That’s where the big schism came in. There was a big gap between what was being offered and what was expected. Today pricing is reasonable… it will increase, but only within the respective product segment. Pricing will not move across segments—customers will not accept it.
Driven by the recent pick-up in demand, many developers have increased prices substantially post the correction. Do you see the old frenzy taking over again?
I don’t think so. In many cases, increases are only notional. Many developers had priced their products at absurdly low levels. I think there are two ways to price your product—pricing for liquidity, or pricing for continuity of business. Today, developers are moving from pricing for liquidity to pricing for business continuity and margin restoration. If prices go up hugely from here, it would be worrying. The industry was out of the affordability range by a certain percentage, and the correction has rectified that, in my view.
So, do you think prices have peaked out for the near term?
Prices will depend on how the economy performs. If you have more money, you will want to live in a better house. The same customer up-trades. What defines pricing in our market? We don’t categorise the car market in the country by how many Rolls Royces are sold annually, but how many Marutis are sold. The fascination with high prices has a little to do with media hype—in the past, we have sold some premium projects, but we had sold lower-priced projects in significantly larger volumes. However, everything that was reported was about higher-priced projects. A small rental deal at Rs400p sq ft was reported, while a 1m-sq-ft deal at Rs40p sq ft was not reported. That’s part of life. Overall, I must say that property prices in India in good locations with adequate infrastructure are competitive with anywhere else in the world. If the Indian economy grows faster than we expect, property prices will reflect that—just as they will reflect any disappointment in the economy’s growth. Huge wealth was created in 2005-07, and part of it has been deployed in property. Property prices may go up disproportionately if there is one more round of wealth creation. That’s the law of supply and demand. In our business, supply takes 3-4 years to catch up with demand; short-term mismatches are reflected in scarcity pricing.
Why are land prices so high in India?
Who sells the land? The government. Who is the biggest beneficiary? Again, the government. Either government directly influences high prices through what it sells, or influences land prices by the controls it has created. Real estate developers are price takers; we have not manufactured that land, we have not increased the price of the land. High land prices are a handicap for developers. The difference between what I charge the customer and what I spend is my margin. Since the customer cannot go beyond what his affordability would allow, high land prices hurt us… it is a bane to our industry.
Has the government done enough to simplify the land acquisition process in the country? What suggestions do you have for them?
We generally end up under-forecasting demand. As a result, supply remains less than what we need. The best way to create more land supply is to create more infrastructure to make places livable. But if infrastructure improves in far-flung areas, land prices will fall. If infrastructure is not there, people will stay concentrated. So land prices will remain high. Government has to create the infrastructure, but progress has not been adequate.
Much has been said on the cumbersome process of approvals. What are your views on this issue?
I have consistently maintained during the downturn that my biggest worry has not been lack of sales or liquidity—it has been lack of approvals. On average, it takes us 12-18 months to secure all the requisite approvals to start a project. Assuming a borrowing cost of 12%, you have to add 20% to the cost of land because of this delay. This is on a high-compliance project that meets all criteria—a ‘passable’ project. Environmental approval itself takes 6-8 months. This is needed even if land is bought from the government. A lot of money is wasted as we face a dichotomy between the government’s stance and environment department’s stance on various issues. For example, environment officials require us to build sewage treatment plants in every large project… even though we are also paying for the municipal sewage system. On average, it takes another 6-12 months for all the approvals to complete a project and hand it over. At least two years of a project cycle are lost in approvals. At least 6-8 months are spent in land aggregation, search and title checking, registration and design.
Do you see any steps being taken by the government to simplify this process? What recommendations do you have to simplify this process?
This will improve, but our democratic processes move slowly and have to be respected. We have learned to live with it. It really is a five-year cycle for project development. Effectively, every time I am buying land I am taking a call on how India is going to look five years from now. That is not easy to predict. That’s the biggest risk in our business. Our pricing has to reflect the risk premium. IRRs are for fixed deposits, not for projects with big risks like ours. Some of the projects where we made the most money have been cases where we have been stuck for 20 years. We had the ability to hold on and finally inflation and superior location pulled us through. But people should understand the constraints we operate in.
Developers in India have 15-20 years worth of land bank, while those in South-East Asian countries have 4-5 years’ worth. Now, many developers are selling long-gestation land banks. Do developers need to take a re-look at their land acquisition strategy?
Yes, us included. We are set up for 10 years… if volumes dip, this 10 could become 20. Please understand that we have a five-year cycle in our business. You need to have two cycles of inventory, hence 10 years’ visibility based on today’s volume is reasonable for our business. When you compare us to South Asian countries, you are comparing a real-estate company with a quasi-contracting company. In these economies, every month government auctions land, you acquire it and convert it. You are a contractor who receives money from a number of clients instead of a single large client. I don’t see myself as a contractor, I see value in what lies on the ground. Of course, some people have aspired for more than their size would allow; they have to sell some land to realign their balance sheets.
Do you feel the benefits of a pan-India footprint outweigh the challenges in entering unfamiliar markets?
It is too early to form an opinion. This question would be best asked and best answered 10 years hence. We have created strong operating teams, strong relationships and have understood the operating environments in most of the economic centres across the country. We have created a universal brand across the country; that is a significant achievement for us. Economically, are these projects disproportionately beneficial to us today? The answer is ‘no’. There is a start-up and learning cost in each new geography, but would you buy a company that aspires for growth and demonstrates that it can achieve it, or one that lies back and milks its existing business for many years hence? We have protected our core business (in NCR market) and we have succeeded. Now that we are on stride in most locations, we will make money everywhere. Pan-India footprint is really for the long term. Ten years later I hope I have the same point of view. We will demonstrate to the market that we are here to stay.
Can developers make the ‘affordable housing’ model work in the current environment of high land costs? What changes need to happen for affordable housing to be a reality?
You are talking about lower-middle-income housing. It will go at its own price point, its own construction cost and its own land location. If you have to do this in the city, the government needs to facilitate it. It is like creating public amenities in cities. Who provides schools, hospitals, etc in cities? The government. The government must create lower-cost housing in cities, as the cities need service providers who can afford only this product. These service providers cannot live tens of kilometres outside the cities. Today we have turned a blind eye to them as they occupy slums. We should provide them accommodation in a more organised way. Mumbai has done some interesting work in providing permanent accommodation to slum dwellers. I have personally visited these projects. The Slum Rehabilitation scheme has been effective. There have been some abuses, but let’s not miss the bigger picture—that large numbers of slum dwellers have also benefited from the scheme.
What is your outlook on the commercial segment? When do you expect to see a pick-up in demand in this segment?
The segment is directly linked to growth in the Indian economy. It will lag the residential segment by 6-12 months. Commercial is likely to revive by the middle of next year. Rates have started to pick up, interest to buy yield-based properties is picking up again. Please do not forget that a lot of commercial supply was created as wrong products in the wrong places. These projects will have to be restructured. Most developers chose to put the highest value proposition on every piece of property. But some places are made for malls, some for bazaars, some for IT parks and some for corporate buildings. The offerings have to be correctly tailored to the customer’s needs.
Why does an average development in India take 4-5 years to build and deliver, while larger projects in Singapore and Hong Kong are delivered in two years?
Part of it is technology… 6-8 months of this is technology, two years of this is red tape. You may bring down construction time by six months in the best case, but you are helpless in the two years that you spend in getting approvals. Technology in our industry has not reached the levels that it should have, but I maintain that technology will find wider application in commercial and high-end residential projects where customers demand it and pricing structures afford it. In some ways, using conventional technologies helps the economically weaker sections, as it generates large employment opportunities.
Most developers rely on outside contractors and architects for their projects. Do you see the industry building in-house capabilities to cover the entire value chain?
No. We do have our own construction capacity and architect teams. But they only meet a part of our requirements. We always use outside architects. It is not advisable, in my view, to rely on in-house skills only. Architects work with hundreds of people. They bring back new ideas. Otherwise, one could become myopic. In a company, one should never become insular. We can have the best architect on record. But with time, people’s tastes change, designs change and external architects bring that value to the table.
Do you feel that a regulator for real estate will be a step in the right direction?
It’s being debated vigorously. I think it’s a step in the right direction, provided the regulator regulates all parties concerned. If it is applicable to developers only when we are already handicapped by various other agencies, then it will only add to delays. Finally, it will add to the cost to the consumer. Look at TRAI, which is dealing even-handedly with all parties concerned. The bill as I see it right now seeks to regulate only the developer and the apartment owners’ associations. It is silent on the agencies on which both of them depend. As long as the regulation is fair and uniform across the board, it is not a bad idea. The regulator should have oversight on all agencies including government and financial institutions. All parties need to work harmoniously, rules should apply to all parties concerned.
As a strategy, you intend to follow a city-centre development technique. In such a scenario, in which geographies do you plan to expand your land bank?
Principally, our focus areas will continue to be NCR and Mumbai and some other specific sites at bigger cities like Chennai, Kochi, etc. We have added land bank selectively in NCR and Mumbai. We will consolidate our holdings, but won’t increase our land bank manifold.
What are 2-3 key milestones for DLF in the next 12-18 months?
We are restructuring our balance sheet. We want to reduce debt in the short term to reasonably low levels and then make it almost insignificant. The second key milestone is to ensure that all initiatives are successfully started across cities and across product categories. Third is tightening our organisation’s focus and compliance focus and emerge more efficient and productive in the years to come.
How will the DLF of 2014 be different from the DLF of today?
DLF will have a good blend of annuity projects and development projects. We will also have an extremely strong balance sheet. We will replace our land banks, not add to them. Our balance sheet will allow us to do that without any strain. We could also leverage our balance sheet to create something significant. We have to take a call on that in the future. At this point in time, our focus is to create an ethical and compliant organisation. We will be able to do much more than what we can today with such an organisation.
Which international developer/s do you respect and why? Would you model your business in line with their business?
There are a number of examples. Vanke in China does a great job with housing, Sun Hung Kai in Hong Kong does a fantastic job with asset enhancements and high-value developments, Capitaland in Singapore has a good model of monetising assets and running multiple real estate businesses separately. Some of the much-maligned Middle East-based developers have achieved what we feel is admirable from the industry’s perspective. In the western world, developers are driven by finance professionals who deal with real estate as one more asset class. In our part of the world, such sophistication is not yet a reality.
Has forward integration into finance crossed your mind?
Not yet, it is too early. It is part of the life cycle of a real estate developer. As the government allows real estate mutual funds and REITs in the country, these things will be explored. Real estate as an asset class needs to be widely owned. Very few people in India have the option of participating in real estate. The high transaction and ownership costs make it impossible for many people to own this asset class. People either own a property or build a property—there is nothing in the middle. People should be allowed to own shares in companies as well as shares in completed assets. Maybe it will take a while, but it will surely come.
What is your outlook for the real estate industry?
Large-scale infrastructure developments across the country will create a need for supporting real estate. Our sector will do well. The government has been supportive during a difficult patch… if it continues to be supportive, the industry will reciprocate. It will be a big contributor to India’s growth in the years to come.
The above Q&A with Mr Rajiv Singh (Vice Chairman, DLF) is an excerpt from IIFL’s recent report, The real Real Estate Story.